<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 September 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 October 31, 1999 -
8,964,552
Page One of Seventeen Pages
<PAGE> 2
UNIVERSAL HEALTH REALTY INCOME TRUST
I N D E X
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Statements of Income
Three and Nine Months Ended -- September 30, 1999 and 1998 ........................................ Three
Condensed Balance Sheets -- September 30, 1999
and December 31, 1998 ............................................................................. Four
Condensed Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 ..................................................... Five
Notes to Condensed Financial Statements ............................................. Six, Seven, Eight & Nine
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. Ten, Eleven, Twelve, Thirteen & Fourteen
Item 3. Quantitative and Qualitative Disclosures About Market Risks ................................ Fifteen
PART II. OTHER INFORMATION AND SIGNATURE ................................................ Sixteen & Seventeen
</TABLE>
Page Two of Seventeen 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
REVENUES (Note 2):
- ------------------
Base rental - UHS facilities $3,443 $3,443 $10,330 $10,320
Base rental - Non-related parties 1,684 1,597 4,931 4,749
Bonus rental 655 652 2,181 2,269
Interest - 2 281 6
-------------- ------------ -------------- ------------
5,782 5,694 17,723 17,344
-------------- ------------ -------------- ------------
EXPENSES:
- ---------
Depreciation & amortization 946 962 2,841 2,946
Interest expense 970 892 2,910 2,540
Advisory fees to UHS 306 291 905 854
Other operating expenses 333 485 1,347 1,395
Provision for investment losses, net 1,583 - 1,583 -
-------------- ------------ -------------- ------------
4,138 2,630 9,586 7,735
-------------- ------------ -------------- ------------
Income before equity in limited liability companies 1,644 3,064 8,137 9,609
Equity in income of limited liability companies 622 407 1,868 959
-------------- ------------ -------------- ------------
NET INCOME $2,266 $3,471 $10,005 $10,568
============== ============ ============== ============
NET INCOME PER SHARE - BASIC $0.25 $0.39 $1.12 $1.18
============== ============ ============== ============
NET INCOME PER SHARE - DILUTED $0.25 $0.39 $1.11 $1.18
============== ============ ============== ============
Weighted average number of shares outstanding - basic 8,957 8,952 8,954 8,952
Weighted average number of share equivalents 22 18 24 21
-------------- ------------ -------------- ------------
Weighted average number of shares and equivalents
outstanding - diluted 8,979 8,970 8,978 8,973
============== ============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page Three of Seventeen Pages
<PAGE> 4
UNIVERSAL HEALTH REALTY INCOME TRUST
Condensed Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 1999 1998
- ------- ------------------- --------------------
(unaudited)
<S> <C> <C>
REAL ESTATE INVESTMENTS:
Buildings & improvements $140,279 $142,871
Accumulated depreciation (36,829) (34,006)
------------------- --------------------
103,450 108,865
Land 21,061 21,061
Construction in progress 321 28
------------------- --------------------
Net Real Estate Investments 124,832 129,954
------------------- --------------------
Investments in and advances to limited liability companies 36,074 38,165
OTHER ASSETS:
Cash 237 572
Bonus rent receivable from UHS 660 681
Rent receivable from non-related parties 31 24
Deferred charges and other assets, net 44 10
------------------- --------------------
$161,878 $169,406
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
LIABILITIES:
Bank borrowings $58,900 $64,800
Note payable to UHS 1,270 1,216
Accrued interest 569 281
Accrued expenses & other liabilities 1,236 1,300
Tenant reserves, escrows, deposits and prepaid rents 444 374
Minority interest 79 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 - 8,963,459
1998 - 8,955,465 90 90
Capital in excess of par value 128,848 128,685
Cumulative net income 136,463 126,458
Cumulative dividends (166,021) (153,885)
------------------- --------------------
Total Shareholders' Equity 99,380 101,348
------------------- --------------------
$161,878 $169,406
=================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page Four of Seventeen Pages
<PAGE> 5
UNIVERSAL HEALTH REALTY INCOME TRUST
------------------------------------
Condensed Statements of Cash Flows
----------------------------------
(amounts in thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,005 $10,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 2,841 2,946
Amortization of interest rate cap 62 93
Provision for investment losses, net 1,583 -
Changes in assets and liabilities:
Rent receivable 14 75
Accrued expenses & other liabilities 20 90
Tenant escrows, deposits & deferred rents 70 192
Accrued interest 288 105
Deferred charges & other (54) 3
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,829 14,072
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited liability companies (8,774) (13,329)
Repayments of advances received from limited liability companies 10,041 -
Capital expenditures, net of dispositions (366) (121)
Proceeds received from sale of assets 998 -
Cash distributions in excess of income from LLCs 823 760
---------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,722 (12,690)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings - 9,600
Repayments of long-term debt (5,900) -
Dividends paid (12,136) (11,730)
Issuance of shares of beneficial interest 150 -
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (17,886) (2,130)
---------- -----------
Decrease in cash (335) (748)
Cash, beginning of period 572 1,238
---------- -----------
CASH, END OF PERIOD $237 $490
========== ===========
Supplemental disclosures of cash flow information:
Interest paid $2,506 $2,291
</TABLE>
See accompanying notes to these condensed financial statements.
