<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-9321
UNIVERSAL HEALTH REALTY INCOME TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-6858580
(State or other jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification No.)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 265-0688
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of common shares of beneficial interest outstanding at July 31, 1997 -
8,952,340
Page One of Twelve Pages
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UNIVERSAL HEALTH REALTY INCOME TRUST
I N D E X
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Statements of Income
Three and Six Months Ended --June 30, 1997 and 1996 ..................... Three
Condensed Balance Sheets -- June 30, 1997
and December 31, 1996.................................................... Four
Condensed Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996.................................. Five
Notes to Condensed Financial Statements..................................... Six & Seven
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... Eight, Nine & Ten
PART II. OTHER INFORMATION AND SIGNATURE .................................. Eleven & Twelve
</TABLE>
Page Two of Twelve Pages
<PAGE> 3
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH REALTY INCOME TRUST
Condensed Statements of Income
(amounts in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES (NOTE 2):
Base rental - UHS facilities $ 3,433 $ 3,432 $ 6,866 $ 6,865
Base rental - Non-related parties 1,337 1,018 2,627 1,984
Bonus rental 788 745 1,562 1,504
Interest 211 184 414 369
------- ------- ------- -------
5,769 5,379 11,469 10,722
------- ------- ------- -------
EXPENSES:
Depreciation & amortization 920 894 1,845 1,774
Interest expense 718 575 1,444 1,123
Advisory fees to UHS 274 250 543 501
Other operating expenses 329 229 663 423
------- ------- ------- -------
2,241 1,948 4,495 3,821
------- ------- ------- -------
Income before equity in limited liability corporations 3,528 3,431 6,974 6,901
Equity in income of limited liability corporations 22 159 234 272
======= ======= ======= =======
NET INCOME $ 3,550 $ 3,590 $ 7,208 $ 7,173
======= ======= ======= =======
NET INCOME PER SHARE $ 0.40 $ 0.40 $ 0.80 $ 0.80
======= ======= ======= =======
Weighted average number of shares and equivalents 8,960 8,959 8,962 8,958
======= ======= ======= =======
</TABLE>
See accompanying notes to these condensed financial statements.
Page Three of Twelve Pages
<PAGE> 4
UNIVERSAL HEALTH REALTY INCOME TRUST
Condensed Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS: 1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
REAL ESTATE INVESTMENTS:
Buildings & improvements $ 139,047 $ 138,400
Accumulated depreciation (28,362) (26,540)
--------- ---------
110,685 111,860
Land 19,697 19,683
Mortgage loans receivable, net -- 6,405
Construction loan and interest receivable 1,969 398
Construction in progress 3,112 1,246
Reserve for investment losses (91) (151)
--------- ---------
Net Real Estate Investments 135,372 139,441
OTHER ASSETS:
Cash 127 137
Bonus rent receivable from UHS 666 634
Rent receivable from non-related parties 108 32
Investments in limited liability corporations 9,636 7,932
Deferred charges and other assets, net 315 390
--------- ---------
$ 146,224 $ 148,566
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Bank borrowings $ 39,900 $ 42,000
Note payable to UHS 1,114 1,082
Accrued interest 216 234
Accrued expenses & other liabilities 752 686
Tenant reserves, escrows, deposits and prepaid rental 561 515
Minority interest 100 67
SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value; 5,000,000 shares authorized;
none outstanding .............................. -- --
Common shares, $.01 par value;
95,000,000 shares authorized; issued
and outstanding: 1997 - 8,952,340
1996 - 8,952,340 .............................. 90 90
Capital in excess of par value ...................... 128,643 128,643
Cumulative net income ............................... 105,362 98,154
Cumulative dividends ................................ (130,514) (122,905)
--------- ---------
Total Shareholders' Equity 103,581 103,982
--------- ---------
$ 146,224 $ 148,566
========= =========
</TABLE>
See accompanying notes to these condensed financial statements.
