<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ........ to .........
Commission file number 1-9321
UNIVERSAL HEALTH REALTY INCOME TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-6858580
(State or other jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification No.)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 265-0688
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of common shares of beneficial interest outstanding at July 31, 1999 -
8,958,726
Page One of Sixteen Pages
<PAGE> 2
UNIVERSAL HEALTH REALTY INCOME TRUST
I N D E X
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
<S> <C>
Condensed Statements of Income
Three and Six Months Ended -- June 30, 1999 and 1998.............. Three
Condensed Balance Sheets -- June 30, 1999
and December 31, 1998............................................. Four
Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998........................... Five
Notes to Condensed Financial Statements................................ Six, Seven & Eight
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... Nine, Ten, Eleven, Twelve & Thirteen
Item 3. Quantitative and Qualitative Disclosures About Market Risks... Fourteen
PART II. OTHER INFORMATION AND SIGNATURE ............................. Fifteen & Sixteen
</TABLE>
Page Two of Sixteen Pages
<PAGE> 3
Part I. Financial Information
Universal Health Realty Income Trust
Condensed Statements of Income
(amounts in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues (Note 2):
<S> <C> <C> <C> <C>
Base rental - UHS facilities $ 3,444 $ 3,444 $ 6,887 $ 6,877
Base rental - Non-related parties 1,647 1,576 3,247 3,152
Bonus rental 747 771 1,526 1,617
Interest 47 2 281 4
------- ------- ------- -------
5,885 5,793 11,941 11,650
------- ------- ------- -------
Expenses:
Depreciation & amortization 948 1,017 1,895 1,984
Interest expense 919 905 1,940 1,648
Advisory fees to UHS 299 290 599 563
Other operating expenses 486 457 1,014 910
------- ------- ------- -------
2,652 2,669 5,448 5,105
------- ------- ------- -------
Income before equity in limited liability companies 3,233 3,124 6,493 6,545
Equity in income of limited liability companies 578 404 1,246 552
------- ------- ------- -------
Net Income $ 3,811 $ 3,528 $ 7,739 $ 7,097
======= ======= ======= =======
Net Income per share - basic $ 0.43 $ 0.39 $ 0.86 $ 0.79
======= ======= ======= =======
Net Income per share - diluted $ 0.42 $ 0.39 $ 0.86 $ 0.79
======= ======= ======= =======
Weighted average number of shares outstanding - basic 8,953 8,952 8,953 8,952
Weighted average number of share equivalents 26 22 25 23
------- ------- ------- -------
Weighted average number of shares and equivalents
outstanding - diluted 8,979 8,974 8,978 8,975
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page Three of Sixteen Pages
<PAGE> 4
Universal Health Realty Income Trust
Condensed Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
Assets: 1999 1998
- ------- ---- ----
(unaudited)
Real Estate Investments:
<S> <C> <C>
Buildings & improvements $ 142,855 $ 142,871
Accumulated depreciation (35,888) (34,006)
--------- ---------
106,967 108,865
Land 21,061 21,061
Construction in progress 304 28
Reserve for investment losses (186) (116)
--------- ---------
Net Real Estate Investments 128,146 129,838
--------- ---------
Investments in and advances to limited liability companies 36,243 38,165
Other Assets:
Cash 432 572
Bonus rent receivable from UHS 694 681
Rent receivable from non-related parties 35 24
Deferred charges and other assets, net 246 126
--------- ---------
$ 165,796 $ 169,406
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Bank borrowings $ 61,400 $ 64,800
Note payable to UHS 1,252 1,216
Accrued interest 336 281
Accrued expenses & other liabilities 1,165 1,300
Tenant reserves, escrows, deposits and prepaid rents 452 374
Minority interest 82 87
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: 1999 - 8,958,726
1998 - 8,955,465 90 90
Capital in excess of par value 128,767 128,685
Cumulative net income 134,197 126,458
Cumulative dividends (161,945) (153,885)
--------- ---------
Total Shareholders' Equity 101,109 101,348
--------- ---------
$ 165,796 $ 169,406
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page Four of Sixteen Pages
<PAGE> 5
Universal Health Realty Income Trust
Condensed Statements of Cash Flows
(amounts in thousands, unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,739 $ 7,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 1,895 1,984
Amortization of interest rate cap 62 62
Changes in assets and liabilities:
Rent receivable (24) (15)
Accrued expenses & other liabilities (52) 58
Tenant escrows, deposits & deferred rents 78 162
Accrued interest 55 11
Deferred charges & other 86 (36)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,839 9,323
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited liability companies (8,512) (13,328)
Repayments of advances received from limited liability companies 10,041 --
Capital expenditures, net of dispositions (343) (121)
Cash distributions in excess of income from LLCs 397 482
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,583 (12,967)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings -- 10,700
Repayments of long-term debt (3,400) --
Dividends paid (8,060) (7,789)
Issuance of shares of beneficial interest 64 --
Payment of financing costs (166) --
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (11,562) 2,911
-------- --------
Decrease in cash (140) (733)
Cash, beginning of period 572 1,238
-------- --------
CASH, END OF PERIOD $ 432 $ 505
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 1,787 $ 1,541
</TABLE>
See accompanying notes to these condensed financial statements.
