1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) ( x ) QUARTERLY REPORT PURSUANT TO Section 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO Section 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........ to ......... Commission file number 1-9321 UNIVERSAL HEALTH REALTY INCOME TRUST ----------------------------------------------------- (Exact name of registrant as specified in its charter) MARYLAND 23-6858580 (State or other jurisdiction of (I. R. S. Employer Incorporation or Organization) Identification No.) UNIVERSAL CORPORATE CENTER 367 SOUTH GULPH ROAD KING OF PRUSSIA, PENNSYLVANIA 19406 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 265-0688 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock outstanding at October 31, 1996 - 8,952,340 Page One of Eleven Pages
2 UNIVERSAL HEALTH REALTY INCOME TRUST I N D E X PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Statements of Income Three Months Ended --September 30, 1996 and 1995 ...... Three Nine Months Ended -- September 30, 1996 and 1995 Condensed Balance Sheets -- September 30, 1996 and December 31, 1995 ................................. Four Condensed Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 ......... Five Notes to Condensed Financial Statements .................. Six & Seven Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .. Eight, Nine & Ten PART II. Other Information and Signature ................. Eleven Page Two of Eleven Pages
3 PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Statements of Income (amounts in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------ ------------------ 1996 1995 1996 1995 ------- ------- ------- ------- <S> <C> <C> <C> <C> Revenues (Note 2): Base rental - UHS facilities $ 3,433 $ 3,426 $10,298 $10,059 Base rental - Non-related parties 1,401 802 3,385 2,311 Bonus rental 590 733 2,094 2,161 Interest 187 254 556 727 ------- ------- ------- ------- 5,611 5,215 16,333 15,258 ------- ------- ------- ------- EXPENSES: Depreciation & amortization 930 860 2,704 2,510 Interest expense 705 491 1,828 1,334 Advisory fees to UHS 271 243 772 708 Other operating expenses 390 170 813 500 ------- ------- ------- ------- 2,296 1,764 6,117 5,052 ------- ------- ------- ------- Income before equity in limited liability corporations 3,315 3,451 10,216 10,206 Equity in income of limited liability corporations 151 -- 423 -- ------- ------- ------- ------- NET INCOME $ 3,466 $ 3,451 $10,639 $10,206 ======= ======= ======= ======= NET INCOME PER SHARE $ 0.39 $ 0.38 $ 1.19 $ 1.14 ======= ======= ======= ======= Weighted average number of shares and equivalents 8,959 8,947 8,958 8,947 ======= ======= ======= ======= </TABLE> See accompanying notes to these condensed financial statements. Page Three of Eleven Pages
4 UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Balance Sheets (amounts in thousands) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (unaudited) <S> <C> <C> ASSETS: REAL ESTATE INVESTMENTS: Buildings & improvements $ 138,400 $ 129,961 Accumulated depreciation (25,631) (22,986) --------- --------- 112,769 106,975 Land 19,683 17,927 Mortgage loans receivable, net 6,450 6,444 Reserve for investment losses (80) (158) --------- --------- NET REAL ESTATE INVESTMENTS 138,822 131,188 OTHER ASSETS: Cash 169 139 Bonus rent receivable - UHS 586 606 Rent receivable - non-related parties 23 13 Investment in limited liability corporations 6,377 308 Deferred charges, net 444 516 --------- --------- $ 146,421 $ 132,770 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Bank borrowings $ 39,530 $ 25,375 Note payable to UHS 1,066 1,021 Accrued interest 229 157 Accrued expenses & other liabilities 764 676 Tenant reserves, escrows, deposits and prepaid rental 564 544 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: 1996 - 8,952,340 1995 - 8,947,192............................... 90 89 Capital in excess of par value....................... 128,643 128,643 Cumulative net income................................ 94,635 83,996 Cumulative dividends................................. (119,100) (107,731) --------- --------- TOTAL SHAREHOLDERS' EQUITY 104,268 104,997 --------- --------- $ 146,421 $ 132,770 ========= ========= </TABLE> See accompanying notes to these condensed financial statements. Page Four of Eleven Pages
5 UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Statements of Cash Flows (amounts in thousands, unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,639 $ 10,206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 2,704 2,510 Amortization of interest rate cap 93 93 Changes in assets and liabilities: Rent receivable 10 (43) Accrued expenses & other liabilities 88 (8) Tenant escrows, deposits & prepaid rents 20 1 Construction & mortgage loan interest receivable -- 3 Accrued interest 72 50 Reserve for investment losses (78) (177) Deferred charges & other (40) (87) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,508 12,548 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in limited liability corporations (6,069) -- Acquisition of real property (10,195) (3,461) Advances under construction note receivable -- (2,337) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (16,264) (5,798) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional borrowings 14,155 4,630 Dividends paid (11,369) (11,274) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,786 (6,644) -------- -------- Increase in cash 30 106 Cash, beginning of period 139 2 -------- -------- CASH, END OF PERIOD $ 169 $ 108 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 1,618 $ 1,148 ======== ======== </TABLE> See accompanying notes to these condensed financial statements. Page Five of Eleven Pages
