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, 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 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,
2000: $139,644,750.
Number of shares of beneficial interest outstanding of registrant as of January
31, 2000: 8,991,563.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999 (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,
1999, the Trust had investments in thirty-six facilities located in
thirteen states consisting of the following:
<TABLE>
<CAPTION>
Facility Name Location Type of Facility Guarantor
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chalmette Medical Center (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.("MOB") ---
Family Doctor's Medical Office Bldg. (B) Shreveport, LA MOB Columbia/HCA Healthcare Corp.
Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX MOB St. Lukes & Methodist Health Sys.
Professional Bldgs. at Kings Crossing (B) Kingwood, TX MOB ---
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 MOB ---
Desert Samaritan Hospital MOBs (C) Phoenix, AZ MOB ---
Suburban Medical Center MOBs (D) Louisville, KY MOB ---
Maryvale Samaritan Hospital MOBs (E) Phoenix, AZ MOB ---
Desert Valley Medical Center MOB (F) Phoenix, AZ MOB ---
Thunderbird Paseo Medical Plaza (G) Glendale, AZ MOB ---
Cypresswood Professional Center (H) Houston, TX MOB ---
Samaritan West Valley Medical Ctr. (I) Goodyear, AZ MOB, Imaging Ctr. ---
Edwards Medical Plaza (F) Phoenix, AZ MOB ---
Desert Springs Medical Plaza (J) Las Vegas, NV MOB Quorum Health Group, Inc.
Pacifica Palms Medical Plaza (F) Torrance, CA MOB ---
St. Jude Heritage Health Complex (K) Fullerton, CA MOB ---
Rio Rancho Medical Center (L) Rio Rancho, NM MOB ---
Orthopaedic Specialists of Nevada Building (M) Las Vegas, NV MOB ---
Santa Fe Professional Plaza (F) Scottsdale, AZ MOB ---
East Mesa Medical Center (G) Mesa, AZ MOB ---
Summerlin Hospital Medical Office Building (N) Las Vegas, NV MOB ---
Sheffield Medical Building (B) Atlanta, GA MOB ---
Southern Crescent Center, II (O) Riverdale, GA MOB ---
<FN>
(A) Leased to subsidiaries of Universal Health Services, Inc. ("UHS")
(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 a LLC which owns the real estate
assets of this facility. 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 August, 2000.
(E) The Trust has a 60% interest in a LLC which owns the real estate assets of
this facility.
(F) The Trust has a 95% equity interest in a LLC which owns the real estate
assets of this facility.
(G) The Trust has a 75% equity interest in a 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. In
connection with this investment, the Trust made a capital contribution of
$343,000 to the limited partnership.
1
<PAGE>
(I) The Trust has a 89% equity interest in a LLC which owns the real estate
assets of this facility
(J) The Trust has a 99% equity interest in a LLC which owns the real estate
assets of this facility. Tenants of this medical office building include a
subsidiary of UHS.
(K) The Trust has a 48% equity interest in a LLC which owns the real estate
assets of this facility.
(L) The Trust has a 80% equity interest in a LLC which owns the real estate
assets of this facility.
(M) Land leased from Valley Health Systems, LLC (a UHS subsidiary).
(N) The Trust has a 98% equity interest in a LLC which owns the real estate
assets of this facility. The Tenants in this multi-tenant medical office
building include a subsidiary of UHS.
(O) The construction on this facility is scheduled to be completed during the
second quarter of 2000.
</FN>
</TABLE>
In this Annual Report on Form 10-K, 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.
Included in the Trust's portfolio is ownership of nine hospital
facilities (aggregate net investment of $131 million) which contain an
aggregate of 1,259 licensed beds. The leases with respect to such
facilities comprised 80% of the Trust's 1999 revenues, have fixed terms
with an average of 4.2 years remaining and provide for renewal options
for up to six five-year terms. During 1998, wholly-owned subsidiaries
of Universal Health Services, Inc. ("UHS") exercised five-year renewal
options on four hospitals owned by the Trust which were scheduled to
expire in 1999 through 2001. The leases on these facilities were
renewed at the same lease rates and terms as the initial leases.
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. During 1999, the lease on Tri-State Rehabilitation
Hospital was amended and renewed for a five-year term commencing June
1, 1999 and ending May 31, 2004. Pursuant to the terms of the lease, as
amended, the minimum rent has been increased and the additional rent
provision has been eliminated.
For the hospital facilities owned by the Trust, the combined ratio of
earnings before interest, taxes, depreciation, amortization and lease
and rental expense (EBITDAR) to minimum rent plus additional rent
payable to the Trust was approximately 5.0, 5.1 and 4.7 for the years
ended December 31, 1999, 1998 and 1997, 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 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, 1999, subsidiaries of UHS leased seven of
the nine hospital facilities owned by the Trust with terms expiring in
2000 through 2006. The leases to the subsidiaries of UHS
2
<PAGE>
are guaranteed by UHS and are cross-defaulted with one another. Each of
the leases contains renewal options of up to six five-year periods.
These leases accounted for 73% of the total revenue of the Trust for
the five years ended December 31, 1999 (70% for the year ended December
31, 1999). Including 100% of the revenues generated at the
unconsolidated LLCs in which the Trust has various non-controlling
equity interests ranging from 33% to 99%, the UHS leases accounted for
52% of the combined consolidated and unconsolidated revenue for the
five years ended December 31, 1999 (39% for the year ended December 31,
1999).
For the year ended December 31, 1999, one UHS facility did not generate
sufficient EBITDAR to cover the 1999 rent expense payable to the Trust.
The lease on this facility, which matures in December, 2000, generated
5% of the Trust's 1999 rental revenue. During the third quarter of
1999, the Trust recorded a $2.6 million provision for investment loss
on this facility since management of the Trust concluded that the
carrying-value of the facility had been permanently impaired.
Management of the Trust cannot 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 (UHS is required to give
notice of intent by June 30, 2000). All of the Trust's remaining
hospital facilities, including the facilities operated by non-related
parties, had a combined 1999 EBITDAR of 5.2 times (ranging from 1.1
times to 9.0 times) the 1999 rent expense payable to 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 lease terms. If the leases are not renewed at their current
rates, the Trust would be required to find other operators for those
facilities and/or enter into leases on terms potentially less favorable
to the Trust than the current leases.
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.
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 the Trustees who are unaffiliated with UHS (the
"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.
3
<PAGE>
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 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 2000. 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 1999, 1998 and 1997. 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, 1999, UHS owned 8% of the
outstanding shares of beneficial interest.
Competition
The Trust believes that it is one of thirteen 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 Trust's hospital 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. Providers participating in managed care
programs
4
<PAGE>
agree to provide services to patients for a discount from established
rates which generally results in pricing concessions by the providers
and lower margins. Additionally, managed care companies generally
encourage alternatives to inpatient treatment settings and reduce
utilization of inpatient services. In response to increased pressure on
revenues, the operators of the Trust's hospital facilities continue to
implement cost control programs including more efficient staffing
standards and re-engineering of services. Pressure on operating margins
is expected to continue due to, among other things, the changes in
Medicare payments mandated by the Balanced Budget Act of 1997
("BBA-97") which became effective October 1, 1997 and the industry-wide
trend towards managed care which limits the ability of the Trust's
hospital facilities to increase their prices.
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, 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 hospital
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 hospital facilities to continue to experience
increased competition, admission constraints and payor pressures.
A large portion of the Trust's non-hospital properties consist of
medical office buildings which are located either close to or on the
campuses of hospital facilities. These properties are either directly
or indirectly affected by the factors discussed above as well as
general real estate factors such as the supply and demand of office
space and market rental rates.
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 Medicare program reimburses the operators of the Trust's hospitals
primarily based on established rates by a diagnosis related group
("DRG") 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 BBA-97, there were no increases in the rates
paid to hospitals for inpatient care through September 30, 1998 and
reimbursement for bad debt expense and capital costs as well as other
items have been reduced. Inpatient operating payment rates increased
0.5% for the period of October 1, 1998 through September 30, 1999,
however, the modest rate increase was less than inflation and was more
than offset by the negative impact of converting reimbursement on
skilled nursing facility patients from a cost based reimbursement to a
prospective payment system and from lower DRG payments on certain
patient transfers mandated by BBA-97. Inpatient operating payment rates
were increased 1.1% for the period of October 1, 1999 through September
30, 2000, however, the modest increase was less than inflation and is
expected to be more than offset by the negative impact of increasing
the qualification threshold for additional payments for treating costly
inpatient cases (outliers). Payments for Medicare outpatient services
historically have been paid based on costs, subject to certain
adjustments and limits. BBA-97 requires that payment for those services
be converted to PPS. The Health Care Financing
5
<PAGE>
Administration's current plan is to implement PPS for outpatients by
July 1, 2000, however, there is a possibility that outpatient PPS may
be delayed until January, 2001. Since final provisions of the
outpatient Medicare PPS are not yet available, the operators of the
Trust's facilities can not completely estimate the resulting impact on
their future results of operations. The Trust expects continuing
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.
6
<PAGE>
Executive Officers of the Registrant
Name Age Position
Alan B. Miller 62 Chairman of the Board and
Chief Executive Officer
Kirk E. Gorman 49 President, Chief Financial
Officer, Secretary and Trustee
Charles F. Boyle 40 Vice President and Controller
Cheryl K. Ramagano 37 Vice President and Treasurer
Timothy J. Fowler 44 Vice President, Acquisition
and Development
Alan C. Hale 32 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.
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
- Corporate 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.
Mr. Alan C. Hale was elected Vice President, Acquisition and
Development, of the Trust in October, 1998. Mr. Hale had previously
served as Vice President, Acquisition and Development, for UHS,
Ambulatory Services Division, since the commencement of his employment
with UHS in November, 1996. Prior thereto, he served as Vice President,
Acquisition and Development for EquiMed, Inc. since 1994.
The Trust's officers are all employees of UHS and as of December 31,
1999, the Trust had no salaried employees. In both 1999 and 2000, the
Trustees awarded a $50,000 bonus to Mr. Kirk E. Gorman, President,
Chief Financial Officer, Secretary and Trustee of the Trust. Also, in
both 1999 and 2000, UHS agreed to a $50,000 reduction in the advisory
fee paid by the Trust.
7
<PAGE>
Item 2. Properties
The following table shows the Trust's investments in hospital facilities leased
to Universal Health Services, Inc. and other non-related parties. The table on
the next page provides information related to various properties in which the
Trust has significant investments, some of which are accounted for by the equity
method. The capacity in terms of beds (for the hospital facilities) and the
five-year occupancy levels are based on information provided by the lessees.
<TABLE>
<CAPTION>
Lease Term
-----------------------------
Number of End of
available Average Occupancy (1) initial Renewal
Hospital Facility Type of beds @ ---------------------------------------- Minimum or renewed term
Name and Location facility 12/31/99 1999 1998 1997 1996 1995 rent term (years)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Chalmette Medical Centers
Virtue Street Pavilion (3) Rehabilitation 45 61% 63% 64% 61% 57% $1,261,000 2004 25
Chalmette Medical Center Acute Care 118 65% 61% 64% 66% 67% 1,229,000 2003 15
Chalmette, Louisiana (2)
Inland Valley Regional
Medical Center Acute Care 80 68% 60% 52% 49% 49% 1,857,000 2006 30
Wildomar, California (3)
McAllen Medical Center Acute Care 472 69% 69% 76% 88% 87% 5,485,000 2001 30
McAllen, Texas (3)
Wellington Regional
Medical Center Acute Care 120 41% 37% 36% 36% 30% 2,495,000 2006 30
West Palm Beach,
Florida (3)
The BridgeWay Behavioral Health 70 78% 79% 68% 62% 65% 683,000 2004 25
North Little Rock,
Arkansas (3)
Meridell Achievement Center Behavioral Health 114 49% 53% 47% 45% 65% 1,071,000 2000 20
Austin, Texas
Tri-State Regional
Rehabilitation Hospital Rehabilitation 80 74% 82% 74% 59% 59% 1,206,000 2004 20
Evansville, Indiana (4)
Vencor Hospital Sub-Acute Care 114 46% 42% 50% 45% 38% 1,179,000 2001 25
Chicago, Illinois (5)
8
<PAGE>
Item 2. Properties (continued)
Lease Term
-------------------------------------
End of
Average Occupancy (1) initial Renewal
Hospital Facility Type of ---------------------------------------- Minimum or renewed term
Name and Location facility 1999 1998 1997 1996 1995 rent term (years)
- ----------------------------------------------------------------------------------------------------------------------------------
Fresno - Herndon Medical
Plaza Medical 100% 100% 100% 100% 100% $688,000 2000 -2003 various
Fresno, California (6) Office Building
Kelsey-Seybold Clinic
at King's Crossing 100% 100% 100% 100% 100% 264,000 2005 10
Professional Center Medical
at King's Crossing Office Buildings 100% 100% 100% 93% 100% 295,000 2000 -2005 various
Kingwood, Texas (7)
The Southern Crescent
Center I Medical 100% 100% 100% 89% - 628,000 2000 -2006 various
Riverdale, Georgia (8) Office Building
The Cypresswood Professional Medical
Center Spring, Texas (9) Office Building 100% 100% 96% - - 545,000 2002 -2007 various
Desert Springs Medical Plaza Medical 99% 100% - - - 1,655,000 2000-2006 various
Las Vegas, Nevada (10) Office Building
Orthopaedic Specialists
of Nevada Las Vegas, Medical 100% - - - - 183,000 Bldg. 2009 20
Nevada (11) Office Building 20,000 Ground 2049 non-renewable
Sheffield Medical Office
Building Medical 90% - - - - 1,371,000 2000-2012 various
Atlanta, Georgia (12) Office Building
The Southern Crescent
Center II Medical N/A - - - - 415,000 2010 10
Atlanta, Georgia (13) Office Building
</TABLE>
9
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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, 1999. Average occupancy rate for the multi-tenant medical
office buildings is based on the occupied square footage of each
building. 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 Chalmette Medical
Center, 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 Chalmette Medical Center facility is a 122-bed
medical/surgical facility. The Virtue Street Pavilion is a 73
licensed-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 ("Lifecare"), for a portion of the facility. Annual rental is $1.1
million under the provisions of this agreement. The sub-lease, which
expires in December, 2000, contains one three year extension at the
lessee's option. Management of the Trust can not predict whether the
sub-lease agreement with Lifecare will be renewed at the end of the
initial term. 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 Chalmette Medical
Center. Rental commitments and the guarantee by UHS under the existing
leases continue for the remainder of the respective terms of the
leases. In October, 1999, the Trust purchased $3.2 million of newly
constructed acute care capacity at Chalmette Medical Center including a
new operating room and stat lab, 16 beds and administrative space.