Page Five of Sixteen Pages
<PAGE> 6
UNIVERSAL HEALTH REALTY INCOME TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
(unaudited)
(1) GENERAL
The financial statements included herein have been prepared by the Trust,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which, in the opinion of the
Trust, are necessary to fairly present results for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the Trust
believes that the accompanying disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements, accounting policies and the
notes thereto included in the Trust's Annual Report on Form 10-K for the year
ended December 31, 1998. Certain prior year amounts have been reclassified to
conform with current year financial statement presentation.
In this Quarterly Report on Form 10-Q the term "revenues" does not include the
revenues of the unconsolidated limited liability companies in which the Trust
has various non-controlling equity interests ranging from 33% to 99%. The Trust
accounts for its share of the income/loss from these investments by the equity
method.
(2) RELATIONSHIP WITH UNIVERSAL HEALTH SERVICES, INC.
Approximately 71% for both three month periods ended June 30, 1999 and 1998 and
70% and 71% for the six month periods ended June 30, 1999 and 1998,
respectively, of the Trust's revenues were earned under the terms of the leases
with wholly-owned subsidiaries of Universal Health Services, Inc. ("UHS"). UHS
has unconditionally guaranteed the obligations of its subsidiaries under the
leases. Below is the detailed listing of the revenues received from UHS and
other non-related parties for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
(IN THOUSANDS)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Base rental - UHS facilities $ 3,444 $ 3,444 $ 6,887 $ 6,877
Base rental - Non-related parties 1,647 1,576 3,247 3,152
------- ------- ------- -------
Total base rental 5,091 5,020 10,134 10,029
------- ------- ------- -------
Bonus rental - UHS facilities 709 654 1,431 1,388
Bonus rental - Non-related parties 38 117 95 229
------- ------- ------- -------
Total bonus rental 747 771 1,526 1,617
------- ------- ------- -------
Interest - Non-related parties 47 2 281 4
------- ------- ------- -------
Total revenues $ 5,885 $ 5,793 $11,941 $11,650
======= ======= ======= =======
</TABLE>
UHS owned approximately 8% of the Trust's outstanding shares of beneficial
interest as of June 30, 1999. The Trust has granted UHS an option to purchase
Trust shares in the future at fair market value to enable UHS to maintain a 5%
interest in the Trust. The Trust's officers are all employees of UHS.
Page Six of Sixteen Pages
<PAGE> 7
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"). The Advisory
Agreement expires on December 31 of each year, however, it is renewable by the
Trust, subject to a determination by the Trustees who are unaffiliated with UHS,
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 1999. 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. The Advisory fee
is payable quarterly, subject to adjustment at year end based upon audited
financial statements of the Trust. Advisory fees paid to UHS amounted to
$299,000 and $290,000 for the three months ended June 30, 1999 and 1998 and
$599,000 and $563,000 for the six month periods ended June 30, 1999 and 1998,
respectively.