Page Four of Twelve Pages
<PAGE> 5
UNIVERSAL HEALTH REALTY INCOME TRUST
Condensed Statements of Cash Flows
(amounts in thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,208 $ 7,173
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 1,845 1,774
Amortization of interest rate cap 62 62
Provision for investment losses 80 --
Changes in assets and liabilities:
Rent receivable (108) (159)
Accrued expenses & other liabilities 66 (14)
Tenant escrows, deposits & prepaid rents 46 111
Mortgage loan interest receivable -- (60)
Accrued interest (18) 30
Payments made for investment losses (140) (86)
Deferred charges & other (30) 19
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,011 8,850
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited liability corporations (1,926) (6,069)
Acquisition of real property (661) (10,194)
Payments made for construction in progress (1,833) --
Advances under construction note receivable (1,571) --
Repayments under mortgage note receivable 6,457 --
Cash distributions in excess of income from LLCs 222 --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 688 (16,263)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings -- 14,965
Repayments of long-term debt (2,100) --
Dividends paid (7,609) (7,564)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,709) 7,401
-------- --------
Decrease in cash (10) (12)
Cash, beginning of period 137 139
-------- --------
CASH, END OF PERIOD $ 127 $ 127
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 1,368 $ 1,001
</TABLE>
See accompanying notes to these condensed financial statements.
Page Five of Twelve Pages
<PAGE> 6
UNIVERSAL HEALTH REALTY INCOME TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(unaudited)
(1) GENERAL
The financial statements included herein have been prepared by the Trust,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which, in the opinion of the
Trust, are necessary to fairly present results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the Trust
believes that the accompanying disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements, accounting policies and the
notes thereto included in the Trust's Annual Report on Form 10-K for the year
ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.
The Financial Accounting Standards Board recently issued Statement 128, Earnings
per Share, which is effective for financial statements for periods ending
December 15, 1997. Adoption of Statement 128 would have had no material effect
on the Trust's earnings per share for three and six month periods ended June 30,
1997 and 1996.
(2) RELATIONSHIP WITH UNIVERSAL HEALTH SERVICES, INC.
Approximately 71% and 75% for the three month periods ended June 30, 1997 and
1996 and 71% and 76% for the six month periods ended June 30, 1997 and 1996,
respectively, of the Trust's revenues were earned under the terms of the leases
with wholly-owned subsidiaries of Universal Health Services, Inc. ("UHS"). UHS
has unconditionally guaranteed the obligations of its subsidiaries under the
leases. Below is the detailed listing of the revenues received from UHS and
other non-related parties for the three and six months ended June 30, 1997 and
1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Base rental - UHS facilities $ 3,433,000 $ 3,432,000 $ 6,866,000 $ 6,865,000
Base rental - Non-related parties 1,337,000 1,018,000 2,627,000 1,984,000
----------- ----------- ----------- -----------
Total base rental 4,770,000 4,450,000 9,493,000 8,849,000
----------- ----------- ----------- -----------
Bonus rental - UHS facilities 671,000 627,000 1,333,000 1,275,000
Bonus rental - Non-related parties 117,000 118,000 229,000 229,000
----------- ----------- ----------- -----------
Total bonus rental
788,000 745,000 1,562,000 1,504,000
----------- ----------- ----------- -----------
Interest - Non-related parties 211,000 184,000 414,000 369,000
----------- ----------- ----------- -----------
Total revenues $ 5,769,000 $ 5,379,000 $11,469,000 $10,722,000
=========== =========== =========== ===========
</TABLE>
Page Six of Twelve Pages
<PAGE> 7
Certain of the Trust's facilities leased to subsidiaries of UHS have had
earnings before interest, taxes, depreciation, amortization and lease and rental
expense (EBITDAR) of less than 1.5 times the rent payable to the Trust. For the
twelve months ended June 30, 1997, two of the UHS facilities did not generate
sufficient EBITDAR to cover the annual rent expense payable to the Trust. The
leases on these facilities, which mature in 2000 and 2001, generated 18% of the
Trust's rental income for the twelve month period ending June 30, 1997. One
additional UHS facility had EBITDAR for the twelve month period ending June 30,
1997 which was less than 1.5 times the annual rent payable to the Trust. The
lease on this facility, which matures in 2001, generated 10% of the Trust's
rental income for the twelve month period ending June 30, 1997. Management of
the Trust can not predict whether the leases with subsidiaries of UHS, which
have renewal options at existing lease rates, or any of the Trust's other
leases, will be renewed at the end of their initial lease terms. If the leases
are not renewed at their current rates, the Trust would be required to find
other operators for those facilities and/or enter into leases on terms
potentially less favorable to the Trust than the current leases.
UHS owned approximately 8% percent of the Trust's outstanding shares of
beneficial interest as of June 30, 1997. The Trust has granted UHS an option to
purchase Trust shares in the future at fair market value to enable UHS to
maintain a 5% interest in the Trust. The Trust has no salaried employees and the
Trust's officers are all employees of UHS and receive no cash compensation from
the Trust.