Under the existing lease terms, base rent on this facility was
increased by $308,000 per year as a result of this additional purchase.
(3) During 1998, wholly-owned subsidiaries of UHS exercised five-year
renewal options on four hospitals owned by the Trust which were
scheduled to expire in 1999 through 2001 (Virtue Street Pavilion, The
Bridgeway, Inland Valley Regional Medical Center and Wellington Medical
Center). The leases on these facilities were renewed at the same lease
rates and terms as the initial leases. As part of the renewal
agreement, the Trust also agreed to grant additional fixed rate renewal
options to a wholly-owned subsidiary of UHS commencing in 2022 on the
real property of McAllen Medical Center.
(4) Tri-State Regional Rehabilitation Hospital was purchased by the
Trust in 1989 at which time the Trust entered into an agreement with
the operator, an unaffiliated third-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 five-year renewal terms. During 1999, the
lease on this facility was amended and renewed for a five-year term
commencing on June 1, 1999 and ending on May 31, 2004. Pursuant to the
terms of the lease as amended, the minimum rent has been increased and
the additional rent provision has been eliminated.
(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 $1.3 million (including accrued
interest) at December 31, 1999. The note payable has a face value of $1
million and is due on December 31, 2001. The amount of interest payable
on this
10
<PAGE>
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 1999 financial results is
approximately $76,000 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. During 1999,
Vencor, Inc. filed for bankruptcy and as a result, the Trust did not
receive or record approximately one-half of a month of rental revenue.
Management of Vencor, Inc. has informed the Trust that pursuant to its
petition for debt reorganization, it intends on paying all rent due to
the Trust pursuant to the terms of the lease. Vencor, Inc. was granted
a Motion for an Order Pursuant to Section 365(d)(4) of the Bankruptcy
Code Further Extending the Time Within Which Debtors Must Assume or
Reject Unexpired Leases of Non-residential Property, extending the date
to June 13, 2000. Rental payments on this facility have been received
through March, 2000.
(6) Fresno-Herndon Medical Plaza, a multi-tenant medical office
building, was purchased by the Trust in 1994 for approximately $6.3
million. The 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 February, 2000 to March, 2003. The Trust has granted the seller
the option to repurchase the property in November, 2001 for $7,250,000.
(7) During 1994 and 1995, the Trust financed construction and in 1995
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 for an initial term of 10 years. This lease is
guaranteed 50% by St. Luke's Episcopal Health System and 50% by
Methodist Health Care System. The two multi-tenant buildings total
27,535 net square feet and are occupied by tenants consisting primarily
of medical professionals.
(8) During 1996, the Trust purchased The Southern Crescent Center I,
for approximately $6 million. The Southern Crescent Center I, is a
41,400 square foot, multi-tenant medical office building located
adjacent to the Southern Regional Medical Center in Riverdale, Georgia.
(9) 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.
(10) During 1998, the Trust invested a total of $10.1 million to
acquire a 99% non-controlling interest in a limited liability company
that owns the Desert Springs Medical Plaza located in Las Vegas,
Nevada. The 89,000 square foot medical office building, which is
located on the campus of Desert Springs Hospital, is master leased and
guaranteed by Quorum Health Group, Inc. In connection with this
investment the limited liability company obtained non-recourse,
third-party financing, which has an outstanding balance at December 31,
1999 of $5.9 million.
(11) During 1999, the Trust purchased the Orthopaedic Specialists of
Nevada Building in Las Vegas, Nevada for $1.6 million. The lease
extends for a period of ten years, with two ten-year renewal options.
The land on which this building is located is leased from Valley Health
Systems, LLC, a subsidiary of UHS.
11
<PAGE>
(12) On November 15, 1999, the Trust purchased the Sheffield Medical
Office Building in Atlanta, Georgia for $11.5 million. The leases on
this multi-tenant building have expiration dates ranging from April,
2000 to December, 2012.
(13) As of December 31, 1999, the Trust has invested $2.1 million in a
$7.3 million development project to construct a 60,000 square foot
medical office building to be called The Southern Crescent Center II,
adjacent to the Southern Crescent Center I in Atlanta, GA. The project
is scheduled for completion in the spring of 2000. The building is
master leased to Southern Regional Medical Center under the terms of a
ten year lease agreement, with two five year renewal terms.
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, 1999 to a vote of security holders.
12
<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, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ---------------------------------------
High Price Low Price High Price Low Price
----------------- ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
First Quarter $20 1/2 $19 1/4 $22 1/2 $21
Second Quarter $20 5/16 $19 5/16 $21 3/8 $18 13/16
Third Quarter $19 13/16 $17 1/16 $20 1/4 $18 1/16
Fourth Quarter $17 7/8 $14 5/8 $20 1/4 $18 3/8
</TABLE>
As of January 31, 2000, there were approximately 885 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>
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
First Quarter $ .450 $ .435 $ .425 $ .420 $ .42
Second Quarter .450 .435 .425 .425 .42
Third Quarter .455 .440 .425 .425 .42
Fourth Quarter .455 .445 .430 .425 .42
--------- --------- --------- -------- --------
$ 1.810 $ 1.755 $ 1.705 $ 1.695 $ 1.68
========= ========= ========= ======== ========
</TABLE>
13
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Financial highlights for the Trust for the five years ended December
31, 1999 were as follows:
<TABLE>
<CAPTION>
(000s except per share amounts)
-----------------------------------------------------------------------------------------
1999 (1) 1998 (1) 1997 (1) 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $23,865 $23,234 $22,764 $21,923 $20,417
Net Income $13,972 $14,337 $13,967 $14,158 $13,584
Funds from
Operations (2) $21,772 $19,857 $18,809 $18,174 $17,024
Per Share Data:
Net income-Basic $1.56 $1.60 $1.56 $1.58 $1.52
Net income-Diluted $1.56 $1.60 $1.56 $1.58 $1.52
Dividends $1.810 $1.755 $1.705 $1.695 $1.680
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Funds from operations ("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. FFO shown above is calculated as follows:
<TABLE>
<CAPTION>
(000s)
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $13,972 $14,337 $13,967 $14,158 $13,584
Depreciation expense:
Consolidated investments 3,833 3,809 3,740 3,554 3,315
Unconsolidated affiliates 2,322 1,587 978 337 --
Amortization of interest
rate cap 62 124 124 125 125
Provision for investment loss, net 1,583 -- -- -- --
------- ------- ------- ------- -------
Total $21,772 $19,857 $18,809 $18,174 $17,024
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
At End of Period 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $178,821 $169,406 $146,755 $148,566 $132,770
Debt $ 76,889 $ 66,016 $ 42,347 $ 43,082 $ 26,396
</TABLE>
14
<PAGE>
Item 7. 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 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 its growth on favorable terms; liability and
other claims asserted against the Trust or operators of the Trust's
facilities, and other factors referenced 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 factors will have on the operating
results of its lessees, including the facilities leased to subsidiaries
of UHS. 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.
Liquidity and Capital Resources
General
The Trust commenced operations on December 24, 1986. As of December 31,
1999, the Trust had investments in thirty-six facilities located in
thirteen states.
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 1999, dividends of $1.81 per share, or $16.2 million in
the aggregate, were declared and paid.
Net cash generated by operating activities was $19.6 million in 1999,
$18.7 million in 1998 and $17.7 million in 1997. The $900,000 net
increase in 1999 as compared to 1998 was due primarily to: (i) a $1.1
million increase in net income plus the addback of the non-cash charges
(depreciation, amortization, amortization of interest rate cap expense
and provisions for investment losses); (ii) a
15
<PAGE>
$113,000 unfavorable change in rent receivable, and; (iii) a $96,000
unfavorable change in other net working capital accounts. The $1
million net increase in 1998 as compared to 1997 was due primarily to:
(i) a $500,000 increase in net income plus the addback of the non-cash
charges (as defined above); (ii) a $100,000 favorable change in rent
receivable, and; (iii) a $400,000 favorable change in tenant escrows,
deposits and prepaid rents.
During 1999, the $19.6 million of cash flows generated from operating
activities, the $10 million of cash received for the repayments of
three short-term loans advanced to separate LLCs during 1998, the $1.2
million of cash distributions received in excess of income from the
Trust's investments in LLCs, the $10.8 million of additional borrowings
and the $998,000 proceeds recorded from the sale of Lakeshore Hospital
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)
acquire a medical office building in Las Vegas, Nevada ($1.6 million);
(vi) acquire the Sheffield Medical Building ($11.5 million); (vii)
finance capital expenditures ($4.4 million); (viii) purchase land
($307,000), and; (ix) pay dividends ($16.2 million).
During 1998, the $18.7 million of cash flows generated from operations,
the $23.6 million of additional borrowings, the $900,000 of cash
distributions received in excess of income from the Trust's investments
in LLCs and the $600,000 reduction in cash were used primarily to: (i)
pay dividends ($15.7 million); (ii) investments in and advances to five
limited liability companies ($27.9 million, see Note 3), and; (iii)
purchase real property and additions to land and buildings ($200,000).
Included in the $27.9 million invested in/advanced to limited liability
companies was $10.0 million of short-term loans advanced to three
separate LLCs in which the Trust has ownership interests ranging from
48% to 95%. These loans, which earned interest at variable rates
depending upon the length of time the loan was outstanding, earned
interest at an annual average rate of 9% for 1998. The loans were fully
repaid to the Trust during 1999 when the LLCs secured long-term,
third-party financing.
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 1999, the Trust amended its unsecured, non-amortizing revolving
credit agreement (the "Agreement"), which expires on June 24, 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 the commitment fee are
based upon the Trust's debt to total capital ratio as defined by the
Agreement. At December 31, 1999 the applicable margin over the
certificate of deposit and Eurodollar rates were 7/8% and 5/8%,
respectively, and the commitment fee was .20%. There are no
compensating balance requirements. The Agreement contains a provision
16
<PAGE>
whereby the commitments will be reduced by 50% of the proceeds
generated from any new equity offering. At December 31, 1999, the Trust
had approximately $21 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.
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.
At December 31, 1999, the Trust had five outstanding swap agreements
for notional principal amounts of $35,580,000 which mature from May,
2001 through November, 2006. These swap agreements effectively fix the
interest rate on $35,580,000 of variable rate debt at 6.64% including
the revolver spread of .625%. The Trust had one interest rate cap, for
which the Trust paid $622,750, which matured in June, 1999 and fixed
the maximum rate on $15 million of variable rate revolving credit notes
at 7.625% including the revolver spread of .625%. The interest rate
swap and cap agreements were entered into in anticipation of certain
borrowing transactions made by the Trust. The effective rate on the
Trust's revolving credit notes including commitment fees and interest
rate swap expense was 6.2%, 6.7% and 6.9% during 1999, 1998 and 1997,
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 $135,000, $136,000 and $118,000 in 1999, 1998
and 1997, respectively. The Trust is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swap
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, 1999 would have resulted in
payments from the counterparties to the Trust of approximately
$862,000. The fair value of the interest rate swap agreements at
December 31, 1999 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 3% or $631,000 to $23.9 million in 1999 as
compared to 1998 and 2% or $470,000 to $23.2 million in 1998 as
compared to $22.8 million in 1997. The $631,000 increase during 1999
over 1998 was due primarily to a $451,000 increase in base rentals from
non-related parties and a $170,000 increase in interest income. The
$451,000 increase in base rentals from non-related parties resulted
primarily from: (i) revenues generated from the Sheffield Medical
Building and the Orthopaedic Specialists of Nevada Building, both of
which were acquired during the fourth quarter of 1999 ($275,000), and;
(ii) a $134,000 increase in the base rentals of Tri-State
Rehabilitation Hospital resulting from the June 1, 1999 lease amendment
which increased the minimum rent and eliminated the additional rent
provision. The $170,000 increase in interest income is primarily due to
the interest earned on short-term loans advanced to three separate LLCs
(in which the Trust has ownership interests), all of which were repaid
to the Trust by June 30, 1999. The $470,000 increase during 1998 over
1997 was due primarily to a $788,000 increase in base rentals from
non-related parties (due primarily to the completion of The Cypresswood
Professional Center during the third quarter of 1997), and a $122,000
increase in bonus rental income from UHS facilities. These favorable
changes were partially offset by a $473,000 decrease in interest income
due to a mortgage loan receivable which was fully repaid in June, 1997
and a construction loan receivable which was repaid in December, 1997.
17
<PAGE>
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 hospital
facilities. The Trust's hospital facilities have experienced growth in
outpatient utilization over the past several years. The increase in
outpatient services 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, managed care companies and other 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 hospital 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 the increased competition,
admission constraints and payor pressures to continue. The ability of
the Trust's hospital facilities to maintain or grow their net revenues
and operating margins is dependent upon their ability to successfully
respond to these trends as well as reductions in spending on
governmental healthcare programs.
The Medicare program reimburses the operators of the Trust's hospitals
primarily based on established rates by a diagnosis related group
("DRG") 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 ("BBA-97"),
there were no increases in the rates paid to hospitals for inpatient
care through September 30, 1998 and reimbursement for bad debt expense
and capital costs as well as other items have been reduced. Inpatient
operating payment rates increased 0.5% for the period of October 1,
1998 through September 30, 1999, however, the modest rate increase was
less than inflation and was more than offset by the negative impact of
converting reimbursement on skilled nursing facility patients from a
cost based reimbursement to a prospective payment system and from lower
DRG payments on certain patient transfers mandated by BBA-97. Inpatient
operating payment rates were increased 1.1% for the period of October
1, 1999 through September 30, 2000, however, the modest increase was
less than inflation and is expected to be more than offset by the
negative impact of increasing the qualification threshold for
additional payments for treating costly inpatient cases (outliers).
Payments for Medicare outpatient services historically have been paid
based on costs, subject to certain adjustments and limits. BBA-97
requires that payment for those services be converted to prospective
payment systems (PPS). The Health Care Financing Administration's
current plan is to implement PPS for outpatients by July 1, 2000,
however, there is a possibility that outpatient PPS may be delayed
until January, 2001. Since final provisions of the outpatient Medicare
PPS are not yet available, the operators of the Trust's facilities can
not completely estimate the resulting impact on their future results of
operations. The Trust expects continuing 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
18
<PAGE>
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.