(3) DIVIDENDS
A dividend of $.45 per share or $4.0 million in the aggregate was declared by
the Board of Trustees on June 2, 1999 and was paid on June 30, 1999 to
shareholders of record as of June 15, 1999. Pursuant to the terms of the
Dividend Reinvestment and Share Purchase Plan established in the second
quarter of 1999, $64,000 of the second quarter 1999 dividend was distributed in
the form of 3,261 newly issued shares.
(4) ACQUISITIONS
During the second quarter of 1999, the Trust paid $5.0 million to acquire a 98%
interest in a limited liability company that owns the Summerlin Hospital Medical
Office Building, which was constructed in 1997 and is connected to the Summerlin
Hospital Medical Center in Las Vegas, Nevada. Summerlin Hospital Medical Center
is owned by a limited liability company in which UHS holds a 72% ownership
interest. Summerlin Hospital Medical Office Building was owned by this same
limited liability company prior to the sale to the limited liability company in
which the Trust holds a 98% ownership interest. Additionally, during the second
quarter of 1999, the Trust paid $1.6 million for a 75% interest in a limited
liability company that owns the East Mesa Medical Center, which is comprised of
two separate medical office buildings, located near the Valley Lutheran Hospital
in Mesa, Arizona.
(5) NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the effective date
of SFAS No. 133 for one year until January 1, 2001. The Registrant does not
expect the adoption of this statement to have a material impact on its financial
position or results of operations.
The Trust expects to adopt Statement 133 in January 2001 and has not yet
quantified the impact on the financial statements. However, the Statement could
increase the volatility in earnings and other comprehensive income.
Page Seven of Sixteen Pages
<PAGE> 8
(6) SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The following table represents summarized unaudited financial information of the
limited liability companies ("LLCs") accounted for by the equity method. Amounts
presented include investments in the following LLCs as of June 30, 1999:
Name of LLC Property Owned by LLC
DSMB Properties Desert Samaritan Hospital MOBs
DVMC Properties Desert Valley Medical Center MOBs
Parkvale Properties Maryvale Samaritan Hospital MOBs
Suburban Properties Suburban Medical Center MOBs
Litchvan Investments Samaritan West Valley Medical Center
Paseo Medical Properties II Thunderbird Paseo Medical Plaza
Willetta Medical Properties Edwards Medical Plaza
DesMed Desert Springs Medical Plaza
PacPal Investments Pacifica Palms Medical Plaza
RioMed Investments Rio Rancho Medical Center
West Highland Holdings St. Jude Heritage Health Complex
Santa Fe Scottsdale Santa Fe Professional Plaza
653 Town Center Investments Summerlin Hospital Medical Office Building
Bayway Properties East Mesa Medical Center
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------------
1999 1998 1999 1998
-------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Revenues $4,562 $4,081 $8,368 $5,796
Expenses 3,917 3,696 6,914 5,235
Net Income 645 385 1,454 561
UHT's share of net income 578 404 1,246 552
</TABLE>
As of June 30, 1999, these LLCs had approximately $79 million of non-recourse
debt payable to third-party lending institutions. Upon securing long-term,
third-party financing, these LLCs repaid loans payable to the Trust totaling $10
million during the six month period ended June 30, 1999. While outstanding, the
loans payable to the Trust earned interest at a combined average annual rate of
10.0% during the 1999 six month period.
Page Eight of Sixteen Pages
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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 or achievements of the Trust's 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 following: a substantial portion of the
Trust's revenues are dependent on one operator, Universal Health Services, Inc.,
("UHS"); a substantial portion of the Trust's leases are involved in the
healthcare industry which is undergoing substantial changes and is subject to
possible changes in the levels and terms of reimbursement from third-party
payors and government reimbursement programs, including Medicare and Medicaid;
the Trust's ability to finance growth on favorable terms; the impact of Year
2000 issues; liability and other claims asserted against the Trust or operators
of the Trust's facilities, and; other factors referenced in the Trust's 1998
10-K or herein. Additionally, the operators of the Trust's facilities, including
UHS, are confronted with other issues such as: industry capacity; demographic
changes; existing laws and government regulations and changes in or failure to
comply with laws and governmental regulations; the ability to enter into managed
care provider agreements on acceptable terms; competition; the loss of
significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for healthcare; and the
ability to attract and retain qualified personnel, including physicians.