Page Five of Seventeen Pages
<PAGE> 6
UNIVERSAL HEALTH REALTY INCOME TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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% and 72% for the three month periods ended September 30, 1999
and 1998 and 70% and 71% for the nine month periods ended September 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 nine months ended September
30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Base rental - UHS facilities $ 3,443 $ 3,443 $ 10,330 $ 10,320
Base rental - Non-related parties 1,684 1,597 4,931 4,749
------- ------- ------- -------
Total base rental 5,127 5,040 15,261 15,069
------- ------- ------- -------
Bonus rental - UHS facilities 655 652 2,086 2,040
Bonus rental - Non-related parties - - 95 229
------- ------- ------- -------
Total bonus rental 655 652 2,181 2,269
------- ------- ------- -------
Interest - Non-related parties - 2 281 6
------- ------- ------- -------
Total revenues $ 5,782 $ 5,694 $17,723 $17,344
======= ======= ======= =======
</TABLE>
UHS owned approximately 8% of the Trust's outstanding shares of beneficial
interest as of September 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 Seventeen 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
$306,000 and $291,000 for the three months ended September 30, 1999 and 1998 and
$905,000 and $854,000 for the nine month periods ended September 30, 1999 and
1998, respectively.
(3) DIVIDENDS
A dividend of $.455 per share or $4.1 million in the aggregate was declared by
the Board of Trustees on September 1, 1999 and was paid on September 30, 1999 to
shareholders of record as of September 15, 1999. Pursuant to the terms of the
Dividend Reinvestment and Share Purchase Plan established in the second quarter
of 1999, $87,000 of the third quarter 1999 dividend was distributed in the form
of 4,951 newly issued shares.
(4) SUBSEQUENT EVENTS
During the fourth quarter of 1999, the Trust acquired a single-tenant
medical office building located in Las Vegas, Nevada for $1.6 million. The
building is located on the campus of Valley Hospital Medical Center (a UHS
majority-owned hospital that also owns and leases to the Trust the land on
which the building is located) and is currently leased to the Orthopaedic
Specialists of Nevada. Additionally, during the fourth quarter of 1999, the
Trust acquired additional newly constructed assets from Chalmette Medical
Center (a UHS owned facility) for $3.2 million.
(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 Seventeen 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 September 30, 1999:
<TABLE>
<CAPTION>
Name of LLC Property Owned by LLC
----------- ---------------------
<S> <C>
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>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Revenues $4,918 $3,243 $13,286 $9,039
Expenses 4,236 2,779 11,150 8,014
Net Income 682 464 2,136 1,025
UHT's share of net income 622 407 1,868 959
</TABLE>
As of September 30, 1999, these LLCs had approximately $78 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 1999. While outstanding, the loans payable to the
Trust earned interest at a combined average annual rate of 10.0% during 1999.
(7) PROVISION FOR INVESTMENT LOSSES
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 flows.
