FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 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 Number)
Universal Corporate Center
367 South Gulph Road
P.O. Box 61558 19406-0958
King of Prussia, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 265-0688
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Shares of beneficial interest,
$.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Aggregate market value of voting shares held by non-affiliates as of January 31,
1998: $181,635,256.
Number of shares of beneficial interest outstanding of registrant as of January
31, 1998: 8,954,840.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997 (incorporated by reference
under Part III).
<PAGE>
PART I
Item 1. BUSINESS
General
The Trust commenced operations on December 24, 1986. As of December 31,
1997, the Trust had investments in twenty-six facilities located in
twelve states consisting of the following:
<TABLE>
<CAPTION>
Facility Name Location Type of Facility Guarantor
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
De La Ronde (A) Chalmette, LA Acute Care Universal Health Services, Inc.
Virtue Street Pavilion (A) Chalmette, LA Rehabilitation Universal Health Services, Inc.
Inland Valley Regional Medical Ctr. (A) Wildomar, CA Acute Care Universal Health Services, Inc.
McAllen Medical Center (A) McAllen, TX Acute Care Universal Health Services, Inc.
Meridell Achievement Center (A) Austin, TX Behavioral Health Universal Health Services, Inc.
The Bridgeway (A) N.Little Rock, AR Behavioral Health Universal Health Services, Inc.
Wellington Regional Medical Center (A) W.Palm Beach, FL Acute Care Universal Health Services, Inc.
Vencor Hospital - Chicago (B) Chicago, IL Sub-Acute Care Vencor, Inc.
Tri-State Rehabilitation Hospital (B) Evansville, IN Rehabilitation HEALTHSOUTH Corporation
Fresno Herndon Medical Plaza (B) Fresno, CA Medical Office Bldg. ---
Family Doctor's Medical Office Bldg. (B) Shreveport, LA Medical Office Bldg. Columbia/HCA Healthcare Corp.
Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX Medical Office Bldg. Caremark International, Inc.
Professional Bldgs. at Kings Crossing (B) Kingwood, TX Medical Office Bldg. ---
Chesterbrook Academy (B) Audubon, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) New Britain, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) Newtown, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) Uwchlan, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Southern Crescent Center (B) Riverdale, GA Medical Office Bldg. ---
Desert Samaritan Hospital MOBs (C) Phoenix, AZ Medical Office Bldg. ---
Suburban Medical Center MOBs (D) Louisville, KY Medical Office Bldg. ---
Maryvale Samaritan Hospital MOBs (E) Phoenix, AZ Medical Office Bldg. ---
Desert Valley Medical Center MOB (F) Phoenix, AZ Medical Office Bldg. ---
Thunderbird Paseo Medical Plaza (G) Glendale, AZ Medical Office Bldg. ---
Cypresswood Professional Center (H) Houston, TX Medical Office Bldg. ---
Samaritan West Valley Medical Ctr. (I) Goodyear, AZ MOB, Imaging Ctr. ---
Lake Shore Hospital (J) Manchester, NH Unoccupied ---
<FN>
(A) Leased to subsidiaries of Universal Health Services, Inc.
(B) Real estate assets owned by the Trust and leased to an unaffiliated
third party or parties.
(C) The Trust has a 61% equity interest in a limited liability company
("LLC") which owns the real estate assets of this facility.
(D) The Trust has a 33% equity interest in an LLC which owns the real
estate assets of this facility on which construction was completed
during the third quarter of 1996. In connection with this property,
the Trust posted a $3.5 million standby letter of credit for the
benefit of the third party lending institution that provided financing
which matures in May, 1999.
(E) The Trust has a 60% interest in an LLC which owns the real estate
assets of this facility.
(F) The Trust has a 95% equity interest in an LLC which owns the real
estate assets of this facility.
(G) The Trust has a 75% equity interest in an LLC which owns the real
estate assets of this facility.
(H) The Trust has provided financing, which matures in August, 2002, to a
limited partnership in which the Trust owns a 77% controlling
interest. Construction on this facility was completed on a substantial
portion of the building and the facility was opened during the third
quarter of 1997. In connection with this investment, the Trust made a
capital contribution of $343,000 to the limited partnership.
(I) The Trust has a 89% equity interest in an LLC which owns the real
estate assets of this facility. Construction was completed and the
facility opened during the fourth quarter of 1997.
(J) The Trust received free and clear title to the real estate assets of
Lake Shore Hospital during 1995. The Trust continues to actively
negotiate with third parties interested in purchasing or leasing the
real estate assets of the Lake Shore facility.
</FN>
</TABLE>
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As of December 31, 1997, the Trust has invested an aggregate of $175
million in various real estate assets, mortgage loans, construction
loans and limited liability companies and limited partnerships which
own real estate assets. Included in the Trust's portfolio is ownership
of nine hospital facilities (aggregate investment of $136 million)
which contain an aggregate of 1,279 licensed beds. The leases with
respect to such facilities have fixed terms with an average of three
years remaining and provide for renewal options for up to six five-year
terms. The initial terms of these leases expire beginning in 1999.
Minimum rents are payable based on the initial acquisition costs of the
facilities and, with respect to all facilities other than the one
leased to Vencor Hospital - Chicago, additional rents are payable based
upon a percentage of each facility's revenue in excess of base year
amounts or CPI increases in excess of base year amounts. The lessees
have rights of first refusal to purchase the facilities exercisable
during and in most cases for 180 days after the expiration of the lease
terms and also have purchase options exercisable upon three to six
months notice at the end of each lease term at the facility's fair
market value.
For the hospital facilities owned by the Trust, the combined ratio of
earnings before interest, taxes, depreciation, amortization and lease
and rental expense (EBITDAR) (excluding a favorable prior year net
revenue adjustment recorded during 1996 at one of the Trust's
facilities) to minimum rent plus additional rent payable to the Trust
was approximately 4.7, 5.0, and 5.3 for the years ended December 31,
1997, 1996 and 1995, respectively. The coverage ratio for individual
facilities varies (see "Relationship to Universal Health Services,
Inc.").
Pursuant to the terms of the leases with subsidiaries of Universal
Health Services, Inc. ("UHS"), UHS is responsible for building
operations, maintenance and renovations required at the seven hospital
facilities leased from the Trust. For the Trust's multi-tenant medical
office buildings, cash reserves have been established to fund required
building maintenance and renovations. Lessees are required to maintain
all risk, replacement cost and commercial property insurance policies
on the leased properties. The Trust is one of the named insured and
believes the leased properties are adequately insured.
Relationship to Universal Health Services, Inc.
Leases. As of December 31, 1997, subsidiaries of UHS leased seven of
the nine hospital facilities owned by the Trust with initial terms
expiring in 1999 through 2003. The leases to the subsidiaries of UHS
are guaranteed by UHS and are cross-defaulted with one another. Each of
the leases contains renewal options of up to six 5-year periods. These
leases accounted for 79% of the total revenue of the Trust for the five
years ended December 31, 1997 (75% for the three years ended December
31, 1997).
For the year ended December 31, 1997, three of the UHS facilities did
not generate sufficient EBITDAR to cover the 1997 rent expense payable
to the Trust. The leases on these facilities, one which matures in 2000
and two which mature in 2001, generated 27% of the Trust's 1997 rental
income. All of the Trust's remaining hospital facilities, including the
facilities operated by non-related parties, had a combined 1997 EBITDAR
of 6.5 times (ranging from 2.2 times to 8.5 times) the 1997 rent
expense payable to the Trust.
For the year ended December 31, 1996, two of the UHS facilities did not
generate sufficient EBITDAR to cover the 1996 rent expense payable to
the Trust. The leases on these facilities, which mature in 2000 and
2001, generated 18% of the Trust's 1996 rental income. One additional
UHS facility had 1996 EBITDAR which was less than 1.5 times the 1996
rent payable to the Trust. The lease on this facility, which matures in
2001, generated 10% of the Trust's 1996 rental
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<PAGE>
income. One additional UHS facility had 1996 EBITDAR (excluding a
favorable prior year net revenue adjustment) which was less than 2.0
times the 1996 rent expense payable to the Trust. The lease on this
facility, which matures in 1999 generated 6% of the Trust's 1996 rental
income. All of the Trust's remaining hospital facilities, including the
facilities operated by non-related parties, had a combined 1996 EBITDAR
of 7.5 times (ranging from 2.1 times to 8.9 times) the 1996 rent
expense payable to the Trust.
In recent years, an increasing number of legislative initiatives have
been introduced or proposed in Congress and in state legislatures that
would effect major changes in the healthcare system, either nationally
or at the state level (see "Regulation"). 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.
Management of the Trust cannot 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. Representatives of UHS and the Trustees
who are unaffiliated with UHS (the "Independent Trustees") have
commenced informal discussions regarding the terms under which UHS
would be willing to extend the leases on those facilities with terms
expiring in 1999 through 2003, some of which have had EBITDAR of less
than 1.0 times the rent payable to the Trust. There is no assurance
that an agreement will be reached or, if an agreement is reached, what
terms will be agreed upon. 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.
Pursuant to the terms of the leases with UHS, the lessees have rights
of first refusal to: (i) purchase the respective leased facilities
during and for 180 days after the lease terms at the same price, terms
and conditions of any third party offer, or; (ii) renew the lease on
the respective leased facility at the end of, and for 180 days after,
the lease term at the same terms and conditions pursuant to any third
party offer. The leases also grant the lessees options, exercisable on
at least six months notice, to purchase the respective leased
facilities at the end of the lease term or any renewal term at the
facility's then fair market value. The terms of the leases also provide
that in the event UHS discontinues operations at the leased facility
for more than one year, or elects to terminate its lease prior to the
expiration of its term for prudent business reasons, UHS is obligated
to offer a substitution property. If the Trust does not accept the
substitution property offered, UHS is obligated to purchase the leased
facility back from the Trust at a price equal to the greater of its
then fair market value or the original purchase price paid by the
Trust. As noted below, transactions with UHS must be approved by a
majority of Independent Trustees. The purchase options and rights of
first refusal granted to the respective lessees to purchase or lease
the respective leased facilities, after the expiration of the lease
term, may adversely affect the Trust's ability to sell or lease a
facility, and may present a potential conflict of interest between the
Trust and UHS since the price and terms offered by a third party are
likely to be dependent, in part, upon the financial performance of the
facility during the final years of the lease term.
Advisory Agreement. UHS of Delaware, Inc. (the "Advisor"), a
wholly-owned subsidiary of UHS, serves as Advisor to the Trust under an
Advisory Agreement dated December 24, 1986 between the Advisor and the
Trust (the "Advisory Agreement"). Under the Advisory Agreement, the
Advisor is obligated to present an investment program to the Trust, to
use its best efforts to obtain investments suitable for such program
(although it is not obligated to present any particular
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<PAGE>
investment opportunity to the Trust), to provide administrative
services to the Trust and to conduct the Trust's day-to-day affairs. In
performing its services under the Advisory Agreement, the Advisor may
utilize independent professional services, including accounting, legal
and other services, for which the Advisor is reimbursed directly by the
Trust. The Advisory Agreement expires on December 31 of each year;
however, it is renewable by the Trust, subject to a determination by
the Independent Trustees that the Advisor's performance has been
satisfactory. The Advisory Agreement may be terminated for any reason
upon sixty days written notice by the Trust or the Advisor. The
Advisory Agreement has been renewed for 1998. All transactions with UHS
must be approved by the Independent Trustees. The Advisory Agreement
provides that the Advisor is entitled to receive an annual advisory fee
equal to .60% of the average invested real estate assets of the Trust,
as derived from its consolidated balance sheet from time to time. In
addition, the Advisor is entitled to an annual incentive fee equal to
20% of the amount by which cash available for distribution to
shareholders for each year, as defined in the Advisory Agreement,
exceeds 15% of the Trust's equity as shown on its balance sheet,
determined in accordance with generally accepted accounting principles
without reduction for return of capital dividends. No incentive fees
were paid during 1997, 1996 and 1995. The advisory fee is payable
quarterly, subject to adjustment at year end based upon audited
financial statements of the Trust.