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. Additionally,
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 or renewed lease
terms. Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. 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.
RESULTS OF OPERATIONS
The Trust has investments in thirty-four facilities located in fourteen states.
The Trust invests in healthcare and human service related facilities including
acute care hospitals, behavioral healthcare facilities, rehabilitation
hospitals, sub-acute care facilities, surgery centers, childcare centers and
medical office buildings.
The second quarter dividend of $.45 per share or $4.0 million in the aggregate
was paid on June 30, 1999.
For the quarters ended June 30, 1999 and 1998, net income totaled $3,811,000 and
$3,528,000 or $.42 and $.39 per diluted share, on net revenues of $5,885,000 and
$5,793,000, respectively. For the six months ended June 30, 1999 and 1998, net
income totaled $7,739,000 and $7,097,000 or $.86 and $.79 per diluted share on
net revenues of $11,941,000 and $11,650,000, respectively.
Page Nine of Sixteen Pages
<PAGE> 10
The $92,000 increase in net revenues during the 1999 second quarter as compared
to the 1998 quarter was due primarily to $45,000 of interest income earned on
short-term loans advanced to three separate LLCs in which the Trust has
ownership interests (all loans were fully repaid to the Trust during 1999), as
well as a $55,000 increase in bonus rentals from UHS facilities. The $291,000
increase in net revenues for the six months ended June 30, 1999 over the
comparable prior year period was due primarily to $277,000 of interest income
earned on short-term loans advanced to three separate LLCs in which the Trust
has ownership interests.
Interest expense remained relatively unchanged for the three months ended June
30, 1999 and increased $292,000 or 18% for the six months ended June 30, 1999 as
compared to the comparable prior year periods. The increase in interest expense
for the six months of 1999 compared to the 1998 six month period is due
primarily to increased borrowings used to finance additional investments during
1998 and the first six months of 1999.
Depreciation and amortization expense decreased $69,000 for the three months
ended June 30, 1999 and $89,000 for the six months ended June 30, 1999 compared
to the comparable prior year periods due primarily to the 1998 second quarter
including an additional $45,000 of amortization expense to write-off the
remaining financing costs related to the Trust's old revolving credit agreement
which was terminated and replaced with a new revolving credit facility during
the second quarter of 1998.
Other operating expenses increased $29,000 or 6% during the second quarter of
1999 and increased $104,000 or 11% during the 1999 six month period as compared
to the comparable prior year periods. Included in the Trust's other operating
expenses were the expenses related to the medical office buildings in which the
Trust has a controlling ownership interest which totaled $249,000 and $232,000
for the three month periods ended June 30, 1999 and 1998, respectively, and
$483,000 and $463,000 for the six month periods ended June 30, 1999 and 1998,
respectively. The majority of the expenses associated with the medical office
buildings are passed on directly to the tenants and are included as revenues in
the Trust's statements of income.
Included in the Trust's financial results was $578,000 and $404,000 for the
three months ended June 30, 1999 and 1998 and $1,246,000 and $552,000 for the
six months ended June 30, 1999 and 1998, respectively, of income generated from
the Trust's ownership in limited liability companies which own medical office
buildings in Arizona, California, Kentucky, New Mexico and Nevada.
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 $5.4 million and $4.9 million
for the three months ended June 30, 1999 and 1998 and $10.8 million and $9.8
million for the six months ended June 30, 1999 and 1998, respectively. FFO may
not be calculated in the same manner for all companies, and accordingly, FFO as
presented above may not be comparable to similarly titled measures by other
companies.
FFO does not represent cash flows from operations as defined by generally
accepted accounting principles and should not be considered as an alternative to
net income as an indicator of the Trust's operating performance or to cash flows
as a measure of liquidity.