Interest expense increased $514,000 or 15% in 1999 as compared to 1998
and $547,000 or 19% in 1998 as compared to 1997 due primarily to the
additional borrowings used to finance the 1999, 1998 and 1997
investments described in Note 3 of the financial statements.
Depreciation and amortization expense decreased slightly in 1999 as
compared to 1998 and increased $104,000 or 3% in 1998 as compared to
1997. The increase in 1998 as compared to 1997 was due primarily to the
depreciation expense related to the 1997 acquisitions described in Note
3.
Other operating expenses decreased $115,000 or 6% in 1999 as compared
to 1998 primarily due to a favorable expense reserve adjustment
recorded in the third quarter of 1999, relating to Lakeshore Hospital,
which was sold during the third quarter of 1999 for net cash proceeds
of $998,000. Other operating expenses increased $479,000 or 34% in 1998
as compared to 1997 due to the operating expenses on the Cypresswood
Professional Center on which construction was completed during the
third quarter of 1997 and an increase in various other operating
expenses. Included in the Trusts' other operating expenses were the
expenses related to the medical office buildings, in which the Trust
has a controlling ownership interest which totaled $1.0 million in
1999, $1.0 million in 1998 and $770,000 in 1997. The majority of these
expenses are passed on directly to the tenants and are included as
revenues in the Trust's statements of income.
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 twelve months
ended December 31, 1999 patient days and average length of stay at this
facility decreased 7% and 20%, respectively, as compared to the
comparable prior year period. In the twelve month period ended December
31, 1999, this facility had earnings before interest, taxes,
depreciation, amortization and base rental expense (EBITDAR) of 0.8
times the annual rent payable to the Trust. The lease on this facility
expires in December, 2000 and represented 5% of the Trust's rental
revenue for the twelve month period ended December 31, 1999. Although
management of the Trust is actively negotiating the sale/lease of the
property with UHS as well as non-related parties, 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 1999.
Also during 1999, the Trust sold the real estate assets of Lakeshore
Hospital for net proceeds of $998,000. Since the book value of this
facility had previously been reduced to zero, this amount was recorded
as a gain and netted against the provision for investment loss during
1999.
Included in the Trust's financial results was $2.6 million in 1999,
$1.5 million in 1998 and $400,000 in 1997, 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 (Note 8 of the financial statements).
Net income for 1999 was $14.0 million or $1.56 per basic and diluted
share compared to $14.3 million or $1.60 per basic and diluted share in
1998 and $14.0 million or $1.56 per basic and diluted share in 1997.
19
<PAGE>
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
$21.8 million in 1999, $19.9 million in 1998 and $18.8 million in 1997.
FFO may not be calculated in the same manner for all companies, and
accordingly, 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.
General
During 1999, the lease on Tri-State Rehabilitation Hospital was amended
and renewed for a five-year term commencing on June 1, 1999 and ending
on May 31, 2004. Pursuant to the terms of the lease as amended, the
minimum rent has been increased and the additional rent provision has
been eliminated.
During the third quarter of 1998, wholly-owned subsidiaries of UHS
exercised five-year renewal options on four hospitals owned by the
Trust which were scheduled to expire in 1999 through 2001 (Virtue
Street Pavilion, The Bridgeway, Inland Valley Regional Medical Center
and Wellington Regional Medical Center). The leases on these facilities
were renewed at the same lease rates and terms as the initial leases.
As part of the renewal agreement, the Trust also agreed to grant
additional fixed rate renewal options to a wholly-owned subsidiary of
UHS commencing in 2022 on the real property of McAllen Medical Center.
Management of the Trust can not predict whether the leases with
subsidiaries of UHS, which have renewal options at existing lease
rates, or any of the Trust's other leases, will be renewed at the end
of their initial term or first five-year renewal term.
The Trust did not experience any significant Year 2000 computer related
issues as a result of the turn of the century.
Market Risks Associated with Financial Instruments
The Trust's interest expense is sensitive to changes in the general
level of domestic interest rates. To mitigate the impact of
fluctuations in domestic interest rates, a portion of the Trust's debt
is fixed rate accomplished by entering into interest rate swap
agreements. The interest rate swap agreements are contracts that
require the Trust to pay a fixed and receive a floating interest rate
over the life of the agreements. The floating-rates are based on LIBOR
and the fixed-rates are determined upon consummation of the swap
agreements. The interest rate swap agreements do not constitute
positions independent of the underlying exposures. The Trust does not
hold or issue derivative instruments for trading purposes and is not a
party to any instruments with leverage features. The Trust is exposed
to credit losses in the event of non-performance by the counterparties
to its financial instruments. The counterparties are creditworthy
financial institutions, rated A or better by Moody's Investor Services
and the Trust anticipates that the counterparties will be able to fully
satisfy their obligations under the contracts. For the years ended
December 31, 1999, 1998 and 1997, the Trust received a weighted average
rate of 6.09%, 5.24% and 5.79%, respectively, and paid a weighted
average rate on its interest rate swap agreements of 6.02%, 6.94% and
6.94%, respectively.
The table below presents information about the Trust's derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates, including interest rate swaps
as of December 31, 1999. For debt obligations, the table presents
principal cash flows and related weighted-average interest rates by
contractual maturity dates. For interest rate swap agreements, the
table presents notional amounts by expected maturity date and weighted
average interest rates based on rates in effect at December 31, 1999.
20
<PAGE>
<TABLE>
<CAPTION>
Maturity Date, Fiscal Year Ending December 31
---------------------------------------------
There-
(Dollars in thousands) 2000 2001 2002 2003 2004 after Total
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate $1,289 $1,289
Average interest rates 6.0%
Variable rate long-term debt $75,600 $75,600
Interest rate swaps:
Pay fixed/receive
variable notional amounts $1,580 $4,000 $10,000 $20,000 $35,580
Average pay rate 6.80% 6.6025% 6.10375% 6.02%
Average receive rate 3 month 6 month 3 month 3 month
LIBOR LIBOR LIBOR LIBOR
</TABLE>
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, 1999. 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,
1999.
21
<PAGE>
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, 1999.
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, 1999.
22
<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, 1999 and
December 31, 1998 Consolidated Statements of Income -
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1999, 1998 and 1997 Consolidated
Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997 Notes to Consolidated Financial
Statements - December 31, 1999
(3) Schedules
Schedule II - Valuation and Qualifying Accounts -
Years Ended December 31, 1999, 1998 and 1997
Schedule III - Real Estate and Accumulated Depreciation
- December 31, 1999
Notes to Schedule III - December 31, 1999
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last
quarter of the year ended December 31, 1999
(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 10.1 to
the Trust's Form 10-Q for the quarter ended March 31, 1998, 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.
10.2 Agreement effective January 1, 2000, to renew Advisory
Agreement dated as of December 24, 1986 between Universal Health
Realty Income Trust and UHS of Delaware, Inc.
23
<PAGE>
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.
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.
24
<PAGE>
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 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.
10.19 Amendment No. 1 to Lease, made as of July 31, 1998,
between Universal Health Realty Income Trust, a Maryland real estate
investment trust ("Lessor"), and Inland Valley Regional Medical
Center, Inc., a California Corporation ("Lessee"), previously filed as
Exhibit 10.1 to the Trust's Form 10-Q for the quarter ended September
30, 1998, is incorporated herein by reference.
10.20 Amendment No. 1 to Lease, made as of July 31, 1998,
between Universal Health Realty Income Trust, a Maryland real estate
investment trust ("Lessor"), and McAllen Medical Center, L.P. (f/k/a
Universal Health Services of McAllen, Inc.), a Texas Limited
Partnership ("Lessee"), amends the lease, made as of December 24,
1986, between Lessor and Lessee, previously filed as Exhibit 10.2 to
the Trust's Form 10-Q for the quarter ended September 30, 1998, is
incorporated herein by reference.
10.21 Amendment to REVOLVING CREDIT AGREEMENT as of April
30, 1999 among (i) UNIVERSAL HEALTH REALTY INCOME TRUST, a real estate
investment trust organized under the laws of the State of Maryland and
having its principal place of business at 367 South Gulph Road, King
of Prussia, Pennsylvania 19406, (ii) VARIOUS FINANCIAL INSTITUTIONS
and (iii) FIRST UNION NATIONAL BANK, as administrative agent for the
Banks, previously filed as exhibit 10.1 to the Trusts' Form 10-Q for
the quarter ended March 31, 1999, is incorporated herein by reference.
10.22 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.
25
<PAGE>
10.23 Sale agreement, dated October 26, 1999, by and among
FB Sheffield Partners, LLC, a Georgia limited liability company having
an office at 1827 Powers Ferry Road, Building 13, Atlanta, Georgia
30339, Health America Realty Group, LLC, a Georgia limited liability
company and Universal Health Realty Income Trust, having an office at
367 South Gulph Road, King of Prussia, Pennsylvania 19406.
27 Financial Data Schedule
26
<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 21, 2000
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 21, 2000 Alan B. Miller, Chairman of the Board
and Chief Executive Officer
/s/ Kirk E. Gorman
-------------------------------------------
March 24, 2000 Kirk E. Gorman, President, Chief
Financial Officer, Secretary and Trustee
/s/ James E. Dalton, Jr
-------------------------------------------
March 24, 2000 James E. Dalton, Jr., Trustee
/s/ Myles H. Tanenbaum
-------------------------------------------
March 23, 2000 Myles H. Tanenbaum, Trustee
/s/ Daniel M. Cain
-------------------------------------------
March 21, 2000 Daniel M. Cain, Trustee
/s/ Miles L. Berger
-------------------------------------------
March 21, 2000 Miles L. Berger, Trustee
/s/ Elliot J. Sussman
-------------------------------------------
March 21, 2000 Elliot J. Sussman, M.D., M.B.A., Trustee
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - December 31, 1999 and December 31, 1998 F-3
Consolidated Statements of Income - Years Ended December 31, 1999,
1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997 F-6
Notes to the Consolidated Financial Statements - December 31, 1999 F-7
Schedule II - Valuation and Qualifying Accounts -
Years Ended December 31, 1999, 1998 and 1997 F-20
Schedule III - Real Estate and Accumulated Depreciation -
December 31, 1999 F-21
Notes to Schedule III - December 31, 1999 F-22
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, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These consolidated 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 consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999
and 1998 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated 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 consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in our audit of
the basic consolidated 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 consolidated financial statements taken as a whole.
Philadelphia, Pennsylvania Arthur Andersen LLP
January 19, 2000
F-2
<PAGE>
Universal Health Realty Income Trust
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
Assets: 1999 1998
--------- ---------
<S> <C> <C>
Real Estate Investments:
Buildings & improvements $ 154,792 $ 142,871
Accumulated depreciation (37,800) (34,006)
--------- ---------
116,992 108,865
Land 23,128 21,061
Construction in progress 1,247 28
Reserve for investment losses -- (116)
--------- ---------
Net Real Estate Investments 141,367 129,838
--------- ---------
Investments in and advances to limited liability companies 35,748 38,165
Other Assets:
Cash 852 572
Bonus rent receivable from UHS 723 681
Rent receivable from non-related parties 67 24
Deferred charges and other assets, net 64 126
--------- ---------
$ 178,821 $ 169,406
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Bank borrowings $ 75,600 $ 64,800
Note payable to UHS 1,289 1,216
Accrued interest 411 281
Accrued expenses & other liabilities 1,367 1,300
Tenant reserves, escrows, deposits and prepaid rents 404 374
Minority interest 75 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 - 8,990,825
1998 - 8,955,465 90 90
Capital in excess of par value 129,255 128,685
Cumulative net income 140,430 126,458
Cumulative dividends (170,100) (153,885)
--------- ---------
Total Shareholders' Equity 99,675 101,348
--------- ---------
$ 178,821 $ 169,406
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Universal Health Realty Income Trust
Consolidated Statements of Income
---------------------------------
(amounts in thousands, except per share amounts)
Year ended December 31,
-------------------------------------
1999 1998 1997
------- ------- -------
Revenues (Note 2):
<S> <C> <C> <C>
Base rental - UHS facilities $13,828 $13,764 $13,731
Base rental - Non-related parties 6,844 6,393 5,605
Bonus rental 2,912 2,966 2,844
Interest 281 111 584
------- ------- -------
23,865 23,234 22,764
------- ------- -------
Expenses:
Depreciation & amortization 3,857 3,879 3,775
Interest expense 4,004 3,490 2,943
Advisory fees to UHS (Note 2) 1,214 1,161 1,099
Other operating expenses 1,789 1,904 1,425
Provision for investment loss, net 1,583 0 0
------- ------- -------
12,447 10,434 9,242
------- ------- -------
Income before equity in limited liability companies 11,418 12,800 13,522
Equity in income of limited liability companies 2,554 1,537 445
------- ------- -------
Net Income $13,972 $14,337 $13,967
======= ======= =======
Net Income Per Share - Basic $1.56 $1.60 $1.56
======= ======= =======
Net Income Per Share - Diluted $1.56 $1.60 $1.56
======= ======= =======
Weighted average number of shares outstanding - Basic 8,956 8,952 8,952
Weighted average number of share equivalents 21 22 15
------- ------- -------
Weighted average number of shares and equivalents outstanding - Diluted 8,977 8,974 8,967
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Universal Health Realty Income Trust
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
(amounts in thousands, except per share amounts)
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, 1997 8,952 $90 $128,643 $98,154 ($122,905)
Net Income -- -- -- 13,967 --
Issuance of shares of
beneficial interest 3 -- 7 -- --
Dividends ($1.705/share) -- -- -- -- (15,264)
- ------------------------------------------------------------------------------------------------------------------------------
January 1, 1998 8,955 90 128,650 112,121 (138,169)
Net Income -- -- -- 14,337 --
Issuance of shares of
beneficial interest 1 -- 35 -- --
Dividends ($1.755/share) -- -- -- -- (15,716)
- ------------------------------------------------------------------------------------------------------------------------------
January 1, 1999 8,956 90 128,685 126,458 (153,885)
Net Income -- -- -- 13,972 --
Issuance of shares of
beneficial interest 35 -- 570 -- --
Dividends ($1.810/share) -- -- -- -- (16,215)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 8,991 $90 $129,255 $140,430 ($170,100)
==============================================================================================================================
</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
(amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $13,972 $14,337 $13,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 3,857 3,879 3,775
Amortization of interest rate cap 62 124 124
Provision for investment loss, net 1,583 -- --
Changes in assets and liabilities:
Rent receivable (85) 28 (67)
Accrued expenses & other liabilities 150 170 197
Tenant escrows, deposits & deferred rents 30 106 (247)
Accrued interest 130 64 (17)
Deferred charges & other (120) (53) (26)
-------- -------- --------
Net cash provided by operating activities 19,579 18,655 17,706
-------- -------- --------
Cash flows from investing activities:
Investments in LLCs (8,713) (17,912) (3,741)
Advances received from (made to) LLCs 9,980 (9,980) --
Acquisitions and additions to land, buildings and CIP (17,852) (158) (4,246)
Payments made for CIP -- (28)
Proceeds received from sale of assets 998 -- --
Cash distributions in excess of income from LLCs 1,150 863 598
Advances under construction notes receivable -- -- (3,414)
Repayments under mortgage and construction notes receivable -- -- 10,262
-------- -------- --------
Net cash used in investing activities (14,437) (27,215) (541)
-------- -------- --------
Cash flows from financing activities:
Additional borrowings 10,800 23,600 --
Repayments of long-term debt -- -- (800)
Dividends paid (16,215) (15,716) (15,264)
Issuance of shares of beneficial interest 553 10 --
-------- -------- --------
Net cash (used in) provided by financing activities (4,862) 7,894 (16,064)
-------- -------- --------
Increase (decrease) in cash 280 (666) 1,101
Cash, beginning of period 572 1,238 137
-------- -------- --------
Cash, end of period $852 $572 $1,238
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $3,739 $3,232 $2,770
======== ======== ========
</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, 1999
(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, 1999 the Trust
had investments in thirty-six facilities located in thirteen 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 the Trust's hospital facilities and two
medical office buildings 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% 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 flows.