Share Purchase Option. UHS has the option to purchase shares of
beneficial interest in the Trust at fair market value to maintain a 5%
interest in the Trust. As of December 31, 1997, UHS owned 8% of the
outstanding shares of beneficial interest.
Competition
The Trust believes that it is one of fifteen publicly traded real
estate investment trusts (REITs) currently investing primarily in
income-producing real estate with an emphasis on healthcare related
facilities. The REITs compete with one another in that each is
continually seeking attractive investment opportunities in healthcare
related facilities.
The Trust may also compete with banks and other companies, including
UHS, in the acquisition, leasing and financing of healthcare related
facilities. In most geographical areas in which the Trust's facilities
operate, there are other facilities which provide services comparable
to those offered by the Trust's facilities, some of which are owned by
governmental agencies and supported by tax revenues, and others of
which are owned by nonprofit corporations and may be supported to a
large extent by endowments and charitable contributions. Such support
is not available to the Trust's facilities. In addition, certain
hospitals which are located in the areas served by the Trust's
facilities are special service hospitals providing medical, surgical
and behavioral health services that are not available at the Trust's
hospitals or other general hospitals. The competitive position of a
hospital is to a large degree dependent upon the number and quality of
staff physicians. Although a physician may at any time terminate his or
her affiliation with a hospital, the Trust's hospitals seek to retain
doctors of varied specializations on its hospital staffs and to attract
other qualified doctors by improving facilities and maintaining high
ethical and professional standards. The competitive position of a
hospital is also affected by alternative healthcare delivery systems
such as preferred provider organizations ("PPOs"), health maintenance
organizations ("HMOs") and indemnity insurance programs. Such systems
normally involve a discount from a hospital's established charges. The
Trust's facilities continue to experience a shift in payor mix
resulting in an increase in revenues attributable to managed care
payors and unfavorable general industry trends which include pressures
to control healthcare costs. In response to increased pressure on
revenues, the Trust's facilities continue to implement cost control
programs at its facilities including more efficient staffing standards
and re-engineering of services.
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<PAGE>
Outpatient treatment and diagnostic facilities, outpatient surgical
centers, and freestanding ambulatory surgical centers also impact the
healthcare marketplace. Many of the Trust's facilities continue to
experience an increase in outpatient revenues which is primarily the
result of advances in medical technologies and pharmaceutical
improvements, which allow more services to be provided on an outpatient
basis, and increased pressure from Medicare, Medicaid, HMOs, PPOs, and
insurers to reduce hospital stays and provide services, where possible,
on a less expensive outpatient basis. The hospital industry in the
United States, as well as the Trust's acute care facilities, continue
to have significant unused capacity which has created substantial
competition for patients. Inpatient utilization continues to be
negatively affected by payor-required, pre-admission authorization and
by payor pressure to maximize outpatient and alternative healthcare
delivery services for less acutely ill patients. The Trust expects its
facilities to continue to experience increased competition, admission
constraints and payor pressures.
The Trust anticipates investing in additional healthcare related
facilities and leasing the facilities to qualified operators, perhaps
including UHS and subsidiaries of UHS.
Regulation
The Balanced Budget Act of 1997 (the "1997 Act"), enacted on August 5,
1997, calls for the government to trim the growth of federal spending
on Medicare by $115 billion and on Medicaid by $13 billion over the
next five years. The 1997 Act also calls for reductions in the future
rate of increases to payments made to hospitals and reduces the amount
of reimbursement for outpatient services, rehabilitation services, bad
debt expense and capital costs. Both Republicans and Democrats appear
to be working towards a balanced budget by the year 2002 and it is
likely that future budgets will contain certain further reductions in
the rate of increase in Medicare and Medicaid spending. Payments for
Medicare outpatient services provided at general hospitals and all
services provided at rehabilitation hospitals historically have been
reimbursed on costs, subject to certain limits. The 1997 Act requires
that the reimbursement for these services be converted to a prospective
payment system, which will be phased in over time. An increased
proportion of the revenues generated at the Trust's facilities are
derived from fixed payment services, including Medicare and Medicaid.
While management of the Trust is unable to predict what, if any, future
health reform legislation may be enacted at the federal or state level,
the Trust expects its facilities to continue to experience pressure to
limit expenditures by governmental healthcare programs. Further changes
in the Medicare or Medicaid programs and other proposals to limit
healthcare spending could have a material adverse impact on the
operating results of the Trust's facilities and the healthcare
industry.
In addition to the Medicare and Medicaid programs, other payors
continue to actively negotiate the amounts they will pay for services
performed. In general, the operators of the Trust's facilities expect
to continue to experience an increase in business from managed care
programs, including HMOs and PPOs. The consequent growth in managed
care networks and the resulting impact of these networks on the
operating results of the Trust's facilities vary among the markets in
which the Trust's facilities operate.
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Executive Officers of the Registrant
The executive officers of the Trust are as follows:
Name Age Position
Alan B. Miller 60 Chairman of the Board and
Chief Executive Officer
Kirk E. Gorman 47 President, Chief Financial
Officer, Secretary and Trustee
Charles F. Boyle 38 Vice President and
Controller
Cheryl K. Ramagano 35 Vice President and
Treasurer
Timothy J. Fowler 42 Vice President,
Acquisition and Development
Mr. Alan B. Miller has been Chairman of the Board and Chief Executive Officer of
the Trust since its inception in 1986. He served as President of the Trust until
March, 1990. Mr. Miller has been Chairman of the Board, President and Chief
Executive Officer of UHS since its inception in 1978. Mr. Miller also serves as
a director of CDI Corp, Genesis Health Ventures and Penn Mutual Life Insurance
Company.
Mr. Kirk E. Gorman has been President and Chief Financial Officer of the Trust
since March, 1990 and was elected to the Board of Trustees and Secretary in
December, 1994. Mr. Gorman had previously served as Vice President and Chief
Financial Officer of the Trust since April, 1987. Mr. Gorman was elected Senior
Vice President, Treasurer and Chief Financial Officer of UHS in 1992 and served
as its Senior Vice President and Treasurer since 1989.
Mr. Charles F. Boyle was elected Vice President and Controller of the Trust in
June, 1991. Mr. Boyle was promoted to Assistant Vice President - Accounting of
UHS in 1994 and served as its Director of Corporate Accounting since 1989.
Ms. Cheryl K. Ramagano was elected Vice President and Treasurer of the Trust in
September, 1992. Ms. Ramagano was promoted to Assistant Treasurer of UHS in 1994
and served as its Director of Finance since 1990.
Mr. Timothy J. Fowler was elected Vice President, Acquisition and Development of
the Trust upon the commencement of his employment with UHS in October, 1993.
Prior thereto, he served as a Vice President of The Chase Manhattan Bank, N.A.
since 1986.
The Trust has no salaried employees and the Trust's officers are all employees
of UHS and receive no cash compensation from the Trust.
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Item 2. Properties
The following table shows the Trust's individual investments by the type of
facility, capacity in terms of beds, and five-year occupancy levels based on the
information provided by the lessees or mortgagors.
<TABLE>
<CAPTION>
Lease
Number of Term
available End of Renewal
Type of beds @ Average Occupancy (1) Minimum initial term
Facility Name and Location facility 12/31/97 1997 1996 1995 1994 1993 rent term (years)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Virtue Street Pavilion Rehabilitation 45 64% 61% 57% 92% 81% $1,261,000 1999 25
De La Ronde Acute Care 118 64% 66% 67% 66% 68% 879,000 2003 15
Chalmette, Louisiana (2)
Inland Valley Regional Medical Center Acute Care 80 52% 49% 49% 45% 50% 1,857,000 2001 30
Wildomar, California (3)
McAllen Medical Center Acute Care 467 76% 88% 87% 89% 86% 5,485,000 2001 30
McAllen, Texas (3)
Wellington Regional Medical Center Acute Care 120 36% 36% 30% 32% 35% 2,495,000 2001 30
West Palm Beach, Florida (3)
The BridgeWay Behavioral Health 70 68% 62% 65% 61% 57% 683,000 1999 25
North Little Rock, Arkansas
Meridell Achievement Center Behavioral Health 114 47% 45% 65% 47% 44% 1,071,000 2000 20
Austin, Texas
Tri-State Regional Rehabilitation Hospital Rehabilitation 80 74% 59% 59% 61% 71% 1,113,000 1999 25
Evansville, Indiana (4)
Vencor Hospital - Chicago Sub-Acute Care 81 50% 45% 38% 38% - 1,065,000 2001 25
Chicago, Illinois (5)
Fresno - Herndon Medical Plaza Medical - 100% 100% 100% - - 729,000 1999 various
Fresno, California (6) Office Building -2003
Family Doctor's Medical Office Building Medical - 100% 100% 100% - - 240,000 2011 10
Shreveport, Louisiana (7) Office Building
7
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Item 2. Properties (continued)
Lease
Number of Term
available End of Renewal
Type of beds @ Average Occupancy (1) Minimum initial term
Facility Name and Location facility 12/31/97 1997 1996 1995 1994 1993 rent term (years)
Kelsey-Seybold Clinic at King's Crossing Medical - 100% 100% 100% - - $247,000 2005 10
Professional Center at King's Crossing Office Buildings - 100% 93% 100% - - 278,000 2000 various
Kingwood, Texas (8) -2005
Chesterbrook Academy Preschool & - 92% 81% - - - 155,000 2010 14
Audubon, Pennsylvania (9) Childcare
Carefree Learning Center Preschool & - 88% 71% - - - 118,000 2010 14
New Britain, Pennsylvania (9) Childcare
Carefree Learning Center Preschool & - 61% 61% - - - 113,000 2010 14
Newtown, Pennsylvania (9) Childcare
Carefree Learning Center Preschool & - 96% 93% - - - 118,000 2010 14
Uwchlan, Pennsylvania (9) Childcare
The Southern Crescent Center Medical - 100% 89% - - - 802,000 1999 various
Riverdale, Georgia (10) Office Buildings -2006
The Cypresswood Professional Center Medical - 96% - - - - 525,000 2002 various
Houston, Texas (11) Office Buildings -2007
</TABLE>
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(1) Average occupancy rate for the hospital facilities is based on the
average number of available beds occupied during the five years ended
December 31, 1997. Average occupancy rate for the multi-tenant medical
office buildings is based on the occupied square footage of each
building and the average occupancy rate for the preschool and childcare
centers is based on enrollment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for effects
of various occupancy levels at the Trust's hospital facilities. Average
available beds is the number of beds which are actually in service at
any given time for immediate patient use with the necessary equipment
and staff available for patient care. A hospital may have appropriate
licenses for more beds than are in service for a number of reasons,
including lack of demand, incomplete construction, and anticipation of
future needs.
(2) The operations of The Virtue Street Pavilion and De La Ronde, two
facilities which are separated by approximately one mile, were combined
at the end of 1989. Each facility is leased pursuant to a separate
lease. The De La Ronde is a 118-bed medical/surgical facility. The
Virtue Street Pavilion is a 73-bed facility made up of a physical
rehabilitation unit, skilled nursing and inpatient behavioral health
services. In December of 1994, the operator of the Virtue Street
Pavilion entered into a three year sub-lease agreement with Lifecare
Hospitals of New Orleans, LLC, for a portion of the facility. Annual
rental is $1.1 million under the provisions of this agreement. The
sub-lease, which expired in December, 1997, contains two three year
extensions at the lessee's option. The operator of the facility has
granted the lessee a month-to-month extension under the lease while
renewal discussions are being held. No assurance can be given as to the
effect, if any, the consolidation of the two facilities as mentioned
above, had on the underlying value of the Virtue Street Pavilion and De
La Ronde. Rental commitments and the guarantee by UHS under the
existing leases continue for the remainder of the respective terms of
the leases.