Page Ten of Sixteen Pages
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.8 million for the six months
ended June 30, 1999 and $9.3 million for the six months ended June 30, 1998. The
$516,000 net favorable change during the first six months of 1999 as compared to
the comparable prior year period was primarily attributable to: (i) a $553,000
favorable change in net income plus the addback of the non-cash charges
(depreciation, amortization and amortization of interest rate cap expense), and;
(ii) $37,000 of other net unfavorable changes.
During the first six months of 1999, the $9.8 million of cash generated from
operating activities, the $10.0 million of cash received for the repayments of
three short-term loans advanced to separate LLCs during 1998 and the $140,000
reduction in cash were used primarily to: (i) purchase a 95% equity interest in
a limited liability company that owns the Santa Fe Professional Plaza located in
Scottsdale, Arizona ($1.2 million); (ii) purchase a 98% equity interest in a
limited liability company that owns the Summerlin Hospital Medical Office
Building located in Las Vegas, Nevada ($5.0 million); (iii) purchase a 75%
equity interest in a limited liability company that owns the East Mesa Medical
Center located in Mesa, Arizona ($1.6 million); (iv) repay debt ($3.4 million);
(v) finance capital expenditures and pay financing costs ($500,000), and; (vi)
pay dividends ($8.1 million).
During the first six months of 1998, the $9.3 million of cash generated from
operating activities and the $10.7 million of additional borrowings were used
primarily to: (i) purchase a 99% interest in a limited liability company that
owns the Desert Springs Medical Plaza located in Las Vegas, Nevada ($9.4
million); (ii) purchase a 95% equity interest in a limited liability company
that owns the Edwards Medical Plaza in Phoenix, Arizona ($3.8 million), and;
(iii) pay dividends ($7.8 million).
During the second quarter of 1999, UHT amended its revolving credit agreement
which matures in 2003, to increase its borrowing capacity to $100 million from
$80 million. The Agreement provides for interest at the Trust's option, at the
certificate of deposit rate plus 5/8% to 1 1/8%, Eurodollar rate plus 1/2% to 1
1/8% or the prime rate. A fee of .175% to .375% is required on the unused
portion of this commitment. The margins over the certificate of deposit rate,
Eurodollar rate and commitment fee are based upon the Trust's debt to total
capital ratio as defined by the Agreement. As of June 30, 1999, the Trust had
approximately $35 million of unused borrowing capacity under the terms of its
$100 million revolving credit agreement. Also during the second quarter of 1999,
the Trust created a Dividend Reinvestment and Share Purchase Plan pursuant to
the terms of which up to 900,000 newly issued shares of beneficial interest are
authorized for issuance. During the second quarter of 1999, 3,261 shares were
issued pursuant to the terms of this plan.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs,
certain building infrastructure components (including elevators, alarm systems
and certain HVAC systems) and certain computer aided medical equipment that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruption of operations or medical equipment malfunctions that could
affect patient diagnosis and treatment.
Page Eleven of Sixteen Pages
<PAGE> 12
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. Approximately 71% for both three month periods ended June
30, 1999 and 1998, and 70% and 71% for the six month periods ended June 30, 1999
and 1998, respectively, of the Trust's revenues were earned under the terms of
the leases with wholly-owned subsidiaries of UHS.
UHS has undertaken steps to inventory and assess applications and equipment at
risk to be affected by Year 2000 issues and to convert, remediate or replace
such applications and equipment. UHS has completed its assessment of its major
financial, clinical and peripheral software and believes that such software is
substantially Year 2000 compliant. UHS also believes its biomedical equipment is
substantially Year 2000 compliant and it will replace equipment that is not
year 2000 compliant before year end. UHS believes that Year 2000 related
remediation costs incurred through June 30, 1999 have not had a material impact
on its results of operations. UHS also believes that the total capital costs to
be incurred for equipment replacement will not have a material impact on its
results of operations. Some replacement or upgrade of systems and equipment
would take place in the normal course of business. Several systems, key to UHS's
operations, have been scheduled to be replaced through vendor supplied systems
before Year 2000. The costs of repairing existing systems is expensed as
incurred. UHS has allocated a portion of its 1999 capital budget as Year 2000
contingency funds and expects that all of the capital costs can be accommodate
within that budget. UHS presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
material operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of UHS and UHS's
ability to meet its obligations under the terms of its lease with the Trust.