(3) ACQUISITIONS
During the second quarter of 1997, the Trust added new investments to its
portfolio consisting of the following: (i) the purchase of a capital addition to
one of its medical office building and two additional properties located in
Louisiana and Georgia for a combined purchase price of $661,000 and; (ii) $1.9
million invested for the purchase of a 75% equity interest in a limited
liability company that purchased the Thunderbird Paseo Medical Plaza for a total
purchase price of $8.2 million, including $5.9 million of long-term,
non-recourse debt. Thunderbird Paseo Medical Plaza is a 58,000 net square foot
medical office building located on the campus of the Thunderbird Samaritan
Medical Center in Glendale, Arizona.
(4) DIVIDENDS
A dividend of $.425 per share or $3,805,000 in the aggregate was declared by the
Board of Trustees on June 4, 1997 and was paid on June 30, 1997 to shareholders
of record as of June 16, 1997.
(5) FINANCING
During 1993, the Trust funded $6.5 million for the purchase of the real assets
of the Madison Irving Medical Center, by Crouse Irving Memorial Properties,
located in Syracuse, New York. On June 2, 1997, the entire outstanding mortgage
loan balance of $6.3 million was repaid to the Trust.
Page Seven of Twelve Pages
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The matters discussed in this report as well as the news releases issued from
time to time by the Trust contain certain forward-looking statements that
involve risks and uncertainties, including the fact that a substantial portion
of the Trust's revenues are dependent on one operator, Universal Health
Services, Inc., and that a substantial portion of the Trust's leases and
mortgagors are involved in the healthcare industry which is undergoing
substantial changes and is subject to pressure from government reimbursement
programs and other third party payors. In August 1997, a five year budget plan
was approved which calls for a $115 billion reduction in the rate of increase in
Medicare spending over the next five years. Included in the proposal is a $39
billion reduction in the future rate of increases to payments made to hospitals.
In addition, the healthcare industry has been characterized in recent years by
increased competition and consolidation. Management of the Trust is unable to
predict the effect, if any, these industry factors will have on the operating
results of its lessees, including the facilities leased to subsidiaries of UHS,
or on their ability to meet their obligations under the terms of their leases
with the Trust. In addition, certain of the Trust's facilities leased to
subsidiaries of UHS have had EBITDAR of less than 1.5 times the rent payable to
the Trust. (see Note 2). Management of the Trust can not predict whether the
leases with subsidiaries of UHS, which have renewal options at existing lease
rates, or any of the Trust's other leases, will be renewed at the end of their
initial lease terms. If the leases are not renewed at their current rates, the
Trust would be required to find other operators for those facilities and/or
enter into leases on terms potentially less favorable to the Trust than the
current leases.
RESULTS OF OPERATIONS
The Trust has investments in twenty-seven facilities located in thirteen states.
The Trust invests in healthcare and human service related facilities including
acute care hospitals, behavioral healthcare facilities, rehabilitation
hospitals, sub-acute care facilities, surgery centers, child-care centers and
medical office buildings.
The second quarter dividend of $.425 per share or $3,805,000 in the aggregate
was paid on June 30, 1997.
For the quarters ended June 30, 1997 and 1996 net income totaled $3,550,000 and
$3,590,000 or $.40 per share in each quarter on net revenues of $5,769,000 and
$5,379,000, respectively. For the six months ended June 30, 1997 and 1996 net
income totaled $7,208,000 and $7,173,000 or $.80 per share in each six month
period on net revenues of $11,469,000 and $10,722,000, respectively. The
$390,000 increase in net revenue during the 1997 second quarter as compared to
the comparable prior year quarter was primarily attributable to a $319,000
increase in base rental from non-related parties and a $58,000 increase in bonus
rental from UHS facilities. The increase in base rental from non-related parties
resulted primarily from the acquisitions of four preschool and child-care
centers and a multi-tenant medical office building acquired during the second
quarter of 1996. The $747,000 increase in
Page Eight of Twelve Pages
<PAGE> 9
in net revenue for the six months ended June 30, 1997 over the comparable prior
year period was due primarily to a $643,000 increase in base rentals from
non-related parties due to the 1996 acquisitions mentioned above.
Interest expense increased $143,000 or 25% for the three months ended June 30,
1997 and $321,000 or 29% for the six months ended June 30, 1997 as compared to
the comparable prior year periods due to the increased borrowings used to
finance eleven new investments during 1996.
