UHT

Business Context and Reporting Period

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

Reporting Period: Quarterly period ended September 30, 2006 (Form 10-Q)

Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, behavioral health facilities, and medical office buildings. As of September 30, 2006, the portfolio consisted of 45 real estate investments or commitments across 15 states. The Trust is advised by UHS of Delaware, Inc., a subsidiary of Universal Health Services, Inc. (UHS), which is also the principal tenant, accounting for approximately 48% of consolidated revenues.

Key Financial Metrics

Note: Debt figures include $11.3M line of credit borrowings and $25.1M in mortgage notes payable (non-recourse to Trust).

Material Changes vs. Prior Period

• Net Income Surge: Net income for the nine months ended September 30, 2006, increased to $27.6 million from $20.2 million in the prior year period. This increase was primarily driven by non-recurring gains rather than core operating growth.
• Chalmette Asset Exchange: The Trust completed an asset exchange with UHS regarding the Chalmette Medical Center (damaged by Hurricane Katrina). This resulted in a recognized gain of $11.3 million in the third quarter of 2006, representing the excess of the fair value of replacement properties ($19.5 million) over the book value of the damaged asset ($8.2 million).
• Deferred Gain Recognition: The Trust recognized a previously deferred gain of $1.9 million related to the sale of an interest in an unconsolidated LLC.
• Revenue Stability: Total consolidated revenues remained relatively flat at $25.1 million for the nine-month period compared to $25.1 million in the prior year.
• Interest Expense Reduction: Net interest expense decreased by $723,000 for the nine-month period compared to 2005, largely due to the absence of a $252,000 charge in 2005 related to an ineffective interest rate swap and increased interest income from a note receivable.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items

• Chalmette Transaction: The $11.3 million gain is a non-cash, non-recurring item. Future net income will include an additional $4.5 million as construction costs for the Inland Valley Capital Addition are incurred by UHS.
• Wellington Recovery: In the prior year (2005), net income included a $3.9 million gain related to the recovery of replacement costs for hurricane damage at Wellington Regional Medical Center.

Outlook and Management Commentary

• Lease Renewals: UHS agreed to early renewals of leases for Inland Valley, Wellington, McAllen, and Bridgeway facilities, extending terms through 2011-2014 on similar economic terms.
• Dividends: A dividend of $0.565 per share was declared and paid in September 2006. The Trust expects operating cash flow to be sufficient to maintain REIT qualification.
• Construction Pipeline: The Trust has significant construction commitments totaling approximately $31.8 million for various medical office buildings and expansions, with completion dates ranging from late 2006 to late 2007.

Risks and Contingencies

• Concentration Risk: Approximately 48% of consolidated revenues are derived from facilities leased to UHS subsidiaries. UHS is also the Trust's Advisor.
• Government Investigation: UHS and its affiliates (including the operator of McAllen Medical Center) are under investigation by the Department of Health and Human Services regarding compliance with Medicare/Medicaid rules. UHS states it is cooperating but cannot evaluate potential financial exposure.
• Insurance Gaps: Two LLCs owning properties in California earthquake zones could not obtain earthquake insurance at economical rates.
• Competition: Intense competition in the McAllen, Texas market has eroded patient volume and profitability, potentially impacting bonus rents.

Investor Verification Checklist

• Non-Recurring Gains: Verify the sustainability of earnings by excluding the $11.3 million Chalmette gain and $1.9 million deferred gain recognition from net income analysis.
• UHS Financial Health: Review UHS's latest filings, given the Trust's heavy reliance on UHS for revenue (48%) and the ongoing government investigation into UHS affiliates.
• Construction Commitments: Assess the $31.8 million in outstanding construction commitments and the associated letters of credit ($18.9 million) to understand future capital requirements.
• Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, specifically the tangible net worth and debt service coverage ratios.
• FFO vs. Net Income: Analyze Funds from Operations ($21.8M for 9 months) as a more accurate measure of recurring operating performance than Net Income ($27.6M).