The majority of the software used by UHS is purchased from third parties. UHS is
relying on software, (including UHS's major outsourcing vendor, which provides
the financial and clinical applications for the majority of UHS's acute care
facilities), hardware and other equipment vendors to verify Year 2000 compliance
of their products. UHS also depends on: fiscal intermediaries which process
claims and make payments for the Medicare program; health maintenance
organizations, insurance companies and other private payors; vendors of medical
supplies and pharmaceuticals used in patient care; and, providers of utilities
such as electricity, water, natural gas and telephone services. As part of its
Year 2000 strategy, UHS intends to seek assurances from these parties that their
services and products will not be interrupted or malfunction due to the Year
2000 problem. Failure of third parties to resolve their Year 2000 issues could
have a material adverse effect on UHS's results of operations and on its ability
to provide health care services.
Each of UHS's hospitals has a disaster plan which will be reviewed as part of
UHS's Year 2000 contingency planning process. However, no assurance can be given
that UHS will be able to develop contingency plans which will enable each of its
facilities to continue to operate in all circumstances.
This Year 2000 assessment is based on information currently available to UHS and
the Trust, and UHS and the Trust will revise its assessment at it implements its
Year 2000 strategy. UHS can provide no assurance that applications and equipment
UHS believes to be Year 2000 compliant will not experience difficulties or that
UHS will not experience difficulties obtaining resources needed to make
modifications to or replace its affected systems and equipment. Failure by
Page Twelve of Sixteen Pages
<PAGE> 13
UHS or third parties on which it relies to resolve Year 2000 issues could have a
material adverse effect on it's results of operations, its ability to provide
health care services and on UHS's ability o meet its obligations under the terms
of its leases with the Trust. Consequently, the Trust can give no assurances
that issues related to Year 2000 will not have a material adverse effect on it's
financial condition or results of operations.
With respect to the Trust's non-UHS properties, an assessment was conducted by
the Trust which covered the compliance efforts of the tenants and based upon the
responses received, these tenants do not expect Year 2000 related issues to have
a material impact on their operations. Management of the Trust will continue to
monitor the Year 2000 compliance efforts of its non-related tenants as well as
the effects of potential non-compliance.
The Trust will develop contingency plans if, and to the extent, deemed
necessary. However, based upon current information and barring developments, the
Trust does not anticipate developing any substantive contingency plans with
respect to Year 2000 issues. In addition, the Trust has no plans to seek
independent verification or review of its assessments. The Trust believes that
its expenditures for assessing and correcting Year 2000 issues have not been
material. In addition, the Trust is not aware of any issues that will require
material expenditures by the Trust or tenants of the Trust's facilities in the
future.
Based upon current information, the Trust believes that the risk posed by the
foreseeable Year 2000 related problems with its internal systems, (including
both information and non-information systems) is minimal. Year 2000 related
problems at certain third-party payors, service providers and non-related
tenants is greater, however based upon current information, the Trust does not
believe such problems will have a material effect on its operations. While the
Trust believes that it will be Year 2000 compliant by December 31, 1999, there
can be no assurance that the Trust or tenants of the Trust's properties will be
successful in identifying and assessing all compliance issues, or that the
efforts of the Trust or tenants of the Trust's properties to remedy all Year
2000 compliance issues will be effective such that they will not have material
adverse effects on the Trust's business or results of operations.
Page Thirteen of Sixteen Pages
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative disclosures
in 1999 other than the changes as disclosed below. Reference is made to Item 7
in the Annual Report on Form 10-K for the year ended December 31, 1998.