(3) During the third quarter of 1995, UHS purchased the assets of
Westlake Medical Center, ("Westlake") a 126-bed hospital of which the
majority of real estate assets were owned by the Trust and leased to
UHS. In exchange for the real estate assets of Westlake and the
termination of the lease, the Trust received substitution properties
valued at approximately $19 million (the Trust's original purchase
price of Westlake) consisting of additional real estate assets which
were owned by UHS but related to three acute care facilities, of which
the Trust owns the real estate and which are operated by UHS (McAllen
Medical Center, Inland Valley Regional Medical Center and Wellington
Regional Medical Center). These additional real estate assets represent
major additions and expansions made to these facilities by UHS since
the purchase of the facilities by the Trust from UHS in 1986. The Trust
also purchased from UHS, additional real estate assets related to
McAllen Medical Center for approximately $1.9 million in cash. Total
annual base rental payments from UHS to the Trust on the substituted
properties amount to $2.4 million which equals the total base and bonus
rental earned by the Trust on the Westlake facility during 1994 ($2.1
million base and $300,000 bonus). Total annual base rental payments on
the additional real estate assets purchased related to McAllen Medical
Center will be approximately $200,000. Bonus rental on the substituted
and purchased real estate assets will be equal to 1% of the growth in
revenues, in excess of base year amounts, generated by these additional
assets. The guarantee by UHS under the existing leases, as amended to
include the additional property, will continue.
(4) The Trust purchased this hospital during 1989 for approximately
$7.5 million. During 1993, the Trust purchased for approximately $1.1
million, a 20 bed addition which was added to the facility. The Trust
entered into an agreement with the operator, an unaffiliated third
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party, to lease the facility for an initial fixed term of 10 years,
with the operator having the option to extend the lease for five 5-year
renewal terms.
(5) During December of 1993, UHS, the former lessee and operator of
Belmont Community Hospital, sold the operations of the facility to
THC-Chicago, Inc., an indirect wholly-owned subsidiary of Community
Psychiatric Centers ("CPC"). Concurrently, the Trust purchased certain
related real property from UHS for $1 million in cash and a note
payable with a carrying value of $1,147,000 at December 31, 1997. The
note payable has a face value of $1 million and is due on December 31,
2001. The amount of interest payable on this note is contingent upon
the financial performance of this leased facility and its estimated
fair value at the end of the initial lease term. The Trust has
estimated the total amount payable under the terms of this note and has
discounted the payments to their net present value using a 6% rate.
Included in the Trust's 1997 financial results is approximately $65,000
of interest expense related to this note. In connection with this
transaction, UHS's lease with the Trust was terminated and the Trust
entered into an eight year lease agreement with THC-Chicago. In 1997,
CPC was acquired by Vencor, Inc. who assumed their obligations under
the lease and renamed the facility Vencor Hospital-Chicago. The lease
is guaranteed by Vencor, Inc.
(6) In November of 1994, the Trust purchased the Fresno-Herndon Medical
Plaza located in Fresno, California for $6.3 million. The 37,800 square
foot medical office building is leased to several tenants, including an
outpatient surgery center operated by Columbia/HCA Healthcare
Corporation, under the terms of leases with expiration dates ranging
from November, 1999 to March, 2003. The Trust has granted the seller
the option to repurchase the property in November, 2001 for $7,250,000.
(7) During the third quarter of 1995, the Trust purchased for $1.6
million, a medical office building on the campus of a hospital owned by
Columbia/HCA Healthcare Corporation located in Shreveport, Louisiana.
The medical office building is currently being leased under the terms
of a master lease agreement with Columbia/HCA Healthcare Corporation.
(8) In December of 1994, the Trust agreed to provide construction
financing for the Professional Center at Kings Crossing, of which $1.1
million was advanced during 1994 and $3.2 million was advanced during
1995. During the fourth quarter of 1995, upon completion and occupancy
of the properties, the Trust purchased the single tenant and two
multi-tenant medical office buildings for the total construction cost
of $4.3 million. The single tenant building consists of 20,000 net
square feet and is leased to Kelsey-Seybold, a subsidiary of Caremark
International, Inc., for an initial term of 10 years. The two
multi-tenant buildings total 27,535 net square feet and are occupied by
tenants consisting primarily of medical professionals.
(9) During the second quarter of 1996, the Trust purchased four
preschool and childcare centers located in southeast Pennsylvania for a
total of $3.9 million. The childcare centers, which were purchased from
a subsidiary of Nobel Education Dynamics, Inc. ("Nobel"), were leased
back to Nobel pursuant to the terms of long-term, triple net leases.
(10) During the second quarter of 1996, the Trust purchased The
Southern Crescent Center, multi-tenant medical office building, for
approximately $6 million. The Southern Crescent Center is a 41,400
square foot, multi-tenant medical office building located adjacent to
the Southern Regional Medical Center in Riverdale, Georgia.
10
<PAGE>
(11) Construction on the Cypresswood Professional Center, located in
Houston, Texas, was completed during 1997 for a total cost of $4.4
million. In connection with this investment, the Trust provided
five-year financing (which matures in August, 2002) to a limited
partnership which owns the real estate assets of this facility. The
Trust owns a 77% controlling interest in the partnership.
Item 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. No matter was submitted during the fourth quarter of
the year ended December 31, 1997 to a vote of security holders.
11
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Trust's shares of beneficial interest are listed on the New York
Stock Exchange. The high and low closing sales prices for the Trust
shares of beneficial interest for each quarter in the two years ended
December 31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ---------------------------------------
High Price Low Price High Price Low Price
----------------- ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
First Quarter $22 3/8 $19 3/4 $20 $17 1/2
Second Quarter $20 $18 1/2 $19 7/8 $18 1/8
Third Quarter $21 1/2 $18 15/16 $19 7/8 $18 3/8
Fourth Quarter $21 7/8 $20 1/16 $20 1/2 $18 1/2
</TABLE>
As of January 31, 1998 there were approximately 1,074 shareholders of
record of the Trust's shares of beneficial interest. It is the Trust's
intention to declare quarterly dividends to the holders of its shares
of beneficial interest so as to comply with applicable sections of the
Internal Revenue Code governing real estate investment trusts.
Covenants relating to the revolving credit facility limit the Trust's
ability to increase dividends in excess of 95% of cash available for
distribution unless additional distributions are required to be made so
as to comply with applicable sections of the Internal Revenue Code and
related regulations governing real estate investment trusts. In each of
the past five years, dividends per share were declared as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
First Quarter $ .425 $ .420 $ .42 $ .415 $ .415
Second Quarter .425 .425 .42 .415 .415
Third Quarter .425 .425 .42 .415 .415
Fourth Quarter .430 .425 .42 .420 .415
------ ------ ------ ------ ------
$1.705 $1.695 $1.68 $1.665 $1.66
====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Financial highlights for the Trust for the five years ended December
31, 1997 were as follows:
<TABLE>
<CAPTION>
1997 (1) 1996(1) 1995(1) 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues $22,764,000 $21,923,000 $20,417,000 $18,826,000 $18,263,000
Net income $13,967,000 $14,158,000 $13,584,000 $14,312,000 $12,259,000
Funds from
Operations (2) $18,809,000 $18,174,000 $17,024,000 $17,501,000 $14,911,000
Per Share Data:
Net income-Basic $1.56 $1.58 $1.52 $1.60 $1.45
Net income-Diluted $1.56 $1.58 $1.52 $1.60 $1.45
Dividends $1.705 $1.695 $1.68 $1.665 $1.66
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Funds from operations, which does not represent cash provided by
operating activities 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, is calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income $ 13,967,000 $ 14,158,000 $ 13,584,000 $ 14,312,000 $ 12,259,000
Depreciation expense:
Consolidated investments 3,740,000 3,554,000 3,315,000 3,127,000 3,023,000
Unconsolidated affiliates 978,000 337,000 -- -- --
Amortization of interest
rate cap 124,000 125,000 125,000 62,000 --
Gain on disposal of assets -- -- -- -- (371,000)
============ ============ ============ ============ ============
Total $ 18,809,000 $ 18,174,000 $ 17,024,000 $ 17,501,000 $ 14,911,000
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
At End of Period 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total Assets $146,755,000 $148,566,000 $132,770,000 $128,907,000 $126,657,000
Debt $ 42,347,000 $ 43,082,000 $ 26,396,000 $ 21,283,000 $ 18,947,000
</TABLE>
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
General
The Trust commenced operations on December 24, 1986. As of December 31,
1997, the Trust had investments in twenty-six facilities located in
twelve states consisting of the following:
<TABLE>
<CAPTION>
Facility Name Location Type of Facility Guarantor
<S> <C> <C> <C> <C>
De La Ronde (A) Chalmette, LA Acute Care Universal Health Services, Inc.
Virtue Street Pavilion (A) Chalmette, LA Rehabilitation Universal Health Services, Inc.
Inland Valley Regional Medical Ctr. (A) Wildomar, CA Acute Care Universal Health Services, Inc.
McAllen Medical Center (A) McAllen, TX Acute Care Universal Health Services, Inc.
Meridell Achievement Center (A) Austin, TX Behavioral Health Universal Health Services, Inc.
The Bridgeway (A) N.Little Rock, AR Behavioral Health Universal Health Services, Inc.
Wellington Regional Medical Center (A) W.Palm Beach, FL Acute Care Universal Health Services, Inc.
Vencor Hospital - Chicago (B) Chicago, IL Sub-Acute Care Vencor, Inc.
Tri-State Rehabilitation Hospital (B) Evansville, IN Rehabilitation HEALTHSOUTH Corporation
Fresno Herndon Medical Plaza (B) Fresno, CA Medical Office Bldg. ---
Family Doctor's Medical Office Bldg. (B) Shreveport, LA Medical Office Bldg. Columbia/HCA Healthcare Corp.
Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX Medical Office Bldg. Caremark International, Inc.
Professional Bldgs. at Kings Crossing (B) Kingwood, TX Medical Office Bldg. ---
Chesterbrook Academy (B) Audubon, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) New Britain, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) Newtown, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Carefree Learning Center (B) Uwchlan, PA Preschool & Childcare Nobel Education Dynamics & Subs.
Southern Crescent Center (B) Riverdale, GA Medical Office Bldg. ---
Desert Samaritan Hospital MOBs (C) Phoenix, AZ Medical Office Bldg. ---
Suburban Medical Center MOBs (D) Louisville, KY Medical Office Bldg. ---
Maryvale Samaritan Hospital MOBs (E) Phoenix, AZ Medical Office Bldg. ---
Desert Valley Medical Center MOB (F) Phoenix, AZ Medical Office Bldg. ---
Thunderbird Paseo Medical Plaza (G) Glendale, AZ Medical Office Bldg. ---
Cypresswood Professional Center (H) Houston, TX Medical Office Bldg. ---
Samaritan West Valley Medical Ctr. (I) Goodyear, AZ MOB, Imaging Ctr. ---
Lake Shore Hospital (J) Manchester, NH Unoccupied ---
<FN>
(A) Leased to subsidiaries of Universal Health Services, Inc.
(B) Real estate assets owned by the Trust and leased to an unaffiliated
third party or parties.
(C) The Trust has a 61% equity interest in a limited liability company
("LLC") which owns the real estate assets of this facility.
(D) The Trust has a 33% equity interest in an LLC which owns the real
estate assets of this facility on which construction was completed
during the third quarter of 1996. In connection with this property,
the Trust posted a $3.5 million standby letter of credit for the
benefit of the third party lending institution that provided financing
which matures in May, 1999.
(E) The Trust has a 60% interest in an LLC which owns the real estate
assets of this facility.
(F) The Trust has a 95% equity interest in an LLC which owns the real
estate assets of this facility.
(G) The Trust has a 75% equity interest in an LLC which owns the real
estate assets of this facility.
(H) The Trust has provided financing which matures in August, 2002, to a
limited partnership in which the Trust owns a 77% controlling
interest. Construction on this facility was completed on a substantial
portion of the building and the facility was opened during the third
quarter of 1997. In connection with this investment, the Trust made a
capital contribution of $343,000 to the limited partnership.
(I) The Trust has a 89% equity interest in an LLC which owns the real
estate assets of this facility. Construction was completed and the
facility opened during the fourth quarter of 1997.