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 reviews estimates of future cash flows expected
from each of its facilities and evaluates the creditworthiness of its lessees
based on their current operating performance and on current industry conditions.
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 twelve months ended December 31, 1999 patient days
and average length of stay at this facility decreased 7% and 20%, respectively,
as compared to the comparable prior year period. In the twelve month period
ended December 31, 1999, this facility had earnings before interest, taxes,
depreciation, amortization and base rental expense (EBITDAR) of 0.8 times the
annual rent payable to the Trust. The lease on this facility expires in
December, 2000 and represented 5% of the Trust's rental revenue for the twelve
month period ended December 31, 1999. Although management of the Trust is
actively negotiating the sale/lease of the property with UHS as well as
non-related parties, 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 1999.
Also during 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 1999.
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 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" and Emerging Issues Task Force Issue 96-16, "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights", 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 99% 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
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.
F-8
<PAGE>
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" 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 the Trust's
financial statements. The Statement also allows the Trust to continue to account
for stock-based employee compensation using the intrinsic value-based method of
accounting as prescribed by Accounting Principals Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Trust has adopted the
disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the stock option plans in the accompanying financial
statements.
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 are accrued as a
reduction of interest expense.
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 approximate 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.
Comprehensive Income
Net income as reported by the Trust reflects total comprehensive income for the
years ended December 31, 1999, 1998 and 1997.
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.
F-9
<PAGE>
Accounting Pronouncement Not Yet Adopted
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", which deferred the effective date of SFAS No. 133 for one year. 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. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
The Trust will be required to adopt SFAS No. 133 effective as of January 1, 2001
and has not yet quantified the impact of adopting this statement on its
financial statements. Further, the Trust has not determined the method of
adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility in
earnings and other comprehensive income.
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 31st 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
2000. 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 1999, 1998 and 1997. The advisory fee is payable
quarterly, subject to adjustment at year end based upon audited financial
statements of the Trust.
F-10
<PAGE>
For the years ended December 31, 1999, 1998 and 1997, 70%, 71% and 72%,
respectively, of the Trust's revenues were earned under the terms of the leases
with wholly-owned subsidiaries of UHS. Including 100% of the revenues generated
at the unconsolidated LLCs in which the Trust has various non-controlling equity
interests ranging from 33% to 99%, the UHS leases accounted for 39% in 1999, 46%
in 1998 and 53% in 1997 of the combined consolidated and unconsolidated
revenues. The leases to subsidiaries of UHS are guaranteed by UHS and
cross-defaulted with one another.
During the third quarter of 1998, wholly-owned subsidiaries of UHS exercised
five-year renewal options on four hospitals owned by the Trust which were
scheduled to expire in 1999 through 2001 (Virtue Street Pavilion, The Bridgeway,
Inland Valley Regional Medical Center and Wellington Regional Medical Center).
The leases on these facilities were renewed at the same lease rates and terms as
the initial leases. As part of the renewal agreement, the Trust also agreed to
grant additional fixed rate renewal options to a wholly-owned subsidiary of UHS
commencing in 2022 on the real property of McAllen Medical Center. Management of
the Trust can not predict whether the leases with subsidiaries of UHS, which
have renewal options at existing lease rates, or any of the Trust's other
leases, will be renewed at the end of their initial term or first five-year
renewal term.
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.
Revenues received from UHS and from other non-related parties were as follows:
(000s)
--------------------------------------
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Base rental - UHS facilities $13,828 $13,764 $13,731
Base rental - Non-related parties 6,844 6,393 5,605
------- ------- -------
Total base rental 20,672 20,157 19,336
------- ------- -------
Bonus rental - UHS facilities 2,817 2,737 2,615
Bonus rental - Non-related parties 95 229 229
------- ------- -------
Total bonus rental 2,912 2,966 2,844
------- ------- -------
Interest - Non-related parties 281 111 584
------- ------- -------
Total revenues $23,865 $23,234 $22,764
======= ======= =======
At December 31, 1999, 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.
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
F-11
<PAGE>
property from UHS for $1 million in cash and a note payable with a carrying
value of $1.3 million (including accrued interest) at December 31, 1999. 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.
During 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.
Also during 1999, the Trust acquired the Orthopaedic Specialists of Nevada
Building in Las Vegas, Nevada for $1.6 million. The ground lease on this medical
office building is based upon an agreement between Valley Health Systems, LLC (a
UHS subsidiary) and the Trust.
The Trust's officers are all employees of UHS and as of December 31, 1999, the
Trust had no salaried employees. In both 1999 and 2000, the Trustees awarded a
$50,000 bonus to Mr. Kirk E. Gorman, President, Chief Financial Officer,
Secretary and Trustee of the Trust. Also, in both 1999 and 2000, UHS agreed to a
$50,000 reduction in the annual advisory fee paid by the Trust.
(3) Acquisitions and Dispositions
2000 - Subsequent to the year ended December 31, 1999, the Trust invested $6.4
million, including a $4.5 million non-recourse mortgage, in a medical office
building in Danbury, Connecticut. Additionally, during the first quarter of
2000, UHT purchased a 95% equity interest for $1.8 million in a LLC that owns
and operates the Skypark Professional Medical Building on the campus of the
Torrance Memorial Medical Center in Torrance, California.
1999 - During 1999, the Trust added five new investments to its portfolio
consisting of the following: (i) the purchase of a 95% equity interest in a
limited liability company ("LLC") that owns the Santa Fe Professional Plaza
located in Scottsdale, Arizona ($1.2 million); (ii) the purchase of a 98% equity
interest in a LLC that owns the Summerlin Hospital Medical Office Building
located in Las Vegas, Nevada ($5.0 million); (iii) the purchase of a 75% equity
interest in a LLC that owns the East Mesa Medical Center located in Mesa,
Arizona ($1.6 million); (iv) the purchase of the single-tenant the Orthopaedic
Specialists of Nevada Building, and; (v) a multi-tenant medical office building
located in Atlanta, Georgia ($11.5 million).
1998 - During 1998, the Trust added five new investments to its portfolio
consisting of the following: (i) the purchase of a 99% equity interest in a LLC,
that owns Desert Springs Medical Plaza located in Las Vegas, Nevada ($10.1
million); (ii) the purchase of a 95% equity interest in a LLC that owns the
Edwards Medical Plaza located in Phoenix, Arizona ($3.8 million); (iii) the
purchase of a 95% equity interest in a LLC that owns the Pacifica Palms Medical
Plaza located in Torrance, California ($1.7 million); (iv) the purchase of a 48%
equity interest in a LLC that owns the St. Jude Heritage Health Complex located
in Fullerton, California ($1.4 million), and; (v) the purchase of an 80% equity
interest in a LLC that owns the Rio Rancho Medical Center, a medical
F-12
<PAGE>
office building located in Rio Rancho, New Mexico ($900,000). In connection with
the purchase of equity interest in LLCs that own the Pacifica Palms Medical
Plaza, the St. Jude Heritage Health Complex and the Rio Rancho Medical Center,
the Trust advanced a total of $10.0 million of short term loans to three
separate LLCs. The loans, which earned interest at a combined average annual
rate of 9% during 1998, were fully repaid to the Trust during 1999.
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 LLC that
purchased the Thunderbird Paseo Medical Plaza ($1.9 million); (iii) the
completion of construction of The 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 a LLC which owns the real estate assets of the facility ($1.8
million).
(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 five-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 the facility's 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. The Trust records these
additional rents on a pro rata basis over the annual lease period if the
achievement of the specific net patient revenue target amounts is probable.
Minimum future base rents on non-cancelable leases are as follows (000s):
2000 $ 21,644
2001 20,793
2002 13,810
2003 12,899
2004 11,429
Later Years 24,888
--------------
Total Minimum Base Rents $ 105,463
==============
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 generally are required to pay
their pro-rata share of the property's operating costs above a stipulated
amount.
F-13
<PAGE>
(5) Debt
During 1999, the Trust amended its unsecured, non-amortizing revolving credit
agreement (the "Agreement"), which expires on June 24, 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 the commitment fee are based
upon the Trust's debt to total capital ratio as defined by the Agreement. At
December 31, 1999 the applicable margin over the certificate of deposit and
Eurodollar rates were 7/8% and 5/8%, 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, 1999, the Trust had
approximately $21 million of available borrowing capacity.
The average amounts outstanding under the revolving credit agreement during
1999, 1998 and 1997 were $62,042,000, $49,195,000 and $40,774,000, respectively,
with corresponding effective interest rates, including commitment fees but not
including the effect of interest rate swaps of 5.9%, 6.3% and 6.4%. The maximum
amounts outstanding at any month end were $75,600,000, $64,800,000 and
$44,300,00 during 1999, 1998 and 1997, 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. At December 31,1999, the
Trust had five outstanding swap agreements for notional principal amounts of
$35,580,000 which mature from May, 2001 through November, 2006. These swap
agreements effectively fix the interest rate on $35,580,000 of variable rate
debt at 6.64% including the revolver spread of .625%. The Trust had one interest
rate cap, for which the Trust paid $622,750, which matured in June, 1999 and
fixed the maximum rate on $15 million of variable rate revolving credit notes at
7.625% including the revolver spread of .625%. The interest rate swap and cap
agreements were entered into in anticipation of certain borrowing transactions
made by the Trust. The effective rate on the Trust's revolving credit notes
including commitment fees and interest rate swap expense was 6.2%, 6.7% and 6.9%
during 1999, 1998 and 1997, 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 $135,000, $136,000 and $118,000 in 1999, 1998
and 1997, respectively. The Trust is exposed to credit loss in the event of
nonperformance by the counterparties to the interest rate swap 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, 1999 would have resulted in payments from the counterparties to the Trust of
approximately $862,000. The fair value of the interest rate swap agreements at
December 31, 1999 reflects the estimated amounts that the Trust would pay or
receive to terminate the contracts and are based on quotes from the
counterparties.
F-14
<PAGE>
(6) Dividends
Dividends of $1.81 per share were declared and paid in 1999, of which $1.4664
per share was ordinary income and $.3436 per share was a return of capital
distribution. Dividends of $1.755 per share were declared and paid in 1998, of
which $1.682 per share was ordinary income and $.073 per share was a return of
capital distribution. 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
(7) Incentive Plans
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, 1999 no shares have been issued under the terms of this plan.
During 1992 and 1993, the Trust granted options pursuant to the 1988
Non-Statutory Stock Option Plan. Pursuant to the terms of this plan, which
expired in December of 1998, the granted options vested ratably 25% per year
beginning one year after the date of grant and expired ten years from the grant
date. As of December 31, 1999, 58,024 options were outstanding and exercisable
at an aggregate purchase price of $973,137 or $16.77 per share.
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. There are 400,000 shares reserved for issuance
under The Plan. All stock options were granted with an exercise price equal to
the fair market value on the date of the grant. The options granted vest ratably
at 25% per year beginning one year after the date of grant, and expire in ten
years. Dividend equivalent rights reduce the exercise price of the 1997
Incentive Plan options by an amount equal to the cash or stock dividends
distributed subsequent to the date of grant. Since inception through December
31, 1999, there have been 80,000 stock options with dividend equivalent rights
granted to officers and trustees of the Trust. Subsequent to December 31, 1999,
an additional 25,000 stock options with dividend equivalent rights were granted
at an original exercise price of $14.75. The Trust recorded expenses relating to
the dividend equivalent rights of $132,000 in 1999, $123,000 in 1998 and $60,000
in 1997. As of December 31, 1999, there were 35,000 options exercisable under
The Plan with an average exercise price, adjusted to give effect to the dividend
equivalent rights, of $14.40 per share.
F-15
<PAGE>
SFAS No. 123 requires the Trust to disclose pro-forma net income and pro-forma
earnings per share as if compensation expense were recognized for options
granted beginning in 1995. Because the SFAS No. 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. Using this approach, the Trust's net earnings and earnings per
share would have been the pro forma amounts indicated below:
(000s except per share amounts)
-------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------
Net Income:
As Reported $13,972 $14,337 $13,967
Pro Forma $13,833 $14,201 $13,898
Earnings Per Share:
As Reported:
Basic $ 1.56 $ 1.60 $ 1.56
Diluted $ 1.56 $ 1.60 $ 1.56
Pro Forma:
Basic $ 1.54 $ 1.59 $ 1.55
Diluted $ 1.54 $ 1.58 $ 1.55
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following range of assumptions used
for the four option grants that occurred during 1998 and 1997. No options were
granted during 1999, therefore the following table is not applicable ("N/A") for
the year ended December 31, 1999:
Year Ended December 31 1999 1998 1997
- -------------------------------------------------------------------
Volatility N/A 15% 15%
Interest rate N/A 5% - 6% 6 % - 7%
Expected life (years) N/A 7.9 7.9
Forfeiture rate N/A 2% 2%
- -------------------------------------------------------------------
Stock-based compensation costs on a pro forma basis would have reduced net
income by $139,000 in 1999, $136,000 in 1998 and $69,000 in 1997. Because the
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting pro forma disclosures may not be
representative of that to be expected in future years.