During 1999, the operating performance declined significantly at one of the
Trust's behavioral health services facilities operated by, and leased to, a
wholly-owned subsidiary of UHS. Changes in CHAMPUS utilization and the
increasing influence of managed care have led to shorter lengths of stay for
patients at this facility which is operated as an adolescent residential
treatment center. During the nine months ended September 30, 1999 patient days
and average length of stay at this
Page Eight of Seventeen Pages
<PAGE> 9
facility decreased 9% and 15%, respectively, as compared to the comparable prior
year period. In the twelve month period ended September 30, 1999, this facility
had earnings before interest, taxes, depreciation, amortization and base rental
expense (EBITDAR) of 0.4 times the annual rent payable to the Trust. For the
twelve month period ended December 31, 1998, this facility had EBITDAR of 1.1
times the rent payable to the Trust. The lease on this facility expires in 2000
and represented 6% and 5% of the Trust's rental revenue for the nine month
period ended September 30, 1999 and twelve month period ended December 31, 1998,
respectively. Management of the Trust can not predict whether the lease on the
facility will be renewed, or if not renewed, on what terms the facility could be
leased to UHS or a non-related party. However, management of the Trust has
concluded that, based on an analysis of future cash flows, there has been a
permanent impairment in the carrying value of this facility. As a result, the
Trust recorded a $2.6 million provision for investment loss during the third
quarter of 1999.
Also during the third quarter of 1999, the Trust sold the real estate assets of
Lakeshore Hospital for net proceeds of $998,000. Since the book value of this
facility was reduced to zero in a prior year, this amount was recorded as a gain
and netted against the provision for investment loss during the third quarter of
1999.
Page Nine of Seventeen Pages
<PAGE> 10
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
(see Note 7 to Condensed Financial Statements). 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-five 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 third quarter dividend of $.455 per share or $4.1 million in the aggregate
was paid on September 30, 1999.
For the quarters ended September 30, 1999 and 1998, net income totaled
$2,266,000 and $3,471,000 or $.25 and $.39 per diluted share, on net revenues of
$5,782,000 and $5,694,000, respectively. For the nine months ended September 30,
1999 and 1998, net income totaled $10,005,000 and $10,568,000 or $1.11 and $1.18
per diluted share on net revenues of $17,723,000 and $17,344,000, respectively.
Page Ten of Seventeen Pages
<PAGE> 11
The $88,000 increase in net revenues during the 1999 third quarter as compared
to the 1998 quarter was due primarily to an increase in base rental revenue from
non-related parties. The $379,000 increase in net revenues for the nine months
ended September 30, 1999 over the comparable prior year period was due primarily
to: (i) $277,000 of interest income earned on short-term loans advanced to three
separate LLCs in which the Trust has ownership interests; (ii) a $182,000
increase in base rentals from non-related parties; and (iii) a $88,000 decrease
in bonus rent. The increases in base rentals and decreases in bonus rentals is
primarily the result of the Tri-State Rehabilitation Hospital lease amendment
commencing June 1, 1999. Pursuant to the terms of the lease, as amended, the
minimum rent has been increased and the additional rent provision has been
eliminated.
Interest expense increased $78,000 or 9% for the three months ended September
30, 1999 as compared to the comparable prior year period, and increased $370,000
or 15% for the nine months ended September 30, 1999 as compared to the
comparable prior year period. The increase in interest expense for the three and
nine months of 1999 as compared to the 1998 comparable periods was due primarily
to increased borrowings used to finance additional investments during 1998 and
the first nine months of 1999.
Depreciation and amortization expense remained relatively unchanged for the
three months ended September 30, 1999 and decreased $105,000 for the nine months
ended September 30, 1999 compared to the comparable prior year periods. The
decrease during the 1999 nine month period as compared to the comparable 1998
period was 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 decreased $152,000 or 31% during the third quarter of
1999 and decreased $48,000 or 3% during the 1999 nine month period as compared
to the comparable prior year periods. These decreases are primarily due to
$165,000 of favorable adjustments recorded in the third quarter of 1999,
adjusting expense reserves recorded in prior periods relating to Lakeshore
Hospital, which was sold during the third quarter of 1999 for net cash proceeds
of $998,000. 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 $269,000 for the three month
periods ended September 30, 1999 and 1998, respectively, and $732,000 and
$731,000 for the nine month periods ended September 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.
During the third quarter of 1999, the Trust recorded a provision for investment
loss of $2.6 million related to a behavioral health services facility operated
by, and leased to, a wholly-owned subsidiary of UHS. Also during the 1999 third
quarter, the Trust sold the real estate assets of Lakeshore Hospital for net
cash proceeds of $998,000. Since the book value of this facility was reduced to
zero in a prior year, the net cash proceeds received were recorded as a gain and
netted against the provision for investment loss during the third quarter of
1999.