(J) The Trust received free and clear title to the real estate assets of
Lake Shore Hospital during 1995. The Trust continues to actively
negotiate with third parties interested in purchasing or leasing the
real estate assets of the Lake Shore facility.
</FN>
</TABLE>
14
<PAGE>
It is the Trust's intention to declare quarterly dividends to the
holders of its shares of beneficial interest so as to comply with
applicable sections of the Internal Revenue Code governing real estate
investment trusts. Convenants relating to the revolving credit facility
limit the Trust's ability to increase dividends in excess of 95% of
cash available for distribution unless additional distributions are
required to be made to comply with applicable sections of the Internal
Revenue Code and related regulations governing real estate investment
trusts. During 1997, dividends of $1.705 per share, or $15,264,000 in
the aggregate, were declared and paid.
Net cash generated by operating activities was $17.7 million in 1997,
$18.0 million in 1996 and $17.1 million in 1995. The $300,000 net
decrease in 1997 as compared to 1996 was due primarily to a $100,000
decrease in net income plus the addback of the non-cash charges
(depreciation, amortization, reserve for investment losses and
amortization of interest rate cap expense) and $200,000 of unfavorable
changes in other net working capital accounts. The $900,000 net
increase in 1996 as compared to 1995 was due primarily to a $1 million
increase in net income plus the addback of the non-cash charges (as
defined above).
During 1997, the $17.7 million of cash flows generated from operations,
the $6.8 million of cash received for repayments under a mortgage and a
construction note receivable (net of $3.4 million of advances in 1997)
and the $600,000 of cash distributions received in excess of income
from the Trust's investments in LLCs were used primarily to: (i) pay
dividends ($15.3 million); (ii) purchase real property and additions to
land and buildings ($4.2 million); (iii) purchase equity interests in
two limited liability companies ($3.7 million, see Note 3), and; (iv)
repay debt ($800,000). As of December 31, 1997, the Trust had a $1
million short-term cash investment which was used to repay debt in the
beginning of January, 1998.
During 1996, the $18.0 million of cash flows generated from operations
and the $16.6 million of additional borrowings were used primarily to:
(i) pay dividends ($15.2 million); (ii) purchase additional real
property ($10.2 million, see Note 3); (iii) purchase equity interest in
various limited liability companies ($7.6 million, see Note 3), and;
(iv) begin construction on two new medical office buildings which will
be owned by limited liability companies and limited partnerships in
which the Trust will own equity interests ($1.6 million, see Note 3).
The Trust has a $70 million unsecured non-amortizing revolving credit
agreement (the "Agreement"), which expires on September 30, 2001. The
Agreement provides for interest at the Trust's option, at the
certificate of deposit rate plus 3/4% to 1 1/8%, Eurodollar rate plus
5/8% to 1 1/8% or the prime rate. A fee of .15% to .375% is required on
the unused portion of this commitment. The margins over the certificate
of deposit rate, Eurodollar rate and the commitment fee are based upon
the Trust's debt to cash flow ratio as defined by the Agreement. At
December 31, 1997 the applicable margin over the certificate of deposit
and Eurodollar rates were 7/8% and 3/4%, respectively, and the
commitment fee was .20%. There are no compensating balance
requirements. The Agreement contains a provision whereby the
commitments will be reduced by 50% of the proceeds generated from any
new equity offering. At December 31, 1997, the Trust had approximately
$25 million of available borrowing capacity.
Covenants relating to the revolving credit facility require the
maintenance of a minimum tangible net worth and specified financial
ratios, limit the Trust's ability to incur additional debt, limit the
aggregate amount of mortgage receivables and limit the Trust's ability
to increase dividends in excess of 95% of cash available for
distribution, unless additional distributions are required to comply
with the applicable section of the Internal Revenue Code and related
regulations governing real estate investment trusts.
15
<PAGE>
The Trust has entered into interest rate swap agreements and an
interest rate cap agreement which are designed to reduce the impact of
changes in interest rates on its floating rate revolving credit notes.
The Trust has three outstanding swap agreements for notional principal
amounts of $5 million, $4 million and $1,580,000 which mature in May,
1999, July, 2002 and May, 2001, respectively. These swap agreements
effectively fix the interest rate on $10,580,000 of variable rate debt
at 7.69%. The interest rate cap, for which the Trust paid $622,750,
(unamortized premium of $187,000 at December 31, 1997) matures in June,
1999 and fixes the maximum rate on $15 million of variable rate
revolving credit notes at 7.75%. The interest rate swap and cap
agreements were entered into in anticipation of certain borrowing
transactions made by the Trust during 1995, 1996 and 1997. The
effective rate on the Trust's revolving credit notes including
commitment fees and interest rate swap expense was 6.9%, 6.8% and 7.5%
during 1997, 1996 and 1995, respectively. Additional interest expense
recorded as a result of the Trust's hedging activity, which is included
in the effective interest rates shown above, was $118,000, $130,000 and
$69,000 in 1997, 1996 and 1995, respectively. The Trust is exposed to
credit loss in the event of nonperformance by the counterparties to the
interest rate swap and cap agreements. These counterparties are major
financial institutions and the Trust does not anticipate nonperformance
by the counterparties which are rated A or better by Moody's Investors
Service. Termination of the interest rate swaps at December 31, 1997
would have resulted in payments to the counterparties of approximately
$255,000 and termination of the interest rate cap would have resulted
in a payment to the Trust of approximately $3,800. The fair value of
the interest rate swap and cap agreements at December 31, 1997 reflects
the estimated amounts that the Trust would pay or receive to terminate
the contracts and are based on quotes from the counterparties.
Results of Operations
Total revenues increased 4% or $841,000 to $22.8 million in 1997 as
compared to 1996 and 7% or $1.5 million to $21.9 million in 1996 as
compared to 1995. The $841,000 increase during 1997 over 1996 was
primarily attributable to an increase in base rentals from non-related
parties due to the various acquisitions made by the Trust during the
second quarter of 1996 and the third quarter of 1997 (see Note 3). The
$1.5 million increase during 1996 as compared to 1995 was attributable
to an increase in base rentals from non-related parties due to the
various acquisitions made by the Trust during the fourth quarter of
1995 and the second quarter of 1996 (see Note 3).
The average occupancy rate of a hospital is affected by a number of
factors, including the number of physicians using the hospital, changes
in the number of beds, the composition and size of the population of
the community in which the hospital is located, general and local
economic conditions, variations in local medical and surgical practices
and the degree of outpatient use of the hospital services. Current
industry trends in utilization and occupancy have been significantly
affected by changes in reimbursement policies of third party payors. A
continuation of such industry trends could have a material adverse
impact upon the future operating performance of the Trust's facilities.
The Trust's facilities have experienced growth in outpatient
utilization over the past several years. The increase is primarily the
result of advances in medical technologies and pharmaceutical
improvements, which allow more services to be provided on an outpatient
basis, and increased pressure from Medicare, Medicaid, health
maintenance organizations (HMOs), preferred provider organizations
(PPOs) and insurers to reduce hospital stays and provide services,
where possible, on a less expensive outpatient basis. The hospital
industry in the United States, as well as the Trust's acute care
facilities, continue to have significant unused capacity which has
created substantial competition for patients. Inpatient utilization
continues to be negatively affected by payor-required, pre-admission
16
<PAGE>
authorization and payor pressure to maximize outpatient and alternative
healthcare delivery services for less acutely ill patients. The Trust
expects its facilities to continue to experience increased competition,
admission constraints and payor pressures.
An increased proportion of the revenues generated at the Trust's
hospital facilities are derived from fixed payment services, including
Medicare and Medicaid. The Medicare program reimburses the Trust's
hospital facilities primarily based on established rates by a diagnosis
related group for acute care hospitals and by cost based formula for
behavioral health facilities. Historically, rates paid under Medicare's
prospective payment system ("PPS") for inpatient services have
increased, however, these increases have been less than cost increases.
Pursuant to the terms of The Balanced Budget Act of 1997 (the "1997
Act"), there will be no increases in the rates paid to hospitals for
inpatient care through September 30, 1998. Reimbursement for bad debt
expense and capital costs, as well as other items, have been reduced.
Payments for Medicare outpatient services provided at general hospitals
and all services provided at rehabilitation hospitals historically have
been reimbursed on costs, subject to certain limits. The 1997 Act
requires that the reimbursement for these services be converted to a
PPS, which will be phased in over time. While the Trust is unable to
predict what, if any, future health reform legislation may be enacted
at the federal or state level, the Trust expects its facilities to
continue to experience pressure to limit expenditures by governmental
healthcare programs. Further changes in the Medicare or Medicaid
programs and other proposals to limit healthcare spending could have a
material adverse impact on the operating results of the Trust's
facilities and the healthcare industry.
In general, the operators of the Trust's facilities expect to continue
to experience an increase in business from managed care programs,
including HMOs and PPOs. The consequent growth in managed care networks
and the resulting impact of these networks on the operating results of
the Trust's facilities vary among the markets in which the Trust's
facilities operate. Management of the Trust is unable to predict the
rate of growth of the net revenues of its facilities and the resulting
impact on bonus revenues, which are computed as a percentage of each
facility's net revenues in excess of base year amounts or CPI increases
in excess of base year amounts. Net revenues of the Trust's facilities
are dependent upon developments in medical technologies and physician
practice patterns, both of which are beyond the control of management
of the facilities.
Interest expense increased $378,000 or 15% in 1997 as compared to 1996
due primarily to the additional borrowings used to finance the 1996 and
1997 acquisitions and additions (see Note 3). Interest expense
increased $740,000 or 41% in 1996 as compared to 1995 due primarily to
the additional borrowings used to finance the purchase of equity
interests in various limited liability companies and limited
partnerships during the first and second quarters of 1996, the purchase
of four preschool and child-care centers during the second quarter of
1996, and the medical office buildings acquired by the Trust during the
third and fourth quarters of 1996 (see Note 3).
Depreciation and amortization expense increased $139,000 or 4% in 1997
as compared to 1996 due primarily to the depreciation expense related
to the 1997 and 1996 acquisitions described in Note 3. Depreciation and
amortization expense increased $254,000 or 8% in 1996 as compared to
1995 due to the depreciation expense related to the 1996 and 1995
acquisitions (see Note 3).
Other operating expenses increased $276,000 or 24% in 1997 as compared
to 1996 due primarily to the expenses related to the medical office
buildings acquired by the Trust during the second quarter of 1996 and
the third quarter of 1997 and a $100,000 increase in various other
operating expenses. Other operating expenses increased $476,000 or 70%
in 1996 as compared
17
<PAGE>
to 1995 due primarily to the expenses related to the medical office
buildings acquired by the Trust during the fourth quarter of 1995 and
the second quarter of 1996 and a $220,000 increase in the reserve
established for future expenses related to the settlement of Lakeshore
Hospital. The expenses related to the medical office buildings totaled
$769,000 in 1997, $551,000 in 1996 and $290,000 in 1995. The majority
of these expenses are passed on directly to the tenants and are
included as revenues in the Trust's statements of income.
Net income for 1997 was $14.0 million or $1.56 per basic and diluted
share compared to $14.2 million or $1.58 per basic and diluted share in
1996 and $13.6 million or $1.52 per basic and diluted share in 1995.
Funds from operations ("FFO"), which is the sum of net income plus
depreciation expense for consolidated investments and unconsolidated
investments and amortization of interest rate cap expense, totaled
$18.8 million in 1997, $18.2 million in 1996 and $17.0 million in 1995.
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.
General
The matters discussed in this report, as well as the news releases
issued from time to time by the Trust, include certain statements
containing the words "believes", "anticipates", "intends", "expects",
and words of similar import, which constitute "forward-looking
statements", within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the
actual results, performance achievements of the Trust or industry
results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, the fact that a
substantial portion of the Trust's revenues are dependent on one
operator, Universal Health Services, Inc., ("UHS") and that a
substantial portion of the Trust's leases 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 recent years, an increasing number of
legislative initiatives have been introduced or proposed in Congress
and in state legislatures that would effect major changes in the
healthcare system, either nationally or at the state level. 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. The
Trust disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Management of the Trust cannot 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. Representatives of UHS and the Trustees
who are unaffiliated with UHS have commenced informal discussions
regarding the terms under which UHS would be willing to extend the
leases on those facilities with terms expiring in 1999 through 2003,
some of which have had EBITDAR of less than 1.0 times the rent payable
to the Trust (see Note 2). There is no assurance that an agreement will
be reached or, if an agreement is reached, what terms will be agreed
upon. 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.