Depreciation and amortization expense increased $26,000 or 3% for the three
months ended June 30, 1997 and $71,000 or 4% for the six months ended June 30,
1997 over the comparable prior year periods due primarily to the depreciation
expense related to the medical office buildings and the preschool and child-care
centers acquired by the Trust during the second quarter of 1996.
Other operating expenses increased $100,000 or 44% during the second quarter of
1997 and $240,000 or 57% during the 1997 six month period as compared to the
comparable prior year periods due primarily to the expenses related to the
medical office buildings and the preschool and child-care centers acquired by
the Trust during the second quarter of 1996. The expenses relating to the
medical office buildings, which totaled $184,000 and $83,000 for the three month
periods ended June 30, 1997 and 1996 and $373,000 and $173,000 for the six month
periods ended June 30, 1997 and 1996, respectively, are passed on directly to
the tenants of these buildings and are included as revenue in the Trust's
statements of income. Also included in other operating expenses for the three
and six months ended June 30, 1997 was a $40,000 and $80,000, respectively,
increase in the reserve established for future expenses related to Lake Shore
Hospital.
Included in the Trust's financial results was $22,000 and $159,000 for the three
months ended June 30, 1997 and 1996 and $234,000 and $272,000 for the six months
ended June 30, 1997 and 1996, respectively, of income generated from the Trust's
ownership in limited liability corporations which own medical office buildings
in Arizona and Kentucky.
Funds from operations ("FFO"), which is the sum of net income plus depreciation
expense related to wholly owned investments and unconsolidated affiliates and
amortization of interest rate cap expense totaled $4.9 million and $4.6 million
for the three months ended June 30, 1997 and 1996 and $9.5 million and $9.1
million for the six months ended June 30, 1997 and 1996, respectively. FFO does
not represent cash flows from operations as defined by generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of the Trust's operating performance or to cash flows as
a measure of liquidity.
Page Nine of Twelve Pages
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1997, net cash provided by operating activities
was $9.0 million as compared to $8.9 million in the 1996 six month period. The
$161,000 increase in net cash provided by operating activities was due primarily
to a $186,000 increase in net income plus the addback of the non-cash charges
(depreciation, amortization, provision for investment losses and amortization of
interest rate cap expense), partially offset by $25,000 of other unfavorable net
working capital changes.
During the first six months of 1997, the $9.0 million of net cash provided by
operating activities and the $6.7 million of cash received for the repayment
under a mortgage note receivable and cash distributions received in excess of
income from limited liability corporations was primarily used to: (i) pay
dividends ($7.6 million); (ii) finance construction on two new medical office
buildings which will be owned by limited liability corporations and limited
partnerships in which the Trust will own an equity interest ($3.4 million);
(iii) repay long-term debt ($2.1 million); (iv) purchase a 75% equity interest
in a limited liability corporation ($1.9 million), and; (v) acquire additional
property ($661,000).
As of June 30, 1997 the Trust had approximately $27 million of unused borrowing
capacity under the terms of its $70 million revolving credit agreement. This
agreement matures on September 30, 2001 at which time all amounts then
outstanding are required to be repaid.
Page Ten of Twelve Pages
<PAGE> 11
PART II. OTHER INFORMATION
UNIVERSAL HEALTH REALTY INCOME TRUST
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The following information relates to matters submitted to the shareholders
of Universal Health Realty Income Trust. (the "Trust") at the Annual Meeting of
Shareholders on June 4, 1997.
(b) Not applicable.
(c) Election by holders of Trust share of one Class II Trustee
Daniel M. Cain
Votes cast in favor 7,611,005
Votes withheld 211,264
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
All other items of this report are inapplicable.
Page Eleven of Twelve Pages
<PAGE> 12
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1997 UNIVERSAL HEALTH REALTY INCOME TRUST
(Registrant)
/s/ Kirk E. Gorman
--------------------------------------
Kirk E. Gorman, President,
Chief Financial Officer, Secretary and
Trustee
(Principal Financial Officer and Duly
Authorized Officer.)
Page Twelve of Twelve Pages
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798783
<NAME> UNIVERSAL HEALTH REALTY INCOME TRUST
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 7,743
<ALLOWANCES> 5,091
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 161,856
<DEPRECIATION> 28,362
<TOTAL-ASSETS> 146,224
<CURRENT-LIABILITIES> 0
<BONDS> 41,014
0
0
<COMMON> 90
<OTHER-SE> 103,491
<TOTAL-LIABILITY-AND-EQUITY> 146,224
<SALES> 0
<TOTAL-REVENUES> 11,703
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</TABLE>
