UHT

Business Context and Reporting Period

Company: Universal Health Realty Income Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2004
Business Overview: The Trust invests in healthcare and human service facilities, including acute care hospitals, medical office buildings, and childcare centers. As of September 30, 2004, the portfolio consisted of 43 real estate investments across 15 states. A significant portion of revenues is derived from leases with subsidiaries of Universal Health Services, Inc. (UHS), which also serves as the Trust's Advisor.

Key Financial Metrics

Note: FFO is a non-GAAP measure reconciled to Net Income by adding back depreciation and amortization and deducting gains on sales of real property.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased $1.6 million (24%) for the quarter and $3.3 million (16%) for the nine-month period compared to the prior year. This growth is primarily attributed to the consolidation of three Limited Liability Companies (LLCs) effective April 1, 2004, under FASB Interpretation No. 46R.
• Expense Increases: Depreciation, amortization, and operating expenses increased significantly due to the consolidation of the three LLCs. Interest expense also rose due to the inclusion of consolidated LLC debt, partially offset by lower average borrowings and the expiration of an interest rate swap.
• Hurricane Damage: The Trust recorded a $1.9 million property write-down charge for storm damage at the Wellington Regional Medical Center in Florida. This charge was fully offset by a receivable from UHS, resulting in no net impact on income.
• Discontinued Operations: The Virtue Street Pavilion facility is classified as held for sale. The lessee (UHS subsidiary) exercised an option to purchase the facility for $7.32 million, expected to close in December 2004. This sale is projected to result in a gain of approximately $750,000 but will reduce future Funds from Operations as the rental income ($1.26 million annually) exceeds the interest savings from debt repayment.
• LLC Sales: The Trust recognized a $1.0 million gain in the nine-month period from its share of the sale of real property by an unconsolidated LLC.

Guidance, Outlook, and Risks

• Dividends: A quarterly dividend of $0.50 per share was declared and paid in September 2004.
• Liquidity: The Trust maintains an $80 million unsecured revolving credit facility (expandable to $100 million) expiring in May 2007. As of September 30, 2004, approximately $43 million was available for borrowing. The Trust is in compliance with all financial covenants.
• Lease Renewals and Expirations:
  • The Bridgeway Facility: Lease renewed for five years through December 2009 at current terms.
  • Tri-State Regional Rehabilitation Hospital: Lease renewed for five years; however, the renewal rate results in a $321,000 annual reduction in base rental.
  • Virtue Street Pavilion: Lease expires December 2004; sale to UHS subsidiary expected.
• Key Risks:
  • Concentration Risk: A substantial portion of revenues depends on UHS, which is also the Advisor. Conflicts of interest exist as officers are employees of UHS.
  • Healthcare Industry Volatility: Revenues are subject to changes in government reimbursement programs (Medicare/Medicaid) and managed care agreements.
  • Competition: Increased competition in markets like McAllen, Texas, could negatively impact net revenues and bonus rentals.
  • REIT Qualification: Failure to maintain REIT status would subject the Trust to corporate income taxes, significantly reducing cash flow available for distribution.

Investor Verification Checklist

• UHS Dependency: Verify the financial health of Universal Health Services, Inc., given that a significant portion of the Trust's revenue and lease guarantees are tied to this single operator.
• FFO Impact of Virtue Street Sale: Confirm the projected reduction in future Funds from Operations resulting from the December 2004 sale of the Virtue Street Pavilion facility.
• Consolidation Accounting: Review the impact of FIN 46R consolidation on the balance sheet, specifically the addition of $22.2 million in non-recourse debt and $39.1 million in assets from the three consolidated LLCs.
• Insurance Recovery: Monitor the status of the $1.9 million receivable from UHS regarding the hurricane damage at Wellington Regional Medical Center to ensure timely collection.
• Debt Covenants: Verify continued compliance with the revolving credit facility covenants, particularly the tangible net worth and dividend distribution limits.