F-16
<PAGE>
Stock options to purchase shares of beneficial interest have been granted to
officers and directors of the Trust under various plans. Information with
respect to these options is summarized as follows:
<TABLE>
<CAPTION>
Number of Shares Average Option Price Range
Outstanding Options (High-Low)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 58,024 $16.77 $16.875/$16.125
Granted 70,000 $18.625 $18.625
Exercised 0 N/A N/A
Cancelled 0 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 128,024 $17.79 $18.625/$16.125
Granted 10,000 $19.45 $21.4375/$18.375
Exercised (625) $18.625 $18.625
Cancelled (4,375) $18.625 $18.625
- -------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 133,024 $17.88 $21.4375/$16.125
Granted 0 N/A N/A
Exercised 0 N/A N/A
Cancelled 0 N/A N/A
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 133,024 $17.88 $21.4375/$16.125
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(8) 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 December 31, 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
Bayway Properties East Mesa Medical Center
653 Town Center Drive Summerlin Hospital Medical Office Building
F-17
<PAGE>
December 31,
------------------------------------
1999 1998
------------------------------------
(amounts in thousands)
Net property $116,599 $95,732
Other assets 6,701 5,430
Liabilities and third-party debt 82,456 58,118
Loans payable to the Trust ------ 9,980
Equity 40,844 33,063
UHT's share of equity 35,748 28,185
For the Year Ended December 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
(amounts in thousands)
Revenues $18,387 $12,942 $8,135
Operating expenses 6,772 4,677 2,727
Depreciation & amortization 3,385 2,450 1,846
Interest, net 5,436 4,133 3,093
Net income 2,794 1,682 469
UHT's share of net income 2,554 1,537 445
As of December 31, 1999, these LLCs had $79.3 million of non-recourse debt
payable to third-party lending institutions. Aggregate maturities of
non-recourse debt payable to third-parties is as follows (000s):
2000 $2,080
2001 5,860
2002 2,140
2003 2,234
2004 1,814
Later 65,126
-------
Total $79,254
=======
F-18
<PAGE>
(9) Quarterly Results (unaudited - amounts in thousands, except per share
amounts)
<TABLE>
<CAPTION>
1999
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $6,056 $5,885 $5,782 $6,142 $23,865
Net Income $3,928 $3,811 $2,266 $3,967 $13,972
Earnings Per Share-Basic $0.44 $0.43 $0.25 $0.44 $1.56
Earnings Per Share-Diluted $0.44 $0.42 $0.25 $0.44 $1.56
</TABLE>
During the third quarter of 1999, the Trust recorded a net provision for
investment loss of $1.6 million or $.18 per share, (basic and diluted). Included
in the provision for investment loss was a non-cash asset impairment charge of
$2.6 million to reduce the carrying-value of a behavioral health services
facility which has a lease expiration date of December, 2000. The provision for
investment loss was partially offset by a $1.0 million cash gain realized on the
sale of Lakeshore Hospital.
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $5,857 $5,793 $5,694 $5,890 $23,234
Net Income $3,569 $3,528 $3,471 $3,769 $14,337
Earnings Per Share-Basic $0.40 $0.39 $0.39 $0.42 $1.60
Earnings Per Share-Diluted $0.40 $0.39 $0.39 $0.42 $1.60
</TABLE>
F-19
<PAGE>
Universal Health Realty Income Trust
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Other of period
Reserve for Investment Losses:
<S> <C> <C> <C>
Year ended December 31, 1999 $116 $1,583(b) ($1,699)(a) -
======== ======== ======= =======
Year ended December 31, 1998 $89 $300 ($273)(a) $116
======== ======== ======= =======
Year ended December 31, 1997 $151 $227 ($289) $89
======== ======== ======= =======
</TABLE>
(a) Amounts charged against the reserve.
(b) Consists of the following:
Provision for investment loss recorded on
Behavioral Health Services facility $2,581
Cash proceeds generated from sale of Lake Shore Hospital (998)
---------
$1,583
=========
F-20
<PAGE>
<TABLE>
<CAPTION>
Schedule III
Universal Health Realty Income Trust
Real Estate and Accumulated Depreciation - December 31, 1999
(amounts in thousands)
Initial Cost to Cost
Universal Health capitalized Gross amount Date of
Realty Income Trust subsequent at which construction
to acquisition carried at close or most
of period recent
Accumulated significant Average
Depreciation expansion Deprec-
Building Land & Building & as of or Date iable
Description Land & Improv. Improv. Land Improv. Total Dec. 31, 1999 renovation Acquired Life
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Virtue Street Pavilion $1,825 $9,445 - $1,770 $9,445 $11,215 $3,513 1975 1986 35 Years
Chalmette Medical Center 2,000 7,473 $3,148 2,000 10,621 12,621 2,607 1999 1988 34 Years
Chalmette, Louisiana
Inland Valley Regional
Medical Center
Wildomar, California 2,050 10,701 2,868 2,050 13,569 15,619 3,465 1986 1986 43 Years
McAllen Medical Center
McAllen, Texas 4,720 31,442 10,188 6,281 40,069 46,350 10,207 1994 1986 42 Years
Wellington Regional
Medical Center
West Palm Beach,
Florida 1,190 14,652 4,822 1,663 19,001 20,664 4,799 1986 1986 42 Years
The Bridgeway
North Little Rock,
Arkansas 150 5,395 499 150 5,894 6,044 2,173 1983 1986 35 Years
Meridell Achievement
Center
Austin, Texas 1,350 3,782 1,558 1,350 5,340 6,690 2,996 1991 1986 28 Years
Tri-State Rehabilitation
Hospital
Evansville, Indiana 500 6,945 1,062 500 8,007 8,507 2,023 1993 1989 40 Years
Vencor Hospital-Chicago
Chicago, Illinois 158 6,404 1,837 158 8,241 8,399 3,869 1993 1986 25 Years
Fresno-Herndon
Medical Plaza
Fresno, California 1,073 5,266 24 1,073 5,290 6,363 598 1992 1994 45 Years
Family Doctor's Medical
Office Building
Shreveport, Louisiana 54 1,526 494 54 2,020 2,074 188 1991 1995 45 Years
Kelsey-Seybold Clinic
at King's Crossing 439 1,618 6 439 1,624 2,063 153 1995 1995 45 Years
Professional Center
at King's Crossing 439 1,837 43 439 1,880 2,319 170 1995 1995 45 Years
Kingwood, Texas
Chesterbrook Academy
Audubon, Pennsylvania 307 996 - 307 996 1,303 81 1996 1996 45 Years
Carefree Learning Center
New Britain, Pennsylvania 250 744 - 250 744 994 61 1991 1996 45 Years
Carefree Learning Center
Uwchlan, Pennsylvania 180 815 - 180 815 995 66 1992 1996 45 Years
Carefree Learning Center
Newtown, Pennsylvania 195 749 - 195 749 944 61 1992 1996 45 Years
The Southern Crescent
Center 1,130 5,092 21 1,130 5,113 6,243 400 1994 1996 45 Years
The Southern Crescent
Center II - - 806 806 - 806 - 1998 1998 35 Years
Riverdale, Georgia
The Cypresswood
Professional Center
Spring, Texas 573 3,842 187 573 4,029 4,602 288 1997 1997 35 Years
Orthopaedic Specialists
of Nevada Building
Las Vegas, Nevada - 1,579 - - 1,579 1,579 16 1999 1999 25 Years
Sheffield Medical
Building
Atlanta, Georgia 1,760 9,766 - 1,760 9,766 11,526 66 1999 1999 25 Years
------- -------- ------- ------- -------- -------- -------
TOTALS $20,343 $130,069 $27,563 $23,128 $154,792 $177,920 $37,800
======= ======== ======= ======= ======== ======== =======
</TABLE>
F-21
<PAGE>
Universal Health Realty Income Trust
Notes to Schedule III
December 31, 1999
-----------------
(amount in thousands)
(1) Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January 1, 1997
to December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $163,932 $163,855 $158,083
Additions and acquisitions 16,639 158 4,526
SFAS 121 asset write-down (2,581) -- --
Reclasses from construction in progress -- -- 1,246
Dispositions (70) (81) --
--------- --------- ---------
Balance at December 31 $177,920 $163,932 $163,855
========= ========= =========
</TABLE>
(2) Reconciliation of Accumulated Depreciation
The following table reconciles the Accumulated Depreciation from January 1, 1997
to December 31, 1999:
1999 1998 1997
-------- -------- --------
Balance at January 1 $34,006 $30,280 $26,540
Current year depreciation expense 3,832 3,807 3,740
Dispositions (39) (81) --
-------- -------- --------
Balance at December 31 $37,799 $34,006 $30,280
======== ======== ========
The aggregate cost basis and net book value of the properties for Federal income
tax purposes at December 31, 1999 are approximately $172,000,000 and
$133,000,000, respectively.
F-22
[Universal Health Realty Income Trust letterhead]
January 7, 2000
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 1, 1999, 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, 2000, 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, Esq.
Charles Boyle
Agreed to and Accepted:
UHS OF DELAWARE, INC.
By: /s/ Alan B. Miller
Alan B. Miller, President
AGREEMENT FOR PURCHASE AND SALE
among
FB SHEFFIELD PARTNERS, LLC
HEALTHAMERICA REALTY GROUP, LLC
and
UNIVERSAL HEALTH REALTY INCOME TRUST
October 26, 1999
<PAGE>
Table of Contents
Page
ARTICLE 1 AGREEMENT FOR PURCHASE AND SALE.......................1
ARTICLE 2 PURCHASE PRICE........................................2
ARTICLE 3 PHYSICAL CONDITION OF PROJECT.........................2
ARTICLE 4 TITLE TO PROPERTY.....................................2
ARTICLE 5 TITLE INSURANCE.......................................3
ARTICLE 6 CLOSING...............................................4
ARTICLE 7 DOCUMENTS REQUIRED AT CLOSING.........................5
ARTICLE 8 APPORTIONMENTS AND ADJUSTMENTS........................7
ARTICLE 9 REMEDIES..............................................8
ARTICLE 10 BROKERS...............................................9
ARTICLE 11 NOTICES...............................................9
ARTICLE 12 ASSIGNMENT...........................................10
ARTICLE 13 REPRESENTATIONS......................................11
ARTICLE 14 CONDITIONS PRECEDENT TO CLOSING......................16
ARTICLE 15 POST-CLOSING OBLIGATIONS.............................17
ARTICLE 16 MISCELLANEOUS........................................18
ARTICLE 17 SECURITY DEPOSIT.....................................20
<PAGE>
AGREEMENT FOR PURCHASE AND SALE
THIS AGREEMENT (this "Agreement"), made as of the 26th day of October,
1999 by and among FB SHEFFIELD PARTNERS, LLC, a Georgia limited liability
company having an office at 1827 Powers Ferry Road, Building 13, Atlanta,
Georgia 30339 ("Seller"), HEALTHAMERICA REALTY GROUP, LLC, a Georgia limited
liability company ("HRG"), and UNIVERSAL HEALTH REALTY INCOME TRUST, having an
office at 367 South Gulph Road, King of Prussia, Pennsylvania 19406
("Purchaser");
W I T N E S S E T H:
ARTICLE 1
AGREEMENT FOR PURCHASE AND SALE
Seller agrees to sell and cause to be conveyed to Purchaser, and
Purchaser agrees to purchase, the following property (collectively, the
"Project"):
(a) The real property located in the City of Atlanta, State of
Georgia, and more particularly described on Exhibit A annexed hereto (the
"Land"), together with all existing improvements thereon, consisting of an eight
story medical office building containing 71.903 rentable square feet, an
attached three and one-half story, 194 car parking space, parking garage and an
adjoining 76 car parking space, .73 acre surface area parking lot, known
collectively as the "Sheffield Medical Building", and located at 1938 Peachtree
Street, N.W., Atlanta, Georgia (collectively, together with the Land, called the
"Property");
(b) All of Seller's right, title and interest in and to all
Tenant Leases (as hereinafter defined) affecting the Property;
(c) All of Seller's right, title and interest in and to all
tangible and intangible personal property now or hereafter owned or held by
Seller in connection with its ownership of the Project, including but not
limited to any leases, contracts, leasing materials and forms, keys, records and
correspondence relating to tenants, security deposits, prepaid rentals,
telephone exchange numbers and the use of the name "Sheffield Medical Building";
(d) All of Seller's right, title and interest in and to all
easements, licenses, appurtenances, rights, privileges and hereditaments
belonging or appertaining to the Project; and
(e) All fixtures and articles of personal property attached or
appurtenant to or used in connection with the Project which are owned by Seller
and located at, in or on the Property, including, without limiting the
generality of the foregoing, any and all equipment, machinery, computer hardware
and software, plumbing, heating and lighting fixtures,
<PAGE>
mail boxes, surveillance and security systems, watering systems, tools, and
maintenance equipment and supplies owned by Seller and located at, in or on the
Property.
ARTICLE 2
PURCHASE PRICE
The purchase price for the Project shall be ELEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($11,500,000) (the "Purchase Price"), plus or minus the
adjustments provided for in this Agreement (the "Closing Payment"), to be paid
to Seller in immediately available federal funds in such manner, place and
account as Seller may reasonably request, at or prior to the Closing (as
hereinafter defined).
ARTICLE 3
PHYSICAL CONDITION OF PROJECT
Purchaser agrees to purchase the Project in its "AS IS" condition on the Closing
Date, subject to, and in reliance upon, Seller's representations and warranties
as set forth in this Agreement. Purchaser has not relied upon, and Seller is not
liable or bound in any manner by, any verbal or written statements,
representations, real estate brokers' "set-ups" or other information pertaining
to the Project furnished by either Seller or HRG or by any real estate broker,
agent, employee, servant or other persons unless and except to the extent that
any of the same are expressly set forth in this Agreement.
ARTICLE 4
TITLE TO PROPERTY
4.1 At the Closing, Seller shall deliver to Purchaser good, marketable
and indefeasible fee simple title to the Property, subject only to the Permitted
Encumbrances (as hereinafter defined).