18
<PAGE>
Management of the Trust recognizes the need to evaluate the impact on
its operations of the change to calendar year 2000 and does not expect
the total cost of required building related modifications to have a
material impact on its results of operations. However, management of
the Trust cannot estimate the magnitude of calendar year 2000 related
issues on the operations of its tenants and no estimates can be given
on the potential adverse impact on the Trust's results of operations
resulting from failure of its tenants to adequately prepare for the
year 2000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Trust's Balance Sheets and its Statements of Income, Changes in
Shareholders' Equity and Cash Flows, together with the report of Arthur
Andersen LLP, independent public accountants, are included elsewhere
herein. Reference is made to the "Index to Financial Statements and
Schedules."
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the caption "Election of Trustees" in the Trust's definitive
Proxy Statement to be filed with the Securities and Exchange Commission
within 120 days after December 31, 1997. See also "Executive Officers
of the Registrant" appearing in Part I hereof.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the
caption "Executive Compensation" and "Compensation Pursuant to Plans"
in the Trust's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after December 31,
1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Trust's definitive Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after December
31, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the
caption "Transactions With Management and Others" in the Trust's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997.
19
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Statement Schedules:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 1997 and
December 31, 1996
Consolidated Statements of Income - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements - December
31, 1997
(3) Schedules
Schedule II - Valuation and Qualifying Accounts - Years
Ended December 31, 1997, 1996 and 1995
Schedule III - Real Estate and Accumulated Depreciation
- December 31, 1997
Notes to Schedule III - December 31, 1997
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter
of the year ended December 31, 1997
(c) Exhibits:
3.1 Declaration of Trust, dated as of August 1986, previously
filed as Exhibit 3.1 Amendment No. 3 of the Registration Statement on
Form S-11 and Form S-2 of Universal Health Services, Inc. and the Trust
(Registration No. 33-7872), is incorporated herein by reference.
3.2 Amendment to Declaration of Trust, dated as of June 23, 1993,
previously filed as Exhibit 3.2 to the Trust's Annual Report on Form
10-K for the year ended December 31, 1993, is incorporated herein by
reference.
3.3 Amended and restated bylaws, filed as Exhibit 3.2 to the
Trust's Annual Report on Form 10-K for the year ended December 31,
1988, is incorporated herein by reference.
10.1 Advisory Agreement, dated as of December 24, 1986, between
UHS of Delaware, Inc. and The Trust, previously filed as Exhibit 10.2
to the Trust's Current Report on Form 8-K dated December 24, 1986, is
incorporated herein by reference.
20
<PAGE>
10.2 Agreement effective January 1, 1998, to renew Advisory
Agreement dated as of December 24, 1986 between Universal Health Realty
Income Trust and UHS of Delaware, Inc.
10.3 Contract of Acquisition, dated as of August 1986, between the
Trust and certain subsidiaries of Universal Health Services, Inc.,
previously filed as Exhibit 10.2 to Amendment No. 3 of the Registration
Statement on Form S-11 and S-2 of Universal Health Services, Inc. and
the Trust (Registration No. 33-7872), is incorporated herein by
reference.
10.4 Form of Leases, including Form of Master Lease Document
Leases, between certain subsidiaries of Universal Health Services, Inc.
and the Trust, previously filed as Exhibit 10.3 to Amendment No. 3 of
the Registration Statement on Form S-11 and Form S-2 of Universal
Health Services, Inc. and the Trust (Registration No. 33-7872), is
incorporated herein by reference.
10.5 Share Option Agreement, dated as of December 24, 1986,
between the Trust and Universal Health Services, Inc., previously filed
as Exhibit 10.4 to the Trust's Current Report on Form 8-K dated
December 24, 1986, is incorporated herein by reference.
10.6 Corporate Guaranty of Obligations of Subsidiaries Pursuant to
Leases and Contract of Acquisition, dated December 1986, issued by
Universal Health Services, Inc. in favor of the Trust, previously filed
as Exhibit 10.5 to the Trust's Current Report on Form 8-K dated
December 24, 1986, is incorporated herein by reference.
10.7 Contract of Acquisition dated August 31, 1988 between the
Trust, Rehab Systems Company, Inc. and Tri-State Regional
Rehabilitation Hospital, Inc., previously filed as Exhibit 10.2 to the
Trust's September 30, 1988 Form 10-Q, is incorporated herein by
reference.
10.8 Key Employees' Restricted Share Purchase Plan approved by the
Trustees on December 1, 1988 which authorized the issuance of up to
50,000 common shares, previously filed as Exhibit 10.11 to the Trust's
Annual Report on form 10-K for the year ended December 31, 1988, is
incorporated herein by reference.
10.9 Share Compensation Plan for Outside Trustees, previously
filed as Exhibit 10.12 to the Trust's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated herein by reference.
10.10 1988 Non-Statutory Stock Option Plan, as amended, previously
filed as Exhibit 10.13 to the Trust's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated herein by reference.
10.11 Lease dated December 22, 1993, between Universal Health
Realty Income Trust and THC-Chicago, Inc. as lessee, previously filed
as Exhibit 10.14 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 1993, is incorporated herein by reference.
10.12 Mortgage Modification, Consolidation and Extension Agreement
and Consolidated Note dated December 28, 1993 in the amount of
$6,500,000 from Crouse Irving Memorial Properties, Inc. to Universal
Health Realty Income Trust, previously filed as Exhibit 10.15 to the
Trust's Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference.
21
<PAGE>
10.13 Agreement for Purchase and Sale and Repurchase Agreement
dated as of November 4, 1994 between Fresno-Herndon Partners, Limited
and Universal Health Realty Income Trust, previously filed as Exhibit
10.16 to the Trust's Annual Report on Form 10-K for the year ended
December 31, 1994, is incorporated herein by reference.
10.14 Agreement of Purchase and Sale, and Construction Loan
Agreement dated as of December 20, 1994 between Turner Adreac, L.C. and
Universal Health Realty Income Trust, previously filed as Exhibit 10.17
to the Trust's Annual Report on Form 10-K for the year ended December
31, 1994, is incorporated herein by reference.
10.15 Sale Agreement, dated as of September 1, 1995, by and among
Universal Health Realty Income Trust and Desert Commercial Properties
Limited Partnership, previously filed as Exhibit 10.18 to the Trust's
Annual Report on Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
10.16 Operating Agreement of DSMB Properties, L.L.C., dated as of
September 1, 1995, by and among Universal Health Realty Income Trust
and Desert Commercial Properties Limited Partnership, previously filed
as Exhibit 10.19 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
10.17 Agreement and Escrow Instructions, dated as of August 15,
1995, by and between Phase III Desert Samaritan Medical Building
Partners and Desert Commercial Properties Limited Partnership,
previously filed as Exhibit 10.20 to the Trust's Annual Report on 10-K
for the year ended December 31, 1996, is incorporated herein by
reference.
10.18 Amendment to Credit Agreement dated as of September 27, 1996
by and among Universal Health Realty Income Trust, Corestates Bank,
N.A. as agent, NationsBank, N.A, and First Union National Bank,
previously filed as Exhibit 10.1 to the Trust's Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by reference.
10.19 Universal Health Realty Income Trust 1997 Incentive Plan,
previously filed as Exhibit 10.1 to the Trust's Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by reference.
27 Financial Data Schedule
28.1 Dividend Reinvestment Plan for Stockholders, previously filed
as Exhibit 28.1 to the Trust's Form 10-Q for the quarter ended March
31, 1987, is incorporated herein by reference.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 5, 1998
UNIVERSAL HEALTH REALTY INCOME TRUST
(Registrant)
By: /s/ Alan B. Miller
Alan B. Miller, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date Signature and Title
/s/ Alan B. Miller
March 5, 1998 Alan B. Miller, Chairman of the Board
and Chief Executive Officer
/s/ Kirk E. Gorman
March 5, 1998 Kirk E. Gorman, President, Chief
Financial Officer, Secretary and Trustee
/s/ James E. Dalton, Jr.
March 9, 1998 James E. Dalton, Jr., Trustee
/s/ Peter Linneman
March 5, 1998 Peter Linneman, Trustee
/s/ Myles H. Tanenbaum
March 5, 1998 Myles H. Tanenbaum, Trustee
/s/ Michael R. Walker
March 5, 1998 Michael R. Walker, Trustee
/s/ Daniel M. Cain
March 5, 1998 Daniel M. Cain, Trustee
/s/ Charles F. Boyle
March 5, 1998 Charles F. Boyle, Vice President and
Controller
/s/ Cheryl K. Ramagano
March 5, 1998 Cheryl K. Ramagano, Vice President and
Treasurer
/s/ Timothy J. Fowler
March 9, 1998 Timothy J. Fowler, Vice President,
Acquisitions and Development
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and December 31, 1996 F-3
Consolidated Statements of Income - Years Ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995 F-6
Notes to Consolidated Financial Statements - December 31, 1997 F-7
Schedule II - Valuation and Qualifying Accounts -
Years Ended December 31, 1997, 1996 and 1995 F-17
Schedule III - Real Estate and Accumulated Depreciation -
December 31, 1997 F-18
Notes to Schedule III - December 31, 1997 F-19
F-1
<PAGE>
Report of Independent Public Accountants
To The Shareholders and Board of Trustees of
Universal Health Realty Income Trust:
We have audited the accompanying consolidated balance sheets of Universal Health
Realty Income Trust and Subsidiaries (a Maryland real estate investment trust)
as of December 31, 1997 and 1996 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and the
schedules referred to below are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal Health Realty Income Trust and Subsidiaries, as of December 31, 1997
and 1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Financial Statements and Schedules on Page F-1 are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not a
required part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Philadelphia, Pennsylvania Arthur Andersen LLP
January 20, 1998
F-2
<PAGE>
Universal Health Realty Income Trust
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
Assets: 1997 1996
<S> <C> <C>
Real Estate Investments:
Buildings & improvements $143,600,000 $138,400,000
Accumulated depreciation (30,280,000) (26,540,000)
------------- -------------
113,320,000 111,860,000
Land 20,255,000 19,683,000
Mortgage loans receivable, net -- 6,405,000
Construction loan and interest receivable -- 398,000
Construction in progress -- 1,246,000
Reserve for investment losses (89,000) (151,000)
------------- -------------
Net Real Estate Investments 133,486,000 139,441,000
Other Assets:
Cash 1,238,000 137,000
Bonus rent receivable from UHS 653,000 634,000
Rent receivable from non-related parties 80,000 32,000
Investments in limited liability companies 11,075,000 7,932,000
Deferred charges and other assets, net 223,000 390,000
------------- -------------
$146,755,000 $148,566,000
============= =============
Liabilities and Shareholders' Equity:
Liabilities:
Bank borrowings $41,200,000 $42,000,000
Note payable to UHS 1,147,000 1,082,000
Accrued interest 217,000 234,000
Accrued expenses & other liabilities 1,130,000 686,000
Tenant reserves, escrows, deposits and prepaid rental 268,000 515,000
Minority interest 101,000 67,000
Commitments and Contingencies (Note 1)
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 - 8,954,840
1996 - 8,952,340 90,000 90,000
Capital in excess of par value 128,650,000 128,643,000
Cumulative net income 112,121,000 98,154,000
Cumulative dividends (138,169,000) (122,905,000)
------------- -------------
Total Shareholders' Equity 102,692,000 103,982,000
------------- -------------
$146,755,000 $148,566,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Universal Health Realty Income Trust
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
Revenues (Note 2):
<S> <C> <C> <C>
Base rental - UHS facilities $13,731,000 $13,731,000 $13,491,000
Base rental - Non-related parties 5,605,000 4,706,000 3,195,000
Bonus rental 2,844,000 2,735,000 2,773,000
Interest 584,000 751,000 958,000
----------- ----------- -----------
22,764,000 21,923,000 20,417,000
----------- ----------- -----------
Expenses:
Depreciation & amortization 3,775,000 3,636,000 3,382,000
Interest expense 2,943,000 2,565,000 1,825,000
Advisory fees to UHS (Note 2) 1,099,000 1,044,000 953,000
Other operating expenses 1,425,000 1,149,000 673,000
----------- ----------- -----------
9,242,000 8,394,000 6,833,000
----------- ----------- -----------
Income before equity in limited liability companies 13,522,000 13,529,000 13,584,000
