UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust (a Maryland REIT)

Reporting Period: Fiscal year ended December 31, 2000

Overview: The Trust invests in healthcare-related real estate, including acute care hospitals, behavioral health facilities, rehabilitation hospitals, and medical office buildings. As of December 31, 2000, the portfolio consisted of 41 facilities in 15 states. A significant portion of the Trust's revenue is derived from leases with subsidiaries of Universal Health Services, Inc. (UHS), which accounted for 63% of total revenues in 2000. The Trust is advised by UHS of Delaware, Inc.

Key Financial Metrics

Liquidity: The Trust maintains a $100 million unsecured revolving credit facility. As of December 31, 2000, approximately $17 million of borrowing capacity was available. The effective interest rate on revolving credit notes was 7.1% in 2000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% ($3.5 million) to $27.3 million in 2000 compared to 1999. This was primarily driven by a $3.3 million increase in base rentals from non-related parties due to new acquisitions (Sheffield Medical Building, Orthopaedic Specialists of Nevada Building, Danbury MOB, and Southern Crescent II).
• Net Income Increase: Net income rose to $16.3 million ($1.81/share) from $14.0 million ($1.56/share) in 1999. This increase was bolstered by a $1.9 million gain on the sale of the Meridell Achievement Center to a UHS subsidiary.
• Expense Increases: Interest expense increased 53% ($2.1 million) due to additional borrowings for acquisitions and a rise in the effective interest rate on the revolving credit facility. Other operating expenses increased 57% ($1.0 million) primarily due to acquisition-related costs.
• Impairment Charges: The Trust recorded a $1.1 million provision for investment loss in Q4 2000 related to its share of an asset impairment at a Phoenix-based medical office complex LLC.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Gain on Sale: A $1.9 million gain was recognized in Q4 2000 from the sale of the Meridell Achievement Center to a UHS subsidiary for $5.45 million.
  • Impairment: A $1.1 million non-cash charge was recorded in Q4 2000 for an investment in a Phoenix medical office complex LLC.
• Outlook and Risks:
  • Concentration Risk: A substantial portion of revenues depends on UHS. Leases with UHS subsidiaries are guaranteed by UHS and cross-defaulted.
  • Regulatory Environment: The Trust is exposed to changes in healthcare reimbursement (Medicare/Medicaid). The Balanced Budget Act of 1997 (BBA-97) and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) impact reimbursement rates. BIPA increases payments starting April 2001.
  • Lease Renewals: Management cannot predict if leases will be renewed at current rates. UHS has rights of first refusal and purchase options at fair market value.
  • Interest Rate Risk: The Trust uses interest rate swaps to fix rates on variable debt. As of year-end, $35.58 million of debt was effectively fixed at 6.89%.

Investor Verification Checklist

• UHS Dependency: Verify the financial health of Universal Health Services, Inc., as 63% of revenues and a significant portion of lease guarantees depend on it.
• Lease Expirations: Review the schedule of lease expirations, particularly for the six hospital facilities leased to UHS, to assess renewal risks.
• Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, specifically the 95% dividend payout limit and tangible net worth requirements.
• Impairment Trends: Monitor the performance of the Phoenix medical office complex and other unconsolidated LLCs for further impairment risks.
• Regulatory Impact: Assess the actual impact of the BIPA reimbursement increases commencing in April 2001 on lessee cash flows.