Included in the Trust's financial results was $622,000 and $407,000 for the
three months ended September 30, 1999 and 1998 and $1,868,000 and $959,000 for
the nine months ended September 30, 1999 and 1998, respectively, of income
generated from the Trust's ownership in
Page Eleven of Seventeen Pages
<PAGE> 12
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,
amortization of interest rate cap expense and net provision for investment
losses, totaled $5.4 million and $4.9 million for the three months ended
September 30, 1999 and 1998 and $16.2 million and $14.7 million for the nine
months ended September 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $14.8 million for the nine months
ended September 30, 1999 and $14.1 million for the nine months ended September
30, 1998. The $757,000 net favorable change during the first nine months of 1999
as compared to the comparable prior year period was primarily attributable to:
(i) a $884,000 favorable change in net income plus the addback of the non-cash
charges (depreciation, amortization, amortization of interest rate cap expense
and provision for investment loss, net) and; (ii) $127,000 of other net
unfavorable changes.
During the first nine months of 1999, the $14.8 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, the $823,000 of
cash distributions in excess of income from LLCs, the $998,000 proceeds recorded
from the sale of Lakeshore Hospital and the $335,000 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) invest additional capital in existing LLCs ($1.0
million); (v) repay debt ($5.9 million); (vi) finance capital expenditures
($366,000), and; (vii) pay dividends ($12.1 million).
During the first nine months of 1998, the $14.1 million of cash generated from
operating activities, the $760,000 of cash distributions in excess of income
from LLCs and the $9.6 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
($11.7 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,
Page Twelve of Seventeen Pages
<PAGE> 13
Eurodollar rate and commitment fee are based upon the Trust's debt to total
capital ratio as defined by the Agreement. As of September 30, 1999, the Trust
had approximately $38 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. Since inception, 9,087 shares have been 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.
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% and 72% for the three month periods
ended September 30, 1999 and 1998, respectively, and 70% and 71% for the nine
month periods ended September 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 September 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
Page Thirteen of Seventeen Pages
<PAGE> 14
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.
UHS developed contingency plans for its hospitals that it believes will reduce
disruption in service that may be caused by the Year 2000 problem. As part of
the contingency plan, each hospital has a disaster plan, which is reviewed
regularly. These disaster plans are designed to enable the hospital to continue
to function during natural disasters and other crises. The plans contemplate
moving patients to other facilities if the hospital is not able to continue to
care for them. In some cases, the facility may not be able to develop
contingency plans which allow the hospital to continue to operate. For example,
the affected hospital may not be able to secure supplies of fuel to operate its
backup generators if electrical supplies fail for an extended period. Despite
these contingency plans no assurance can be given that UHS's facilities will be
able 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 as 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 UHS
or third parties on which it relies to resolve Year 2000 issues could have a
material adverse effect on its results of operations, its ability to provide
health care services and on UHS's ability to 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 its 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 Fourteen of Seventeen Pages
<PAGE> 15
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. During the third
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 September 30, 1999, including the swap agreement with a
$10 million notional principal amount entered into during the third quarter of
1999:
Maturity Date, Fiscal Year Ending December 31
---------------------------------------------
<TABLE>
<CAPTION>
There-
(Dollars in thousands) 2000 2001 2002 2003 2004 after Total
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps:
Pay fixed/receive
variable notional amounts $1,580 $4,000 $10,000(a) $10,000(b) $25,580
Average pay rate 6.8% 6.6% 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 Fifteen of Seventeen Pages
<PAGE> 16
PART II. OTHER INFORMATION
UNIVERSAL HEALTH REALTY INCOME TRUST
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
All other items of this report are inapplicable.
Page Sixteen of Seventeen Pages
<PAGE> 17
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: November 11, 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 Seventeen of Seventeen Pages
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798783
<NAME> UNIVERSAL HEALTH REALTY INCOME TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 237
<SECURITIES> 0
<RECEIVABLES> 691
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 161,661
<DEPRECIATION> 36,829
<TOTAL-ASSETS> 161,878
<CURRENT-LIABILITIES> 0
<BONDS> 60,170
0
0
<COMMON> 90
<OTHER-SE> 99,290
<TOTAL-LIABILITY-AND-EQUITY> 161,878
<SALES> 0
<TOTAL-REVENUES> 19,591
<CGS> 0
<TOTAL-COSTS> 2,252
<OTHER-EXPENSES> 2,841
<LOSS-PROVISION> 1,583
<INTEREST-EXPENSE> 2,910
<INCOME-PRETAX> 10,005
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,005
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.11
</TABLE>