Equity in income of limited liability companies 445,000 629,000 --
----------- ----------- -----------
Net Income $13,967,000 $14,158,000 $13,584,000
=========== =========== ===========
Net Income Per Share - Basic $1.56 $1.58 $1.52
=========== =========== ===========
Net Income Per Share - Diluted $1.56 $1.58 $1.52
=========== =========== ===========
Weighted average number of shares outstanding - Basic 8,954,000 8,952,000 8,947,000
Weighted average number of share equivalents 13,000 6,000 --
----------- ----------- -----------
Weighted average number of shares and equivalents outstanding - Diluted 8,967,000 8,958,000 8,947,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Universal Health Realty Income Trust
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Shares Capital in
Number excess of Cumulative Cumulative
of Shares Amount par value net income dividends
<S> <C> <C> <C> <C> <C>
January 1, 1995 8,947,192 $89,000 $128,643,000 $70,412,000 ($92,699,000)
Net Income -- -- -- 13,584,000 --
Dividends ($1.68/share) -- -- -- -- (15,032,000)
- - - -----------------------------------------------------------------------------------------------------------------
January 1, 1996 8,947,192 89,000 128,643,000 83,996,000 (107,731,000)
Net Income -- -- -- 14,158,000 --
Issuance of shares of
beneficial interest 5,148 1,000 -- -- --
Dividends ($1.695/share) -- -- -- -- (15,174,000)
- - - -----------------------------------------------------------------------------------------------------------------
January 1, 1997 8,952,340 90,000 128,643,000 98,154,000 (122,905,000)
Net Income -- -- -- 13,967,000 --
Issuance of shares of
beneficial interest 2,500 -- 7,000 -- --
Dividends ($1.705/share) -- -- -- -- (15,264,000)
- - - -----------------------------------------------------------------------------------------------------------------
December 31, 1997 8,954,840 $90,000 $128,650,000 $112,121,000 ($138,169,000)
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Universal Health Realty Income Trust
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,967,000 $14,158,000 $13,584,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 3,775,000 3,636,000 3,382,000
Amortization of interest rate cap 124,000 125,000 125,000
Provision for investment losses 227,000 220,000 --
Changes in assets and liabilities:
Rent receivable (67,000) (47,000) 70,000
Accrued expenses & other liabilities 197,000 77,000 (22,000)
Tenant escrows, deposits & prepaid rents (247,000) (29,000) 180,000
Construction & mortgage loan interest receivable 7,000 (7,000) 3,000
Accrued interest (17,000) 77,000 40,000
Payments made for investment losses (289,000) (227,000) (332,000)
Deferred charges & other 29,000 20,000 43,000
------------ ------------ ------------
Net cash provided by operating activities 17,706,000 18,003,000 17,073,000
------------ ------------ ------------
Cash flows from investing activities:
Investments in limited liability companies (3,741,000) (7,624,000) (308,000)
Acquisitions and additions to land and buildings (4,246,000) (10,195,000) (7,794,000)
Payments made for construction in progress -- (1,246,000) --
Advances under construction note receivable (3,414,000) (391,000) (3,190,000)
Repayments under mortgage and construction notes receivable 10,262,000 -- 4,333,000
Cash distributions in excess of income from LLCs 598,000 -- --
------------ ------------ ------------
Net cash used in investing activities (541,000) (19,456,000) (6,959,000)
------------ ------------ ------------
Cash flows from financing activities:
Additional borrowings, net of financing costs -- 16,625,000 5,055,000
Repayment of debt (800,000) -- --
Dividends paid (15,264,000) (15,174,000) (15,032,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (16,064,000) 1,451,000 (9,977,000)
------------ ------------ ------------
Increase (decrease) in cash 1,101,000 (2,000) 137,000
Cash, beginning of period 137,000 139,000 2,000
------------ ------------ ------------
Cash, end of period $1,238,000 $137,000 $139,000
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $2,770,000 $2,302,000 $1,602,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Universal Health Realty Income Trust
Notes to the Consolidated Financial Statements
December 31, 1997
(1) Summary of Significant Accounting Policies
Nature of Operations
Universal Health Realty Income Trust and Subsidiaries (the "Trust") is organized
as a Maryland real estate investment trust. As of December 31, 1997 the Trust
had investments in twenty-six facilities located in twelve states consisting of
investments in healthcare and human service related facilities including acute
care hospitals, behavioral healthcare facilities, rehabilitation hospitals,
sub-acute care facilities, surgery centers, childcare centers and medical office
buildings, seven of which are leased to subsidiaries of Universal Health
Services, Inc., ("UHS").
Federal Income Taxes
No provision has been made for Federal income tax purposes since the Trust
qualifies as a real estate investment trust under Sections 856 to 860 of the
Internal Revenue Code of 1986, and intends to continue to remain so qualified.
As such, it is required to distribute at least 95 percent of its real estate
investment taxable income to its shareholders.
The Trust is subject to a Federal excise tax computed on a calendar year basis.
The excise tax equals 4% of the excess, if any, of 85% of the Trust's ordinary
income plus 95% of any capital gain income for the calendar year over cash
distributions during the calendar year, as defined. No provision for excise tax
has been reflected in the financial statements as no tax was due.
Earnings and profits, which will determine the taxability of dividends to
shareholders, will differ from net income reported for financial reporting
purposes due to the differences for Federal tax purposes in the cost basis of
assets and in the estimated useful lives used to compute depreciation and the
recording of provision for investment losses.
Real Estate Properties
The Trust records acquired real estate at cost and uses the straight-line method
of depreciation for buildings and improvements over estimated useful lives of 25
to 45 years.
It is the Trust's policy to review the carrying value of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Measurement of the
impairment loss is based on the fair value of the asset. Generally, fair value
will be determined using valuation techniques such as the present value of
expected future cash flow.
The Trust invests primarily in healthcare-related facilities and, therefore, is
subject to certain industry risk factors, which directly impact the operating
results of its lessees. In recent years, an increasing number of legislative
initiatives have been introduced or proposed in Congress and in state
legislatures that would effect major changes in the healthcare system, either
nationally or at the state level. In addition, the healthcare industry has been
characterized in recent years by increased competition and consolidation.
F-7
<PAGE>
In assessing the carrying value of the Trust's real estate investments for
possible impairment, management reviewed estimates of future cash flows expected
from each of its facilities and evaluated the creditworthiness of its lessees
based on their current operating performance and on current industry conditions.
Management of the Trust is unable to predict the effect, if any, that the
industry factors discussed above will have on the operating results of its
lessees or on their ability to meet their obligations under the terms of their
leases with the Trust. In addition, management of the Trust cannot predict
whether any of the leases will be renewed on their current terms or at all. As a
result, management's estimate of future cash flows from its leased properties
could be materially affected in the near term, if certain of the leases are not
renewed at the end of their initial lease terms.
Investments in Limited Liability Companies
The consolidated financial statements of the Trust include the accounts of its
controlled investments. In accordance with the American Institute of Certified
Public Accountants' Statement of Position 78-9 "Accounting for Investments in
Real Estate Ventures", the Trust accounts for its investment in limited
liability companies which it does not control using the equity method of
accounting. These investments, which represent 33% to 95% non-controlling
ownership interests, are recorded initially at the Trust's cost and subsequently
adjusted for the Trust's net equity in income and cash contributions and
distributions.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS 128). SFAS 128 establishes standards for
computing and presenting earnings per share (EPS). Basic earnings per share are
based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share are based on the weighted average number of
common shares during the year adjusted to give effect to common stock
equivalents. All per share amounts for all periods presented have been restated
to conform to SFAS 128.
Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Trust considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents.
Interest Rate Protection Agreements
In managing interest rate exposure, the Trust at times enters into interest rate
swap agreements and interest rate cap agreements. When interest rates change,
the differential to be paid or received under the Trust's interest rate swap
agreements is accrued as interest expense. Premiums paid for purchased interest
rate cap agreements are amortized to interest expense over the terms of the
caps. Unamortized premiums are included in deferred charges in the accompanying
balance sheet. Amounts receivable under the cap agreements is accrued as a
reduction of interest expense.
F-8
<PAGE>
Fair Value of Financial Instruments
The fair value of the Trust's interest rate swap agreements and investments are
based on quoted market prices. The carrying amounts reported in the balance
sheet for cash, accrued liabilities, and short-term borrowings approximates
their fair values due to the short-term nature of these instruments.
Accordingly, these items have been excluded from the fair value disclosures
included elsewhere in these notes to consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.
(2) Related Party Transactions
UHS of Delaware, Inc. (the "Advisor"), a wholly-owned subsidiary of UHS, serves
as Advisor to the Trust under an Advisory Agreement dated December 24, 1986
between the Advisor and the Trust (the "Advisory Agreement"). Under the Advisory
Agreement, the Advisor is obligated to present an investment program to the
Trust, to use its best efforts to obtain investments suitable for such program
(although it is not obligated to present any particular investment opportunity
to the Trust), to provide administrative services to the Trust and to conduct
the Trust's day-to-day affairs. In performing its services under the Advisory
Agreement, the Advisor may utilize independent professional services, including
accounting, legal and other services, for which the Advisor is reimbursed
directly by the Trust. The Advisory Agreement expires on December 31 of each
year; however, it is renewable by the Trust, subject to a determination by the
Independent Trustees that the Advisor's performance has been satisfactory. The
Advisory Agreement may be terminated for any reason upon sixty days written
notice by the Trust or the Advisor. The Advisory Agreement has been renewed for
1998. All transactions with UHS must be approved by the Independent Trustees.
The Advisory Agreement provides that the Advisor is entitled to receive an
annual advisory fee equal to .60% of the average invested real estate assets of
the Trust, as derived from its consolidated balance sheet from time to time. In
addition, the Advisor is entitled to an annual incentive fee equal to 20% of the
amount by which cash available for distribution to shareholders, as defined in
the Advisory Agreement, for each year exceeds 15% of the Trust's equity as shown
on its balance sheet, determined in accordance with generally accepted
accounting principles without reduction for return of capital dividends. No
incentive fees were paid during 1997, 1996 and 1995. The advisory fee is payable
quarterly, subject to adjustment at year end based upon audited financial
statements of the Trust.
F-9
<PAGE>
For the years ended December 31, 1997, 1996 and 1995, 72%, 74% and 79%,
respectively, of the Trust's gross revenues were earned under the terms of the
leases with wholly-owned subsidiaries of UHS. The leases to subsidiaries of UHS
are guaranteed by UHS and cross-defaulted with one another.
For the year ended December 31, 1997, three of the UHS facilities did not
generate sufficient earnings before interest, taxes, depreciation, amortization
and lease and rental expense (EBITDAR) to cover the 1997 rent expense payable to
the Trust. The leases on these facilities, one which matures in 2000 and two
which mature in 2001, generated 27% of the Trust's 1997 rental income. All of
the Trust's remaining hospital facilities, including the facilities operated by
non-related parties, had a combined 1997 EBITDAR of 6.5 times (ranging from 2.2
times to 8.5 times) the 1997 rent expense payable to the Trust.