4.2 Purchaser agrees to accept good, marketable and indefeasible fee
simple title to the Property, subject to the following matters (collectively,
the "Permitted Encumbrances"):
(a) The leases and tenancies affecting the Property on the
date hereof, as set forth and described in Exhibit B annexed
hereto (the "Tenant Leases");
(b) Liens securing payment of all ad valorem, intangible and
other real and personal property taxes, school taxes, and
water and sewer charges against the Property or the personal
property covered by this Agreement for the tax year in which
the Closing Date occurs;
(c) Such other exceptions to title as shall have been approved
in writing by Purchaser on or prior to the Closing Date,
including those (if any) set forth and described on Exhibit C
annexed hereto; provided, however, that, except as provided in
clause (d) below, if there is any lien or encumbrance on the
Property other than as identified in clauses (a) and (b)
above, Purchaser's sole remedy shall be to accept title to the
Property subject thereto (thereby
-2-
<PAGE>
making such encumbrance a Permitted Encumbrance), or to
terminate this Agreement and require the Seller to return the
Security Deposit, whereupon the obligations of the parties
under this Agreement shall end.
(d) Any lien or deed to secure debt on the Property which was
incurred or caused by Seller and which can be discharged by
the payment of money shall either be paid by Seller at or
before closing, or Purchaser may pay a portion of the Purchase
Price due Seller to pay off and discharge said lien or deed to
secure debt.
4.3 Property taxes for the year of closing shall be prorated between
Seller and Purchaser at closing based on their relative periods of ownership of
the Property during the year. If the Property is subject to any retroactive
reassessment or if there is any change in property taxes for the year of
closing, then upon the request of either such party, the property taxes for the
year of closing shall re re-prorated based on new or final tax bills, and the
party who paid or was debited with less than its share based on final proration
shall promptly pay the other any difference due. Any increase in property taxes
for 1998 or prior years shall be solely the responsibility of Seller. The terms
and provisions of this Section 4.3 shall survive the Closing
ARTICLE 5
TITLE INSURANCE
5.1 By the Closing Date, Purchaser shall have obtained a commitment
(the "Title Commitment") from Chicago Title Insurance Company or any other
nationally recognized title insurance company selected by, or acceptable to,
Purchaser (the "Title Company") to issue an owner's policy of title insurance on
the Property in favor of Purchaser in standard ALTA form (the "Title Policy"),
free and clear of any objections, except for Permitted Encumbrances.
5.2 Notwithstanding the foregoing, the existence of liens or
encumbrances other than the Permitted Encumbrances or those which are permitted
by this Agreement shall be deemed to be Permitted Encumbrances if the Title
Company will insure Purchaser's title free and clear of the matter or will
insure against the enforcement of such matter out of the Property, on the
condition that Purchaser's counsel shall agree to accept title with such
insurance. Any unpaid liens for real estate and personal property taxes for
years prior to the fiscal year in which the Closing Date occurs and any other
matter which Seller is obligated to pay and discharge at the Closing shall not
be deemed objections to title, but the amount thereof chargeable to Seller, plus
interest and penalties thereon, if any, shall be shown as chargeable to Seller
in Purchaser's and Seller's settlement statement on the Closing Date and paid to
the Title Company for the payment of such matters.
5.3 Purchaser shall pay any costs for obtaining the Title Commitment
and the title insurance premium for obtaining standard insurance coverage under
the Title Policy in a minimum amount equal to the Purchase Price. Purchaser
shall also pay the cost of a current, as-built boundary survey of the Land
prepared by a reputable and established surveyor in the Atlanta area, to be
obtained by Purchaser by the Closing Date (the "Survey"), which Survey shall
disclose no encumbrances on title to, or ownership of, the Property, except for
Permitted
-3-
<PAGE>
Encumbrances. Seller shall pay the Georgia Real Property Transfer tax on the
deed. Purchaser shall pay all recording fees.
5.4 If and to the extent that such materials are in the possession or
control of Seller, Seller shall deliver or cause to be delivered to Purchaser on
the Closing Date the following additional documents:
(a) all architectural drawings and plans and specifications
for the Improvements, including an "as built" set of plans, if available;
(b) a copy of the paid real estate tax bill for the most
recent period for which real estate taxes have been due and payable;
(c) true and correct copies of all equipment leases, service,
maintenance, union and management contracts, as well as all other documents or
agreements relating to or affecting the Project;
(d) true and complete copies of any engineering and asbestos
reports with respect to the Property;
(e) true and correct copies of operating statements for the
Property for the period commencing with the date of Seller's occupancy through
September 30, 1999 as well as escalation statements for operations, taxes,
electric, utilities and other expenses relating to the Property during the same
period;
(f) true and complete copies of any real estate tax
information available to the Seller relating to the Property for the year of
Closing and the previous year as well as a schedule of any tax reduction
proceedings relating to the Property;
(g) a copy of the present 1999 operating budget of the
Property as well as a copy of any projections for future operating budgets
relating to the Property;
(h) true and complete copies of any certificate of occupancy
for the Property as well as a true and complete copy of any other permits
relating to the Project; provided, however, that nothing contained herein shall
require Seller to deliver certificates or permits obtained or required to be
obtained by any tenants of the Property.
ARTICLE 6
CLOSING
6.1 The consummation of the transactions described in this Agreement
(the "Closing") shall occur on November 16, 1999, or such earlier or later date
as to which Seller and Purchaser may mutually agree (the "Closing Date") at
11:00 a.m. at the offices of King & Spalding, Atlanta, Georgia, legal counsel to
the Purchaser, or in such other manner or at such other place as the parties may
agree upon.
-4-
<PAGE>
6.2 Upon Purchaser's receipt or delivery of all required documents and
instruments and its payment of the balance of the Purchase Price and other
amounts required herein, Purchaser and Seller shall prepare and sign a closing
statement reflecting the adjustments and payments made and agreements in
connection therewith (the "Closing Statement").
6.3 Notwithstanding anything contained in this Agreement to the
contrary, Purchaser and Seller acknowledge that the requirements for the Closing
set forth in this Agreement may be supplemented by a written settlement
statement executed by both Seller and Purchaser.
ARTICLE 7
DOCUMENTS REQUIRED AT CLOSING
7.1 At the Closing, Seller shall execute and deliver the following to
Purchaser:
(a) a Limited Warranty Deed to the Property, based on the
legal description thereof set forth on Exhibit A attached hereto, to be
substantially in the form annexed hereto as Exhibit D (the "Limited Warranty
Deed"), and a Quitclaim Deed with respect to (i) the sewer easement created by
that certain Easement from Piedmont Hospital, Inc., a Georgia corporation, to
Rockfield, Inc., a Georgia corporation, dated January 18, 1957, filed for record
January 22, 1957, and recorded in Deed Book 3188, page 407 et seq. in the
records of Fulton County, Georgia, and (ii) the property description derived
from the Survey, to be substantially in the form of Exhibit O attached hereto
(the "Quitclaim Deed"; the Limited Warranty Deed and the Quitclaim Deed
hereinafter collectively called the "Deed"), pursuant to which Seller shall
convey the Property to Purchaser;
(b) a Bill of Sale, to be substantially in the form annexed
hereto as Exhibit E, pursuant to which Seller shall assign and convey to
Purchaser all personal property covered by this Agreement, with any applicable
sales tax to be paid by Seller;
(c) an Assignment and Assumption of the Tenant Leases, to be
substantially in the form annexed hereto as Exhibit F, pursuant to which Seller
shall assign to Purchaser its interest in (i) all Tenant Leases and (ii) all
guaranties relating thereto;
(d) an Assignment and Assumption of Warranties and Service
Contracts, to be substantially in the form annexed hereto as Exhibit G, pursuant
to which Seller shall assign to Purchaser its interest in (i) all service
contracts relating to the Property and (ii) all transferable guaranties and
warranties relating to the Property;
(e) a written notice of the acquisition of the Property by
Purchaser, originally executed by Seller and Purchaser, which Purchaser or HRG
may transmit, but upon their failure to do so, Seller may transmit, to all
tenants and to other parties affected by the sale and purchase of the Property
(the "Tenant Notices"). Such Tenant Notices shall be prepared by HRG in
substantially the form annexed hereto as Exhibit I, and shall inform the
addressees of the sale and transfer of the Property to Purchaser and contain
appropriate instructions relating to the payment of future rentals, the giving
of future notices, the naming of Purchaser as an additional
-5-
<PAGE>
insured on each tenant's insurance policies and other matters reasonably
required by Purchaser. The Tenant Notices shall specify that unapplied security
deposit under the tenant leases have been delivered to Purchaser;
(f) a non-foreign status affidavit for Seller complying with
the requirements of Internal Revenue Code Section 1445(f)(3) and the regulations
promulgated thereunder in substantially the form annexed hereto as Exhibit J;
(g) all costs and fees required to be paid by Seller pursuant
to Articles 4 or 8 hereof;
(h) a mechanics' lien and general title affidavit, verifying
it to be the fact that, as of the Closing Date, there are no unpaid bills for
work, labor, service or materials furnished to the real property upon the
request or order of Seller which may be made the basis of a lien, and that
Seller is in possession of the Project, subject only to the rights of tenants in
possession under the Tenant Leases, to be substantially in the form annexed
hereto as Exhibit N and otherwise acceptable to the Title Company;
(i) estoppel certificates from all tenants under the Tenant
Leases, as provided in Article 14 hereof; provided, however, that if less than
all tenants execute estoppel certificates, Purchaser's sole remedy shall be to
close and accept the Property without the estoppels (in which event, however,
Seller shall certify under oath, as to Seller's best knowledge, of the status of
each affected Tenant Lease) or terminate this Agreement, whereupon Seller shall
return the Security Deposit and neither party shall have any further obligations
under this Agreement.
(j) such other documents and instruments as may be reasonably
required by the Title Company in order to issue the Title Policy or as Purchaser
or its legal counsel may reasonably request from Seller in order to consummate
the transactions described in this Agreement in accordance with the terms
hereof; provided, however, that such other documents and instruments do not
impose any material expense or risk on Seller.
7.2 At the Closing, Purchaser shall execute, where appropriate, and
deliver the following to Seller:
(a) the Closing Payment;
(b) the Assignment and Assumption of Tenant Leases;
(c) the Assignment and Assumption of Warranties and Service
Agreements;
(d) such other documents and instruments as Seller or its
legal counsel may reasonably request in order to consummate the transactions
described in this Agreement in accordance with the terms hereof; provided,
however, that such other documents and instruments do not impose any material
expense or risk on Purchaser.
-6-
<PAGE>
7.3 If at any time after the Closing it becomes apparent to either
party hereto that any necessary closing documents were either not delivered or
improperly executed or that any closing adjustments were improperly calculated,
the parties shall act in good faith and take all such steps including the
execution or re-execution of documents and the payment of monies as may be
reasonably necessary to rectify such errors or miscalculations. The provisions
of this Section 7.3 shall survive the Closing for a period of one (1) year.
ARTICLE 8
APPORTIONMENTS AND ADJUSTMENTS
8.1 Except as provided in Section 8.5 below, Seller shall be
responsible for and shall pay all accrued expenses with respect to the Project
accruing up to 11:59 p.m. on the Closing Date and shall be entitled to receive
and retain all revenue from the Project accruing up to the Closing Date.
8.2 On the Closing Date, the following adjustments and apportionments
shall be made in cash as follows:
(a) Rents for the month in which the Closing Date occurs (the
"Closing Month") as and when collected. If past due rents are owing by tenants
for any period prior to the Closing Month (the "Rent Arrearages"), then after
request made by Seller subsequent to the Closing Date, Purchaser shall bill all
tenants for such sums, provided, however, that Purchaser shall have no liability
or responsibility for the collection of any such Rent Arrearages. Seller shall
be entitled to those funds received by Purchaser from tenants having Rent
Arrearages after the Closing Date, only where such funds are in payment of such
Rent Arrearages and are excess of amounts then owing or otherwise required to be
paid to Purchaser from such tenants. Notwithstanding the foregoing, for any
"pass-through" expenses which are collected from tenants on the basis of
Seller's estimates of such expenses, promptly following the end of the fiscal
period for which such estimated expenses are allocable, Seller and Purchaser
shall determine the actual expenses allocable to such period and shall adjust
for any difference between the estimated expenses and the actual expenses and
the responsible party promptly shall pay the other the amount of any such
difference.
(b) Real estate taxes, ad valorem taxes, school taxes, annual
assessments and personal property, intangible and use taxes, if any;
(c) Charges under service contracts affecting the Project
which Purchaser has agreed in writing to assume on the Closing Date; and
(d) Water and sewer charges on the basis of the period for
which assessed; provided that if a final bill is not available at Closing, a
reasonable estimate will be made based on prior bills and an amount reasonably
estimated to be adequate to pay such charges through the Closing Date shall be
escrowed with the Purchaser pending receipt of final bills.
-7-
<PAGE>
8.3 At the Closing, Purchaser will receive a further credit against the
Purchase Price in an amount equal to all existing tenant and/or common area
improvement allowances for any work that is in process in an aggregate amount
equal to the total sums which Seller has contracted to pay the affected tenants
under existing Tenant Leases. The foregoing shall not apply, however, to tenant
improvements scheduled to be made to (or any leasing commission owing in respect
of) Suite 303 (1,344 RSF), for Northwest Nephrology Clinic, and as to such
suite, Purchaser shall assume and pay such costs.
8.4 At the Closing, Purchaser will receive a further credit against the
Purchase Price in an amount equal to all unapplied security deposits (and
interest, if any) payable to tenants under Tenant Leases in effect on the
Closing Date. Upon making such credit, Purchaser will be deemed to have received
all such security deposits and shall be fully responsible for the same as if a
cash amount equal to such security deposits were actually delivered to
Purchaser. During the period prior to the Closing, Seller agrees to obtain
Purchaser's prior written consent, such consent not to be unreasonably withheld,
before applying any security deposit(s), or portions thereof, against any tenant
default pursuant to the terms of the defaulting tenant's lease.
8.5 If the Purchase Price is transmitted by wire transfer pursuant to
Seller's order by 12:00 Noon (EST or EDT as applicable) on the day of closing,
then in making the prorations and adjustments at closing, Purchaser will receive
the benefit of the Rents and the burden of Property expenses for the day of
closing. If transmitted thereafter, Seller will receive the benefit of the Rents
and the burden of Property expenses for the day of closing.