As of December 31, 1998, the Trust had three outstanding swap agreements for
notional principal amounts of $5 million (matured in May, 1999), $1.6 million
(matures in May 2001) and $4 million (matures in July, 2002). These swaps
effectively fixed the interest rate on $10.6 million of variable rate debt at
7.6% including the revolver spread of .625%. Also as of December 31, 1998, the
Trust had an interest rate cap, which fixed the maximum rate on $15 million of
variable rate revolving credit notes at 7.6% including the revolver spread of
.625%, which expired in June, 1999. In May, 1999, the Trust entered into a new
swap agreement for a notional principal amount of $10 million. Subsequent to the
second quarter of 1999, the Trust entered into an additional swap agreement for
a notional principal amount of $10 million. These swaps, including the swap
agreement entered into subsequent to the second quarter of 1999, effectively fix
the interest rate on $25.6 million of variable rate debt at 6.6%, including the
revolver spread of .625%
The table below presents updated information about the Trust's interest rate
swap agreements as of June 30, 1999, including the swap agreement with a $10
million notional principal amount entered into subsequent to the second quarter
of 1999:
Maturity Date, Fiscal Year Ending December 31
<TABLE>
<CAPTION>
There-
(Dollars in thousands) 2000 2001 2002 2003 2004 after Total
---- ---- ---- ---- ---- ----- -----
Interest rate swaps:
Pay fixed/receive
<S> <C> <C> <C> <C> <C> <C> <C>
variable notional amounts $ 1,580 $ 4,000 $ 10,000(a) $ 10,000(b) $25,580
Average pay rate 6.89% 6.69% 5.7% 5.9%
Average receive rate 3 Month 6 Month 3 Month 3 Month
LIBOR LIBOR LIBOR LIBOR
</TABLE>
(a) Counterparty has the right to cancel in 2002.
(b) Counterparty has the right to cancel in 2004.
Page Fourteen of Sixteen Pages
<PAGE> 15
PART II. OTHER INFORMATION
UNIVERSAL HEALTH REALTY INCOME TRUST
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The following information relates to matters submitted to the shareholders
of Universal Health Realty Income Trust (the "Trust") at the Annual Meeting
of Shareholders on June 1, 1999.
(b) Not applicable.
(c) At the meeting, the following proposals, as described in the proxy
statement delivered to all the Trust's shareholders, were approved by the
votes indicated:
Election by holders of Trust shares of two Class I Trustees
<TABLE>
<CAPTION>
Alan B. Miller Myles H. Tanenbaum
-------------- ------------------
<S> <C> <C>
Votes cast in favor 6,817,326 6,815,984
Votes withheld 144,657 145,999
</TABLE>
Shareholder proposal to request that the Board of Trustees adopt and submit
for shareholder approval an amendment to the Trusts' Declaration of Trust
regarding the qualifications of Independent Trustees.
<TABLE>
<S> <C>
Votes cast in favor 557,820
Votes cast against 698,692
Votes abstained 80,213
</TABLE>
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Dividend Reinvestment and Share Purchase Plan is hereby incorporated
by reference from Registration Statement Form S-3, Registration No.
333-81763, as filed on June 28, 1999.
27. Financial Data Schedule
All other items of this report are inapplicable.
Page Fifteen of Sixteen Pages
<PAGE> 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1999 UNIVERSAL HEALTH REALTY INCOME TRUST
(Registrant)
/s/ Kirk E. Gorman
--------------------------------------
Kirk E. Gorman, President,
Chief Financial Officer, Secretary and
Trustee
(Principal Financial Officer and Duly
Authorized Officer.)
Page Sixteen of Sixteen Pages
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 432
<SECURITIES> 0
<RECEIVABLES> 5,729
<ALLOWANCES> 5,186
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 164,220
<DEPRECIATION> 35,888
<TOTAL-ASSETS> 165,796
<CURRENT-LIABILITIES> 0
<BONDS> 62,652
0
0
<COMMON> 90
<OTHER-SE> 101,019
<TOTAL-LIABILITY-AND-EQUITY> 165,796
<SALES> 0
<TOTAL-REVENUES> 13,187
<CGS> 0
<TOTAL-COSTS> 1,613
<OTHER-EXPENSES> 1,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,940
<INCOME-PRETAX> 7,739
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,739
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.86
</TABLE>