For the year ended December 31, 1996, two of the UHS facilities did not generate
enough EBITDAR to cover the 1996 rent expense payable to the Trust. The leases
on these facilities, which mature in 2000 and 2001, generated 18% of the Trust's
1996 rental income. One additional UHS facility had 1996 EBITDAR which was less
than 1.5 times the 1996 rent payable to the Trust. The lease on this facility,
which matures in 2001, generated 10% of the Trust's 1996 rental income. One
additional UHS facility had 1996 EBITDAR (excluding a favorable prior year net
revenue adjustment) which was less than 2.0 times the 1996 rent payable to the
Trust. The lease on this facility, which matures in 1999 generated 6% of the
Trust's 1996 rental income. All of the Trust's remaining hospital facilities,
including the facilities operated by non-related parties, had a combined 1996
EBITDAR of 7.5 times (ranging from 2.1 times to 8.9 times) the 1996 rent expense
payable to the Trust.
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the healthcare system, either nationally or at the state level.
In addition, the healthcare industry had 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.
Management of the Trust cannot 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.
Representatives of UHS and the Trustees who are unaffiliated with UHS have
commenced informal discussions regarding the terms under which UHS would be
willing to extend the leases on those facilities with terms expiring in 1999
through 2003, some of which have had EBITDAR of less than 1.0 times the rent
payable to the Trust. There is no assurance that an agreement will be reached
or, if an agreement is reached, what terms will be agreed upon. 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.
F-10
<PAGE>
Revenues received from UHS and from other non-related parties were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Base rental - UHS facilities $13,731,000 $13,731,000 $13,491,000
Base rental - Non-related parties 5,605,000 4,706,000 3,195,000
----------- ----------- -----------
Total base rental 19,336,000 18,437,000 16,686,000
----------- ----------- -----------
Bonus rental - UHS facilities 2,615,000 2,506,000 2,552,000
Bonus rental - Non-related parties 229,000 229,000 221,000
----------- ----------- -----------
Total bonus rental 2,844,000 2,735,000 2,773,000
----------- ----------- -----------
Interest - Non-related parties 584,000 751,000 958,000
----------- ----------- -----------
Total revenues $22,764,000 $21,923,000 $20,417,000
=========== =========== ===========
</TABLE>
At December 31, 1997, approximately 8% of the Trust's outstanding shares of
beneficial interest were held by UHS. The Trust has granted UHS the 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 and Dispositions
1997 - During 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 buildings and two additional properties located in Louisiana and Georgia
($1.4 million); (ii) the purchase of a 75% equity interest in a limited
liability company that purchased the Thunderbird Paseo Medical Plaza ($1.9
million); (iii) the completion of construction of Cypresswood Professional
Center, located in Houston, Texas in which the Trust has a 77% controlling
equity interest ($4.4 million including $1.2 million of construction in progress
capitalized during 1996), and; (iv) the completion of construction of Samaritan
West Valley Medical Center located in Goodyear, Arizona in which the Trust owns
a 89% equity interest in an LLC which owns the real estate assets of the
facility ($1.8 million).
1996 - During 1996, the Trust added eleven new investments to its portfolio
consisting of the following: (i) the purchase of a 50% equity interest in a
limited liability company ("LLC") which owns three medical office buildings
located on the campus of Desert Samaritan Hospital in Phoenix, Arizona totaling
approximately 219,000 gross square feet and leased to several tenants ($5.0
million); (ii) the purchase of four preschool and child-care centers located in
southeastern, Pennsylvania ($3.9 million); (iii) the acquisition of a 33% equity
interest in an LLC which owns a 94,000 square foot medical office building
located on the campus of Columbia/HCA Healthcare Corporation's 260-bed Suburban
Medical Center in Louisville, Kentucky; (iv) the purchase of a 41,400 square
foot, multi-tenant medical office building adjacent to the Southern Regional
Medical Center in Riverdale, Georgia ($6.2 million); (v) the purchase of a 50%
equity interest in an LLC which owns two medical office buildings on the campus
of Maryvale Samaritan Hospital located in
F-11
<PAGE>
Phoenix, Arizona ($1.4 million); (vi) the purchase of a 95% equity interest in
an LLC which purchased the Desert Valley Medical Center, a 54,000 net square
foot medical office building located on the campus of the Columbia Paradise
Valley Hospital in Phoenix, Arizona ($4.3 million including $2.7 million of
long-term, non-recourse debt); (vii) the agreement to provide up to $4.1 million
of construction financing to a limited partnership, of which the Trust owns a
77% controlling equity interest, for the construction of Cypresswood
Professional Center located in Houston, Texas ($1.2 million advanced as of
December 31, 1996 including a $343,000 capital contribution), and; (viii) the
agreement to provide up to $5.1 million of construction financing to an LLC
(excluding $525,000 of capital to be contributed by the Trust upon completion of
the center in the fourth quarter of 1997), of which the Trust owns a 50% initial
equity interest, for the construction of Samaritan West Valley Medical Center
located in Goodyear, Arizona ($391,000 advanced as of December 31, 1996). In
connection with the Trust's acquisition of a 33% equity interest in the LLC
which owns the medical office building on the campus of Suburban Medical Center,
the Trust posted a $3.5 million standby letter of credit for the benefit of the
lender providing the financing. Construction on the Cypresswood Professional
Center and the Samaritan West Valley Medical Center was completed in the third
and fourth quarters of 1997, respectively.
1995 - During the third quarter of 1995, the Trust sold the real estate assets
of Westlake Medical Center ("Westlake") a 126-bed hospital, of which the
majority of real estate assets were owned by the Trust and leased to UHS. In
exchange for the real estate assets of Westlake and the termination of the
lease, the Trust received substitution properties valued at approximately $19
million (the Trust's original purchase price of Westlake) consisting of
additional real estate assets which were owned by UHS but related to three acute
care facilities, of which the Trust owns the real estate and which are operated
by UHS (McAllen Medical Center, Inland Valley Regional Medical Center and
Wellington Regional Medical Center). These additional real estate assets
represent major additions and expansions made to these facilities by UHS since
the purchase of the facilities by the Trust from UHS in 1986. The Trust also
purchased from UHS, additional real estate assets related to McAllen Medical
Center for approximately $1.9 million in cash. Total annual base rental payments
from UHS to the Trust on substituted properties amount to $2.4 million which
equals the total base and bonus rental earned by the Trust on the Westlake
facility during 1994 ($2.1 million base and $300,000 bonus). Total annual base
rental payments on the additional real estate assets purchased related to
McAllen Medical Center will be approximately $200,000. Bonus rental on the
substituted and purchased real estate assets will be equal to 1% of the growth
in revenues, in excess of base year amounts, generated by these additional
assets. The guarantee by UHS under the existing leases, as amended to include
the additional property, will continue.
During the third quarter of 1995, the Trust purchased for $1.6 million, a
medical office building located on the campus of a hospital owned by
Columbia/HCA Healthcare Corporation located in Shreveport, Louisiana. The
medical office building is currently being leased under the terms of a master
lease agreement with Columbia/HCA Healthcare Corporation.
(4) Leases
All of the Trust's leases are classified as operating leases with initial terms
ranging from 5 to 15 years with up to six 5-year renewal options. Under the
terms of the leases, the Trust earns fixed monthly base rents and may earn
periodic additional rents (see Note 2). The additional rent payments are
generally computed as a percentage of facility net patient revenue or CPI
increase in excess of a base amount. The base year amount is typically net
patient revenue for the first full year of the lease.
F-12
<PAGE>
Minimum future base rents on noncancelable leases are as follows:
1998 $19,234,000
1999 19,271,000
2000 15,983,000
2001 14,910,000
2002 3,911,000
Later Years 10,465,000
------------
Total Minimum Base Rents $83,774,000
===========
Under the terms of the hospital leases, the lessees are required to pay all
operating costs of the properties including property insurance and real estate
taxes. Tenants of the medical office buildings are required to pay their
pro-rata share of the property's operating costs above a stipulated amount.
(5) Debt
The Trust has a $70 million, unsecured non-amortizing revolving credit agreement
(the "Agreement") which expires on September 30, 2001. The Agreement provides
for interest at the Trust's option, at the certificate of deposit rate plus 3/4%
to 1 1/8%, Eurodollar rate plus 5/8% to 1 1/8% or the prime rate. A fee of .15%
to .375% is required on the unused portion of this commitment. The margins over
the certificate of deposit rate, Eurodollar rate and the commitment fee are
based upon the Trust's debt to cash flow ratio. At December 31, 1997 the
applicable margin over the certificate of deposit and Eurodollar rates were 7/8%
and 3/4%, respectively, and the commitment fee was .20%. There are no
compensating balance requirements. The Agreement contains a provision whereby
the commitments will be reduced by 50% of the proceeds generated from any new
equity offering. At December 31, 1997, the Trust had approximately $25 million
of available borrowing capacity.
The average amounts outstanding under the revolving credit agreement during
1997, 1996 and 1995 were $40,774,000, $34,410,000, and $21,589,000,
respectively, with corresponding effective interest rates, including commitment
fees but not including the effect of interest rate swaps of 6.4%, 6.3%, and
7.2%. The maximum amounts outstanding at any month end were $44,300,000,
$42,200,000 and $25,375,000 during 1997, 1996 and 1995, respectively.
Covenants relating to the revolving credit facility require the maintenance of a
minimum tangible net worth and specified financial ratios, limit the Trust's
ability to incur additional debt, limit the aggregate amount of mortgage
receivables and limit the Trust's ability to increase dividends in excess of 95%
of cash available for distribution, unless additional distributions are required
to comply with the applicable section of the Internal Revenue Code and related
regulations governing real estate investment trusts.
The Trust has entered into interest rate swap agreements and an interest rate
cap agreement which are designed to reduce the impact of changes in interest
rates on its floating rate revolving credit notes. The Trust has three
outstanding swap agreements for notional principal amounts of $5 million, $4
million and $1,580,000 which mature in May, 1999, July 2002 and May, 2001,
respectively. These swap agreements effectively fix the interest rate on
$10,580,000 of variable rate debt at 7.69%. The interest rate cap, for which the
Trust paid $622,750, (unamortized premium of $187,000 at December 31, 1997)
matures in June, 1999 and fixes the maximum rate
F-13
<PAGE>
on $15 million of variable rate revolving credit notes at 7.75%. The effective
rate on the Trust's revolving credit notes including commitment fees and
interest rate swap expense was 6.9%, 6.8% and 7.5% during 1997, 1996 and 1995,
respectively. Additional interest expense recorded as a result of the Trust's
hedging activity was $118,000, $130,000 and $69,000 in 1997, 1996 and 1995,
respectively. The Trust is exposed to credit loss in the event of nonperformance
by the counterparties to the interest rate swap and cap agreements. These
counterparties are major financial institutions and the Trust does not
anticipate nonperformance by the counterparties which are rated A or better by
Moody's Investors Service. Termination of the interest rate swaps at December
31, 1997 would have resulted in payments to the counterparties of approximately
$255,000 and termination of the interest rate cap would have resulted in a
payment to the Trust of approximately $3,800. The fair value of the interest
rate swap and cap agreements at December 31, 1997 reflects the estimated amounts
that the Trust would pay or receive to terminate the contracts and are based on
quotes from the counterparties.
(6) Dividends
Dividends of $1.705 per share were declared and paid in 1997, of which $1.624
per share was ordinary income and $.081 per share was a return of capital
distribution. Dividends of $1.695 per share were declared and paid in 1996, of
which $1.622 per share was ordinary income and $.073 per share was a return of
capital distribution. Dividends of $1.68 per share were declared and paid in
1995, of which $1.575 per share was ordinary income and $.105 per share was a
return of capital distribution.
(7) Financing
In 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. The entire outstanding mortgage loan balance was repaid
to the Trust on June 2, 1997. Interest on the mortgage loan, including
amortization of prepaid commitment fees, accrued at an average annualized rate
of 11.1% during 1997, 11.3% during 1996 and 11.5% during 1995.
During 1995, the Trust received free and clear title to Lake Shore Hospital, on
which the Trust held a mortgage loan receivable. During 1994, the Trust reached
a settlement agreement with Lake Shore Hospital, Inc. and Community Care
Systems, Inc. concerning the default of their obligations under the Trust's
mortgage loan with Lake Shore Hospital. Under the terms of the settlement
agreement, the Trust received $1.5 million in cash payments during 1994, of
which $1,050,000 was included in net income as recovery of investment losses and
$450,000 was reserved for future expenses related to the settlement of the
facility. The carrying value of this facility was reduced to zero in 1992. The
Trust continues to actively negotiate with third parties interested in
purchasing or leasing the real estate assets of the Lake Shore facility.