8.6 At the Closing, Purchaser will receive a further credit against the
Purchase Price in the amount of any prepaid rents in respect of the Tenant
Leases.
8.7 At the Closing, a further credit to the Purchase Price shall be
made to fund the "Parking Revenue Escrow Account" described in Section 15.1.
8.8 The provisions of this Article 8 shall survive the closing of title
and the delivery of the Deed.
ARTICLE 9
REMEDIES
9.1 If Purchaser defaults in its obligation to purchase the Project
pursuant to this Agreement, then Seller shall have the right, in addition to any
other remedies available to it at law or in equity, to terminate this Agreement
by giving Purchaser written notice thereof and, upon receipt of such notice,
this Agreement shall wholly cease and terminate, no party to this Agreement
shall have any further claim, agreement, or obligation to any other party to
this Agreement (except for Seller's right to retain the Security Deposit), and
any lien of Purchaser against the Project shall automatically cease, terminate
and be released.
9.2 If the sale contemplated by this Agreement is not consummated
because of Seller's failure to perform its obligations hereunder, Purchaser
shall be entitled, as its exclusive remedies, to elect either (a) to terminate
this Agreement or (b) to enforce specific performance of Seller's obligations
under this Agreement; provided, however, that Seller shall not be required to
-8-
<PAGE>
expend any money other than the amounts provided in Article 8, or take any
action other than delivery of the items provided in Article 7, in connection
with such specific performance.
ARTICLE 10
BROKERS
10.1 Purchaser and Seller mutually represent and warrant to each other
that neither they nor any entity related to them have dealt with any broker,
finder or other person or entity who would be entitled to a commission or other
brokerage fee in connection with the transactions described in this Agreement
other than HRG, which entity Seller has agreed to pay the sum of $230,000 at
Closing pursuant to separate agreement, and which Seller shall pay at the
Closing (and provide evidence thereof to Purchaser). HRG only represents Seller
in this transaction and is presently Seller's property manager of the Property.
No commission is due if the sale under this Agreement fails to close for any
reason, including without limitation default of either party, termination as
provided under this Agreement or mutual termination or rescission by Seller and
Purchaser. Purchaser and Seller each agree to indemnify, defend and hold the
other harmless of and from and against any loss, costs, damage or expense
(including reasonable attorneys' fees and court costs) arising out of (i) any
inaccuracy in the representation and warranty contained in the immediately
preceding sentence or (ii) the claims of any broker or finder (or anyone
claiming to be a broker or finder) regarding any services claimed to have been
rendered to the indemnifying party in connection with the transactions
contemplated by this Agreement.
10.2 The provisions of this Article shall survive the closing of title
and the delivery of the Deed and any prior termination of this Agreement for any
reason whatsoever.
ARTICLE 11
NOTICES
Any notice given or required to be given pursuant to any provision of
this Agreement shall be in writing and shall either be personally delivered,
sent by facsimile or sent by a reputable commercial courier service guaranteeing
overnight delivery, and shall be deemed to have been given upon receipt. The
address of the parties for the giving of notices is as follows:
PURCHASER: Universal Health Realty Income Trust
367 South Gulph Road
King of Prussia, PA 19406
Attn: Mr. Kirk E. Gorman
President
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with a copy to: Universal Health Realty Income Trust
3525 Piedmont Road, N.E.
7 Piedmont Center; Suite 202
Atlanta, Georgia 30305
Attn: Mr. Timothy J. Fowler
Vice President
and a copy to: King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Attn: Gerald T. Woods, Esq.
SELLER: FB Sheffield Partners, LLC
c/o Fletcher Bright Company - Atlanta
1827 Powers Ferry Road - Building 13
Atlanta, GA 30339
Attn: Crawford M. Sites, Jr.
Vice President
with a copy to:
Schreeder, Wheeler & Flint
1600 Candler Building
127 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: Warren Wheeler, Esq.
HRG: HealthAmerica Realty Group, L.L.C.
15 Piedmont Center
Suite 600
Atlanta, Georgia 30305
Attn: Thomas Tift
Either party may, by giving notice to the other in the manner set forth
above, change the address to which notices shall be sent to it, provided that
any such change of address shall be effective when received. The attorney for
each party to this Agreement may give notices on behalf of its client with the
same force and effect as if such notice was given directly by such party.
ARTICLE 12
ASSIGNMENT
Purchaser may assign its interest under this Agreement to any affiliate
of Purchaser without Seller's consent. Seller may not assign its interest under
this Agreement.
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ARTICLE 13
REPRESENTATIONS
Seller and Purchaser hereby make the following mutual representations
and warranties to each other, which representations and warranties are
materially true and accurate in every respect as of the date hereof and shall be
materially true and accurate as of the Closing Date and shall survive the
delivery of the Deed and the Closing for one (1) year thereafter:
13.1 Of Seller:
(a) Authority. Seller has the full and unrestricted power and
capacity to enter into and carry out the terms of this Agreement and all other
agreements referred to herein. This Agreement constitutes, and all other
agreements, documents and instruments to be executed by Seller pursuant hereto,
when executed and delivered by Seller, will each constitute a valid and binding
obligation of Seller enforceable in accordance with its terms;
(b) No Defaults. Neither the execution, delivery or
performance of this Agreement or any other agreement contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof or
thereof, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) conflict with, or result in a breach of, any of the terms,
conditions or provisions of, or constitute any default under, any agreement or
instrument to which Seller is a party or is subject; (ii) violate any
restriction to which Seller is a party or is subject; (iii) constitute a
violation of any applicable law, statute, regulation, ordinance, rule, judgment,
decree, writ or order; or (iv) conflict with, or contradict, any right of first
refusal or similar right in respect of the sale of the Property.
(c) No Litigation. There are no actions, suits, claims,
arbitrations, proceedings, orders, judgments or investigations pending or, to
the knowledge of Seller, threatened against or affecting Seller or the Project
or any of the Tenant Leases or which question the validity of this Agreement or
any action taken or to be taken under any of the provisions of this Agreement,
at law or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality.
(d) Equipment. Except as otherwise stated in this Section
13.1, Seller has not received any notification in writing from any governmental
agency or authority that the use and operation of the equipment of Seller
constituting part of the Project is not in compliance with applicable laws,
regulations and guidelines, except for prior notifications which have been
corrected.
(e) Assessments. Seller has received no notice and has no
knowledge of any pending improvements, liens or special assessments to be made
against the Project by any governmental authority;
(f) Condemnation. There is no exercise of eminent domain or
condemnation pending, or to Seller's knowledge threatened, against or affecting
the Project (or
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any part thereof), nor does Seller know or have reasonable grounds to know of
any basis for any of same;
(g) Leases. To the best of Seller's knowledge: Seller is not
in default under any Tenant Lease, nor is there in existence any condition or
fact which with notice or lapse of time, or both, would constitute a default
thereunder; Seller (or its management company) is in possession of all tenant
security deposits in the amounts set forth in the Tenant Leases; no such tenants
shall be entitled to any rebates, revenue participations, rent concessions, rent
limitations or free rent or renewal options, except as provided in the Tenant
Leases; no express written commitments have been made to any tenant for repairs
or improvements, by Seller, as landlord, which remain to be completed or paid
for in full (except as provided in Section 7.3 as to Suite 303); the Tenant
Leases constitute the entire agreement between the landlord and tenant
thereunder, and there are no side letters or other agreements between the
Landlord and each of the tenants; all Tenant Leases are the result of bona fide
arm's-length negotiations with persons who are not affiliates of Seller; no
rents due under any of said Tenant Leases have been assigned, hypothecated or
encumbered (excepting therefrom any such hypothecations or encumbrances being
removed at Closing); no rents under any Tenant Leases have been prepaid in
advance of the then current month which are not the subject of a credit under
Section 8.5; and there are no fees or commissions payable to any third person or
entity in regard to the subject property or any of said Tenant Leases (including
any commissions payable upon the exercise of any renewal option under the Tenant
Leases); no tenant under any Tenant Lease has received any financing, or
commitment to extend financing, from Seller in respect of any tenant
improvements or for any other purposes (except as provided in Section 7.3 as to
Suite 303); and Seller will not, hereafter and prior to the Closing Date, modify
any Tenant Lease, accept any termination or surrender of any Tenant Lease or
enter into any agreement extending the term of any Tenant Lease, without the
prior written consent of Purchaser;
(h) Zoning. [INTENTIONALLY OMITTED];
(i) Permits. Except as otherwise disclosed in this Section
13.1, Seller has not received any notification in writing from any governmental
authority that the Property is lacking any permits or licenses necessary for the
operation and occupancy of the Property. No notice, notification, demand,
request for information, citation, summons or order has been received by Seller
and Seller has no knowledge that any complaint has been filed, penalty has been
assessed or investigation or review is pending or threatened by any governmental
authority with respect to any alleged failure by Seller to have any permit,
license or authorization required in connection with the use, maintenance and
operation of the Property, or with respect to any generation, treatment,
storage, recycling, transportation, release or disposal of any "hazardous
substances" (as hereinafter defined);
(j) Certificate of Occupancy. Seller has no knowledge that
certificates of occupancy have not been issued for the Property, including all
medical offices; however, Seller has not been able to locate or obtain copies of
all certificates of occupancy for all suites in the Project; Seller has no
knowledge that any certificate of occupancy for a current tenant has been
revoked or canceled;
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(k) Access. To the best of Seller's knowledge, no fact or
condition exists which would result or could result in the termination or
reduction of the current access from the Property to existing roads or to sewer
or other utility services presently serving the Property;
(l) Utilities. Water, sewer, electricity and telephone
facilities have been available to the Property during Seller's ownership in
adequate capacity for the purpose of using the Project for its intended purpose;
(m) No Option to Purchase. No third party has an option to
purchase the Project;
(n) No Bankruptcy. There are no attachments, executions,
assignments for the benefit of creditors or voluntary or involuntary proceedings
in bankruptcy pending, contemplated or, to the knowledge of Seller, threatened
against Seller
(o) Service, Maintenance Agreements, etc. As of the Closing
Date, there shall be no employees employed by Seller or contractors retained by
Seller in the operation of the Project; and no contracts, oral or written, with
any employees nor any service contract, maintenance contract, nor any union or
other contract or agreement with respect to the Project; in each case, except as
listed in Exhibit K. All such agreements (if any) listed on said Exhibit K are
in full force and effect without default. Seller will not enter into any new
such agreement or modify any such agreement prior to the Closing;
(p) No Lease of Space. Seller will not, hereafter and prior to
the Closing Date, lease any space which is now or may become vacant without the
prior written approval of Purchaser, not to be unreasonably withheld or delayed;
(q) Seller to Maintain Premises. Seller will maintain the
physical condition of the Property in substantially the same condition as of the
date hereof through the Closing Date, reasonable wear and tear and loss by fire
or other casualty excepted, and will make any ordinary repairs and continue
maintenance of the Property from the date hereof until Closing, as it would do
in the normal course of operations, provided that in the event that any part of
the Project is damaged by fire or other casualty prior to Closing and the cost
to repair same exceeds $20,000, then Purchaser may at its option either (i)
terminate this Agreement (whereupon the Security Deposit shall be returned and
neither party shall be obligated to buy or sell under this Agreement), or (ii)
proceed to close and accept from Seller an assignment of any insurance proceeds
receivable due to such casualty loss plus a payment from Seller of the amount of
the deductible on Seller's casualty insurance policy, but provided further that
if the casualty loss is less than $20,000 the Purchaser shall proceed under
option (ii);
(r) Insurance Requirements. To the best of Seller's knowledge,
there are no outstanding requirements by the holder of any existing note and
mortgage on the Property, or any insurance company, insurance rating board, fire
underwriting board or governmental agency requiring or recommending any repairs
or work to be done at the Property or any equipment to be installed thereon with
which Seller has not fully complied;
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(s) Income and Operating Expenses. Seller believes that the
schedule annexed hereto as Exhibit L and made a part hereof accurately sets
forth the income and expenses of the Project on an annual basis for the period
ended December 31, 1998, and for the current year through September 30, 1999.
However, such statements were prepared by HRG (which itself is making no
representation or warranty to Purchaser in respect thereof), are unaudited and
have not been independently verified by Seller. To the best of Seller's
knowledge, there was no tax abatement or exemption in effect for the Property
during said period. To the best of Seller's knowledge, there has been no
material adverse change in the operation or income of the Property since
September 30, 1999;
(t) Employees. There are no employees employed directly by
Seller and stationed on site in the operation and maintenance of the Property;
(u) No Defective Condition. Except as otherwise may be
described herein and in that certain Property Condition Assessment dated January
17, 1997 prepared for Fletcher Fright Company - Atlanta, by Asset Advisory
Services, Inc. and the Building and Site Assessment, dated May 17, 1999,
prepared for HRG by CDH Partners, Inc. relative to the Property (the terms of
which are hereby incorporated by reference into this Agreement), Seller has not
been advised and is not aware that (considering the age of the Project): (I)
there is any substantial defective condition, structural or otherwise, in the
buildings or other improvements on the Property; or (II) that all heating,
electrical, plumbing, air conditioning, and other mechanical and electrical
systems are not in reasonably good condition and working order, or (III) that
there are any substantial roof leaks. Nevertheless, Seller believes that the
Property does not comply with the Americans With Disabilities Act, and Seller
further discloses that it is possible that the buildings and improvements and
the plumbing, electrical and mechanical systems of the Project do not fully
comply with current codes and ordinances. During its ownership of the Property,
Seller has been required to upgrade some of such systems when preparing suites
for tenant occupancy;
(v) Hazardous Substances. When it was purchased by Seller, the
Project contained asbestos containing materials, and Seller undertook to remove
same, but Seller gives no assurance that all such materials have been removed.
In addition the parties are aware that the physicians and other tenants of the
Project normally procure, store, use and dispose of hazardous materials in the
course of business and medical practice, and Seller makes no representations
about the use or disposal of hazardous materials by tenants. Otherwise, to the
best of Seller's knowledge, except as otherwise may be described in that certain
Phase I Environmental Site Assessment and Limited Asbestos Survey dated February
27, 1997, prepared for Fletcher Bright Company-Atlanta by United Consulting
Group, Ltd. relative to the Property, as supplemented by that certain Phase II
Environmental Site Assessment, dated March 13, 1997, likewise prepared for
Fletcher Bright Company-Atlanta, by United Consulting Group, Ltd.; or the Phase
I Environmental Site Assessment dated May 16, 1999, prepared for HRG by Ahlberg
Engineering, Inc. ("Ahlberg") relative to the Property, as supplemented by that
certain Phase II Environmental Site Assessment, dated September 17, 1999,
likewise prepared for HRG by Ahlberg relative to Property (the terms of each
which reports are hereby incorporated by reference into this Agreement), and
except for substances normally used in medical building
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operations and maintenance (such as for example but without limitation cleaning
fluids), the Property contains no hazardous substance, as such term is defined
in the Comprehensive Environmental Response and Liability Act, 42 U.S.C. ss.
9601 et seq., as amended, or under any other state or local environmental
statues or regulations issued pursuant thereto;
(w) Violations. To the best of Seller's knowledge, there are
no outstanding notes or notices of violations of law or governmental ordinances,
orders or requirement issued by any governmental department, agency, bureau or
instrumentality affecting the Property or any part thereof (collectively,
"Property Violations"); and all Property Violations affecting the Property
discovered by Purchaser to exist as of the Closing Date shall be complied with
and removed of record by Seller, at its expense, at Closing, or Purchaser may
(as its sole remedy) terminate this Agreement, receive a return of the Security
Deposit and neither party shall be obligated to buy or sell hereunder;
(x) Vendors. All vendors, suppliers and other contractors or
persons supplying goods or services to the Property at the instance of Seller or
its property manager, have been paid in full to date or will be paid on the
Closing Date;
(y) No Landmark. [INTENTIONALLY OMITTED]; and
(z) No Unpaid Bills. As of the Closing Date, there are no
unpaid bills for work, labor, service or materials furnished to the Project upon
the request or order of Seller, which may be made the basis of a lien or, if
there are any such bills, Seller will pay them by Closing.
All of the representations or warranties of the Seller in this Article 13 or
otherwise in this Agreement, except for Article 13.1(a), are made and expressly
limited to the actual, present knowledge of the Seller's Managers, without
imputation of knowledge or notice which may be attributed to them as a matter of
law or by virtue of the knowledge of non-executive employees of Seller or
officers or employees of the Seller's property management company (including
HRG). It is agreed that any statement made to "Seller's knowledge" or "to the
best of Seller's knowledge" or similar statements is limited as provided in the
preceding sentence.
13.2 Of Purchaser:
(a) Authority. Purchaser has the full and unrestricted power
and capacity to enter into and carry out the terms of this Agreement and all
other agreements referred to herein. This Agreement constitutes, and all other
agreements, documents and instruments to be executed by Purchaser pursuant
hereto, when executed and delivered by Purchaser, will each constitute a valid
and binding obligation of Purchaser as the case may be, enforceable in
accordance with its terms;
(b) No Defaults. Neither the execution, delivery or
performance of this Agreement or any other agreement contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof or
thereof, nor the consummation of the transactions contemplated hereby or
thereby, will: (i) conflict with, or result in a breach of, any
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of the terms, conditions or provisions of, or constitute any default under, any
agreement or instrument to which Purchaser is a party or is subject; (ii)
violate any restriction to which Purchaser is a party or is subject; or (iii)
constitute a violation of any applicable law, statute, regulation, ordinance,
rule, judgment, decree, writ or order; and
(c) No Litigation. There are no actions, suits, claims,
arbitrations, proceedings, orders, judgments or investigations pending or, to
the knowledge of Purchaser, threatened against or affecting or which question
the validity of this Agreement or any action taken or to be taken under any of
the provisions of this Agreement, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality.
ARTICLE 14
CONDITIONS PRECEDENT TO CLOSING
14.1 The obligation of Purchaser to purchase the Project pursuant to
the provisions of this Agreement shall be subject to the following conditions
(all or any of which may be waived in writing, in whole or in part, by
Purchaser):
(a) The representations and warranties of Seller in this
Agreement shall be true and correct and the covenants and agreements of Seller
contained herein shall have been complied with as of the date of Closing;
(b) Seller shall deliver the documents described in Articles 5
and 7 of this Agreement;
(c) There shall have been no material changes in the zoning
laws and regulations applicable to the Project;
(d) Subject to the terms of Section 7.1(j), Seller shall have
obtained an estoppel certificate from tenants each of occupying the Property's
leased space under the Tenant Leases, to be substantially in the form annexed
hereto as Exhibit M, setting forth that (i) there are no defaults thereunder by
landlord or tenant, (ii) their respective leases are valid, unmodified and in
full force and effect, (iii) that all rent and additional rent has been paid
through the month of Closing and (iv) such other matters as are set forth in
Exhibit M annexed hereto;
(e) Seller shall deliver title to the Property as provided in
Article 5, and Purchaser shall have obtained a Title Policy and Survey
corresponding thereto and confirming same.
14.2 If any of the conditions precedent to closing set forth herein or
any other covenant or closing obligation of Seller shall not have been complied
with as of the Closing Date, then, in such event, Purchaser shall have the
right, in addition to any other rights or remedies available to Purchaser under
this Agreement or in equity or at law, to rescind this transaction in which
event
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the parties shall be relieved and released from any further obligations to
each other or Purchaser may close the transaction in accordance with its terms.
ARTICLE 15
POST-CLOSING OBLIGATIONS
15.1 At the Closing, Seller shall deposit in escrow the sum of $125,000
with HRG, as Escrow Agent, which sum shall constitute an escrow account for the
purposes herein stated (to be effected by adjustment to the Purchase Price),
which sum shall be established on its books as an escrow account. This escrow
account, which shall hereinafter be referred to as the "Parking Revenue Escrow
Account," will be used to cover any shortfall in the Property's parking revenue
that may occur on a monthly basis. Under the terms of this escrow arrangement,
but subject to Section 15.2, the Purchaser will be able to draw from HRG funds
on deposit in the Parking Revenue Escrow Account on a monthly basis if the
revenue associated with the Property's parking facilities does not meet or
exceed $16,667 per month. The remaining funds in the Parking Revenue Escrow
Account will be released by HRG to the Seller once the Property's parking
facilities meet or exceed $16,667 per month of revenue for three (3) consecutive
months (or, at any earlier time at which the Purchaser elects, at its option, to
terminate this escrow agreement). If, during any calendar month ending
subsequent to the Closing Date, parking revenues exceed $16,667, the excess
thereof shall be credited against any deficiency in parking revenue (below
$16,667) in the preceding or succeeding calendar month (but only in one or the
other of such months, and not in any earlier or later calendar months); and any
surplusage in monthly parking revenues in excess of $16,667 remaining after any
such application shall be added to the Parking Revenue Escrow Account (even if,
by doing so, the amount of funds in deposit therein exceeds $125,000). Seller's
obligations hereunder are strictly limited to the funds on deposit from time to
time in the Parking Revenue Escrow Account.
15.2 Purchaser's right to draw upon the Parking Reserve Escrow Account
is expressly conditioned upon Purchaser making reasonable, diligent and
continuous efforts (provided that in doing so Purchaser does not incur any
material expense or risk) to operate the Property's parking facilities in a
manner which will provide the maximum reasonably available revenue from parking;
it being understood and agreed by Seller, however, that so long as the Purchase
operates the Property's parking facilities in substantially the same manner as
operated by Seller immediately prior to the Closing Date, then, such operation
shall be deemed operated in such manner as to provide "the maximum reasonably
available revenue from parking"; that is, and without limitation of the
foregoing, in order to comply herewith, Purchaser shall be under no obligation
to increase (or reduce) parking fees, add parking spaces, change hours of
operation or permit usage not permitted on the Closing Date. Without limiting
the foregoing, Purchaser agrees to instruct its Property management to comply
with this Section. Further, Purchaser is not authorized to give any tenant free
parking (unless that tenant is receiving free parking on the Closing Date) and
must charge all tenants and others a reasonable parking fee for use of the
parking facilities on the Property (with the "reasonableness" of any charge or
free to be determined in the manner provided hereinabove). If Purchaser fails to
comply with the provisions of this Section 15.2, Purchaser's right to draw on
the Parking Revenue Escrow Deposit shall terminate. Purchaser agrees to promptly
refund to Seller any parking revenue which was withdrawn from the Escrow while
Purchaser was in violation of this Section. Purchaser shall provide to Seller no
later than the fifteenth (15th) day of each month, a parking
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revenue report for the prior month giving in reasonable detail the amount and
sources of parking revenue and any funds withdrawn from the Escrow. Seller and
its agents are authorized to directly contact the Purchaser's property manager
and building and parking lot personnel to make inquiries and request documents
regarding the parking revenue and efforts to obtain the maximum parking revenue,
provided that (i) such requests are made only not more frequently than monthly,
and (ii) any direct costs incurred by such persons in responding to such
inquiries are reimbursed to such persons by Seller.
15.3 The provisions of this Article 15 shall survive the Closing.
ARTICLE 16
MISCELLANEOUS
16.1 This Agreement is binding upon and shall inure to the benefit of,
the parties hereto, and their respective heirs, successors, legal
representatives and permitted assigns.
16.2 Wherever under the terms and provisions of this Agreement the time
for performance falls upon a Saturday, Sunday or legal holiday, such time for
performance shall be extended to the second business day thereafter.
16.3 This Agreement may be executed in one or more counterparts, all of
which when taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts have been executed by each of the
parties hereto and delivered to each of the other parties hereto.
16.4 The captions at the beginning of the several paragraphs, Sections
and Articles are for convenience in locating the context, but are not part of
the context. Unless otherwise specifically set forth in this Agreement to the
contrary, all references to Exhibits contained in this Agreement refer to the
Exhibits which are attached to this Agreement all of which Exhibits are
incorporated in, and made a part of, this Agreement by reference. Unless
otherwise specifically set forth in this Agreement to the contrary, all
references to Articles, Sections, paragraphs and clauses refer to portions of
this Agreement.
16.5 If any term or provision of this Agreement shall be held to be
illegal, invalid, unenforceable or inoperative as a matter of law, the remaining
terms and provisions of this Agreement shall not be affected thereby, but each
such remaining term and provision shall be valid and shall remain in full force
and effect.
16.6 This Agreement and the other writings referred to in, or delivered
pursuant to, this Agreement, embody the entire understanding and contract
between the parties hereto with respect to the Project and supersede any and all
prior agreements and understandings between the parties hereto, whether written
or oral, formal or informal, with respect to the subject matter of this
Agreement. This Agreement has been entered into after full investigation by each
party and its professional advisors, and neither party is relying upon any
statement, representation or warranty made by or on behalf of the other which is
not expressly set forth in this Agreement.
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16.7 No extensions, changes, waivers, modifications or amendments to or
of this Agreement, of any kind whatsoever, shall be made or claimed by Seller,
HRG or Purchaser, and no notices of any extension, change, waiver, modification
or amendment made or claimed by Seller, HRG or Purchaser shall have any force or
effect whatsoever, unless the same is contained in a writing and is fully
executed by the party against whom such matter is asserted.
16.8 This Agreement shall be governed and interpreted in accordance
with the laws of the State of Georgia.
16.9 Each party hereto shall pay all charges specified to be paid by
them pursuant to the provisions of this Agreement and their own attorney's fees
in connection with the negotiation, drafting and closing of this Agreement.
16.10 Time is of the essence in this Agreement.
16.11 Seller agrees to keep confidential all information concerning the
Property, the Project and the Tenant Leases which it may retain in its files
subsequent to the Closing Date.
16.12 THE DECLARATION OF TRUST ESTABLISHING UNIVERSAL HEALTH REALTY
INCOME TRUST, FILED AUGUST 6, 1986, A COPY OF WHICH, TOGETHER WITH ALL
AMENDMENTS THERETO ("DECLARATION"), IS DULY FILED IN THE OFFICE OF THE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT
THE NAME "UNIVERSAL HEALTH REALTY INCOME TRUST," REFERS TO THE TRUSTEES UNDER
THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY AND
THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST SHALL BE
HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR
CLAIM AGAINST, THE TRUST. ALL PERSONS DEALING WITH THE TRUST, IN ANY WAY,
WHETHER UNDER THIS AGREEMENT OR IN ANY AGREEMENT REFERENCED HEREIN OR EXECUTED
IN CONNECTION HEREWITH, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
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ARTICLE 17
SECURITY DEPOSIT
Effective upon its execution and delivery of this Agreement, Purchaser shall
deposit in escrow with HRG the sum of $100,000 as earnest money (the "Earnest
Money Deposit"). At the Closing, the Earnest Money Deposit shall be credited to
the Purchase Price. If, by the Closing Date, Purchaser has not purchased the
Property other than because of (i) Seller's noncompliance with any terms or
conditions hereof concerning such purchase or (ii) the exercise by Purchaser of
any right of termination extended to it hereunder pursuant to Section 4.2(c),
Section 9.2, Section 13.1(q) or Section 13.1(w); then, HRG shall pay over to
Seller the Earnest Money Deposit as full liquidated damages and Seller's
exclusive remedy for Purchaser's default (it being understood and agreed by the
parties that any actual damages suffered by Seller as a result of such default
by Purchaser would be impracticable to ascertain and that retention of the
Earnest Money Deposit is a reasonable estimate of Seller's damages). If however,
by the Closing Date, Purchaser has not purchased the Property because of (i)
Seller's noncompliance with any terms and conditions hereof concerning such
purchase or (ii) the exercise by Purchaser of any right of termination extended
to it hereunder pursuant to Section 4.2(c), Section 9.2, Section 13.1(q) or
Section 13.1(w); then, HRG shall return the Earnest Money Deposit to Purchaser.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names by their respective duly authorized representatives
under seal on the day and year first above written.
"SELLER"
FB SHEFFIELD PARTNERS, LLC, a (SEAL) Georgia limited
liability company
By:____________________________________
its Manager
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"PURCHASER"
UNIVERSAL HEALTH REALTY (SEAL)
INCOME TRUST
By:______________________________
Timothy J. Fowler
Vice President
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"HRG"
HEALTHAMERICA REALTY GROUP, LLC
By:________________________________
Its Manager
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EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Trust's previously filed
Registration Statements on Forms S-8 and S-3: 1988 Non-Statutory Stock Option
Plan, Share Compensation Plan for Outside Trustees, 1997 Incentive Plan (File
No. 333-57815) and Dividend Reinvestment Plan for Shareholders (File No.
333-81763).
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 29, 2000
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<NAME> UNIVERSAL HEALTH REALTY INCOME TRUST
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0
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