(8) Incentive Plans
During 1988, the Trustees approved a Key Employees' Restricted Share Purchase
Plan. Under the terms of this plan, which expires in 1998, up to 50,000 shares
have been reserved for issuance to key employees (45,000 shares available for
grant as of December 31, 1997). Eligible employees may purchase shares of the
Trust at par value subject to certain restrictions. The restrictions lapse over
four years if the employee remains employed by the Trust.
F-14
<PAGE>
In 1991, the Trustees adopted a share compensation plan for Trustees who are
neither employees nor officers of the Trust ("Outside Trustees"). Pursuant to
the plan, each Outside Trustee may elect to receive, in lieu of all or a portion
of the quarterly cash compensation for services as a Trustee, shares of the
Trust based on the closing price of the shares on the date of issuance. As of
December 31, 1997, no shares have been issued under the terms of this plan.
During 1992, the Trust amended the 1988 Non-Statutory Stock Option Plan to
increase the number of shares reserved under the plan from 50,000 to 200,000. As
of December 31, 1997, options to purchase 95,000 shares of beneficial interest
were granted, of which 85,000 were granted to officers of the Trust during 1992
at an exercise price of $16.875 per share and 10,000 were granted to an officer
of the Trust during 1993 at an exercise price of $16.125. During 1996, 36,976
options were exercised. As of December 31, 1997, all 58,024 remaining options
were exercisable at an aggregate purchase price of $973,137.
During 1997, the Trust's Board of Trustees approved the Universal Health Realty
Income Trust 1997 Incentive Plan ("The Plan"), which is a newly created stock
option and dividend equivalents rights plan for employees of the Trust,
including officers and directors. Although The Plan has been unanimously
approved by the Trust's Board, it is contingent upon shareholder approval, which
will be solicited in the spring of 1998. There are 400,000 shares reserved for
issuance under The Plan. Pursuant to the terms of The Plan, 70,000 options to
purchase shares of the Trust were granted to officers and directors of the Trust
on June 23, 1997, at an exercise price of $18.625 per share. The options granted
vest ratably at 25% per year beginning one year after the date of grant, and
expire in ten years. As of December 31, 1997, there were no options exercisable
under The Plan. Also on June 23, 1997, there were 70,000 dividend equivalent
rights granted to officers and trustees of the Trust.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages a
fair value based method of accounting for employee stock options and similar
equity instruments, which generally would result in the recording of additional
compensation expense in an entity's financial statements. The statement also
allows an entity to continue to account for stock-based employee compensation
using the intrinsic value for equity instruments using APB Opinion No. 25. The
Trust has adopted the disclosure-only provisions of SFAS 123. Accordingly no
compensation cost has been recognized for the stock option plans. Because the
SFAS 123 method of accounting has not been applied to options granted prior to
January 1, 1995 and since there were no stock options granted by the Trust
during 1995 or 1996, no pro forma disclosures are required. Additionally, no pro
forma disclosures are required for the options granted during 1997, as
shareholder approval has not yet been obtained.
(9) Summarized Financial Information of Equity Affiliates
The following table represents summarized unaudited financial information of the
limited liability companies ("LLC") accounted for by the equity method. Amounts
presented include investments in the following LLCs: DSMB Properties, LLC (61%);
DVMC Properties, LLC (95%); Parkvale Properties, LLC (60%), Suburban Properties,
LLC (33%); Litchvan Investments, LLC (89%); and Paseo Medical Properties II, LLC
(75%).
F-15
<PAGE>
1997
(000s)
Total assets $58,700
Liabilities and debt $44,261
Equity $14,439
UHT's share of equity $11,075
Revenue $8,215
Net income $469
UHT's share of net income $445
(10) Quarterly Results (unaudited)
<TABLE>
<CAPTION>
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
Revenues $5,700,000 $5,769,000 $5,560,000 $5,735,000 $22,764,000
Net Income $3,658,000 $3,550,000 $3,342,000 $3,417,000 $13,967,000
Earnings Per Share-Basic $0.41 $0.40 $0.37 $0.38 $1.56
Earnings Per Share-Diluted $0.41 $0.40 $0.37 $0.38 $1.56
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Revenues $5,343,000 $5,379,000 $5,611,000 $5,590,000 $21,923,000
Net Income $3,583,000 $3,590,000 $3,466,000 $3,519,000 $14,158,000
Earnings Per Share-Basic $0.40 $0.40 $0.39 $0.39 $1.58
Earnings Per Share-Diluted $0.40 $0.40 $0.39 $0.39 $1.58
</TABLE>
F-16
<PAGE>
Universal Health Realty Income Trust
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Other of period
<S> <C> <C> <C> <C>
Reserve for Investment Losses:
Year ended December 31, 1997 $151,000 $227,000 ($289,000)(a) $89,000
========= ======== ========= =========
Year ended December 31, 1996 $158,000 $220,000 ($227,000)(a) $151,000
========= ======== ========= =========
Year ended December 31, 1995 $490,000 -- ($332,000)(a) $158,000
========= ======== ========= =========
</TABLE>
(a) Amounts charged against the reserve.
F-17
<PAGE>
Schedule III
Universal Health Realty Income Trust
Real Estate and Accumulated Depreciation - December 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Cost capitalized Gross amount Date of
Universal Health subsequent to at which construction
Realty Income Trust acquisition carried at Accumulated or most
close of period Depreciation recent Average
as of significant Deprec-
Building Land & Carrying Building Dec. 31, expansion or Date iable
Description Land & Improv. Improv. Costs Land & Improv. Total 1997 renovation Acquired Life
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Virtue Street Pavilion $1,825 $9,445 - - $1,770 $9,445 $11,215 $2,974 1975 1986 35 Years
De La Ronde 2,000 7,473 - - 2,000 7,473 9,473 2,145 1981 1988 34 Years
Chalmette, Louisiana
Inland Valley Regional
Medical Center
Wildomar, California 2,050 10,701 2,868 - 2,050 13,569 15,619 2,826 1986 1986 43 Years
McAllen Medical Center
McAllen, Texas 4,720 31,442 10,188 - 6,281 40,069 46,350 8,316 1994 1986 42 Years
Wellington Regional
Medical Center
West Palm Beach, Florida 1,190 14,652 4,822 - 1,663 19,001 20,664 3,899 1986 1986 42 Years
The Bridgeway
North Little Rock, Arkansas 150 5,395 499 - 150 5,894 6,044 1,835 1983 1986 35 Years
Meridell Achievement Center
Austin, Texas 1,350 3,782 4,139 - 1,350 7,921 9,271 2,451 1991 1986 28 Years
Tri-State Rehabilitation
Hospital
Evansville, Indiana 500 6,945 1,062 - 500 8,007 8,507 1,616 1993 1989 40 Years
Vencor Hospital - Chicago
Chicago, Illinois 158 6,404 1,907 - 158 8,311 8,469 3,207 1993 1986 25 Years
Fresno-Herndon Medical Plaza
Fresno, California 1,073 5,266 24 - 1,073 5,290 6,363 363 1992 1994 45 Years
Family Doctor's Medical
Office Building
Shreveport, Louisiana 54 1,526 494 - 54 2,020 2,074 93 1991 1995 45 Years
Kelsey-Seybold Clinic at
King's Crossing 439 1,618 - - 439 1,618 2,057 81 1995 1995 45 Years
Professional Center at
King's Crossing 439 1,837 43 - 439 1,880 2,319 86 1995 1995 45 Years
Kingwood, Texas
Chesterbrook Academy
Audubon, Pennsylvania - 996 - - - 996 996 37 1996 1996 45 Years
Carefree Learning Center
New Britain, Pennsylvania 250 744 - - 250 744 994 27 1991 1996 45 Years
Carefree Learning Center
Uwchlan, Pennsylvania 180 815 - - 180 815 995 30 1992 1996 45 Years
Carefree Learning Center
Newtown, Pennsylvania 195 749 - - 195 749 944 28 1992 1996 45 Years
The Southern Crescent Center
Riverdale, Georgia 1,130 5,092 864 - 1,130 5,956 7,086 211 1994 1996 45 Years
The Cypresswood Professional
Center
Houston,Texas 573 3,842 573 3,842 4,415 55 1997 1997 35 Years
------- -------- ------- --- ------- ------- -------- -------
TOTALS $18,276 $118,724 $26,910 $- $20,255 $143,600 $163,855 $30,280
======= ======== ======= === ======= ======== ======== =======
</TABLE>
F-18
<PAGE>
Universal Health Realty Income Trust
Notes to Schedule III
December 31, 1997
(1) Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January 1, 1995
to December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at January 1 $158,083,000 $147,888,000 $143,069,000
Additions and acquisitions 4,526,000 10,195,000 7,794,000
Reclasses from construction in progress 1,246,000 -- --
Dispositions -- -- (2,975,000)(a)
------------- ------------- -------------
Balance at December 31 $163,855,000 $158,083,000 $147,888,000
============= ============= =============
</TABLE>
(2) Reconciliation of Accumulated Depreciation
The following table reconciles the Accumulated Depreciation from January 1, 1995
to December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at January 1 $26,540,000 $22,986,000 $22,646,000
Current year depreciation expense 3,740,000 3,554,000 3,315,000
Dispositions -- -- (2,975,000)(a)
------------ ------------ ------------
Balance at December 31 $30,280,000 $26,540,000 $22,986,000
============ ============ ============
</TABLE>
(a) The real property of Westlake Medical Center (original cost of approximately
$20 million and accumulated depreciation of approximately $3 million) was
exchanged during 1995 for additional real estate assets (valued at approximately
$20 million) of three acute care facilities owned by the Trust and operated by
UHS. The swapping of these assets was accounted for as an exchange, and
therefore no gain was recognized.
The aggregate cost basis and net book value of the properties for federal income
tax purposes at December 31, 1997 are approximately $153,000,000 and
$120,000,000, respectively.
F-19
<PAGE>
INDEX TO EXHIBITS
10.2 Agreement, Effective January 1, 1998, to renew Advisory Agreement dated
as of December 24, 1986 between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
27. Financial Data Schedule.
UNIVERSAL HEALTH REALTY INCOME TRUST
January 7, 1998
Mr. Alan B. Miller
President
UHS of Delaware, Inc.
367 South Gulph Road
King of Prussia, PA 19406
Dear Alan:
The Board of Trustees of Universal Health Realty Income Trust at their
December 2, 1997, meeting authorized the renewal of the current Advisory
Agreement between the Trust and UHS of Delaware, Inc. ("Agreement") upon the
same terms and conditions.
This letter constitutes the Trust's offer to renew the Agreement until
December 31, 1998, upon the same terms and conditions. Please acknowledge UHS of
Delaware, Inc.'s acceptance of this offer by signing in the space provided below
and returning one copy of this letter to me.
Sincerely yours,
/s/ Kirk E. Gorman
Kirk E. Gorman
President and Secretary
Cc: Warren J. Nimetz, Esquire
Charles Boyle
Agreed to and Accepted:
UHS OF DELAWARE, INC.
By: /s/ Alan B. Miller
----------------------
Alan B. Miller, President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798783
<NAME> UNIVERSAL HEALTH REALTY INCOME TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,238
<SECURITIES> 0
<RECEIVABLES> 5,733
<ALLOWANCES> 5,089
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 163,855
<DEPRECIATION> 30,280
<TOTAL-ASSETS> 146,755
<CURRENT-LIABILITIES> 0
<BONDS> 42,347
0
0
<COMMON> 90
<OTHER-SE> 102,602
<TOTAL-LIABILITY-AND-EQUITY> 146,755
<SALES> 0
<TOTAL-REVENUES> 23,209
<CGS> 0
<TOTAL-COSTS> 2,524
<OTHER-EXPENSES> 3,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,943
<INCOME-PRETAX> 13,967
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,967
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
</TABLE>