6 UNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (unaudited) (1) GENERAL The financial statements included herein have been prepared by the Trust, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of the Trust, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Trust believes that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies and the notes thereto included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1995. (2) RELATIONSHIP WITH UNIVERSAL HEALTH SERVICES, INC. Approximately 72% and 78% for the three month periods ended September 30, 1996 and 1995 and 74% and 79% for the nine month periods ended September 30, 1996 and 1995, of the Trust's gross revenues were earned under the terms of the leases with wholly-owned subsidiaries of Universal Health Services, Inc. ("UHS"). UHS has unconditionally guaranteed the obligations of its subsidiaries under the leases. Below is the detailed listing of the revenues received from UHS and other non-related parties for the three and nine months ended September 30, 1996 and 1995: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Base rental - UHS facilities $ 3,433,000 $ 3,426,000 $10,298,000 $10,059,000 Base rental - Non-related parties 1,401,000 802,000 3,385,000 2,311,000 ----------- ----------- ----------- ----------- Total base rental 4,834,000 4,228,000 13,683,000 12,370,000 ----------- ----------- ----------- ----------- Bonus rental - UHS facilities 590,000 623,000 1,865,000 1,940,000 Bonus rental - Non-related parties -- 110,000 229,000 221,000 ----------- ----------- ----------- ----------- Total bonus rental 590,000 733,000 2,094,000 2,161,000 ----------- ----------- ----------- ----------- Interest - Non-related parties 187,000 254,000 556,000 727,000 ----------- ----------- ----------- ----------- Total revenues $ 5,611,000 $ 5,215,000 $16,333,000 $15,258,000 =========== =========== =========== =========== </TABLE> UHS owned approximately 8% percent of the Trust's outstanding common shares as of September 30, 1996. The Trust has granted UHS an option to purchase Trust shares in the future at fair market value to enable UHS to maintain a 5% interest in the Trust. The Trust has no salaried employees and the Trust's officers are all employees of UHS and receive no cash compensation from the Trust. Page Six of Eleven Pages
7 (3) DIVIDENDS A dividend of $.425 per share or $3,805,000 in the aggregate was declared by the Board of Trustees on September 6, 1996 and was paid on September 30, 1996 to shareholders of record as of September 16, 1996. (4) SUBSEQUENT EVENTS During the fourth quarter of 1996, the Trust paid $1.5 million in cash to purchase a 95% equity interest in a limited liability corporation which purchased the Desert Valley Medical Center, a 54,000 net square foot medical office building located on the campus of the Columbia Paradise Valley Hospital in Phoenix, Arizona. The total purchase price of Desert Valley Medical Center was $4.3 million including $2.7 million of long-term, non-recourse debt. Also during the fourth quarter of 1996, the Trust agreed to provide up to $4,050,000 of construction financing for the construction of Cypresswood Professional Center located in Houston, Texas. The Trust also invested $343,000 for a 77% equity interest in a limited partnership that will develop, run and operate the facility. The Trust expects construction of this facility to be completed during the third quarter of 1997. Page Seven of Eleven Pages
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The matters discussed in this report as well as the news releases issued from time to time by the Trust contain certain forward-looking statements that involve risks and uncertainties, including the fact that a substantial portion of the Trust's revenues are dependent on one operator, Universal Health Services, Inc., a substantial portion of the Trust's leases and mortgagors are involved in the health industry which is undergoing substantial changes and is subject to pressure from government reimbursement programs and other third party payors, certain of the Trust's facilities have had cash flow less than 1.5 times lease payments, leases may not be renewed at the end of their terms which could require the Trust to find other operators for those facilities and enter into leases on terms potentially less favorable to the Trust than current leases. RESULTS OF OPERATIONS As of September 30, 1996 the Trust had investments in twenty-two facilities located in twelve states. These investments include: (i) ownership of four acute care, one comprehensive rehabilitation and two behavioral health centers leased to subsidiaries of Universal Health Services, Inc. ("UHS"); (ii) ownership of one comprehensive rehabilitation hospital leased to a subsidiary of HEALTHSOUTH Corporation; (iii) ownership of one sub-acute care facility leased to THC-Chicago, Inc. ("THC"), an indirect wholly-owned subsidiary of Community Psychiatric Centers ("CPC"); (iv) ownership of one medical office building leased to several tenants including an outpatient surgery center operated by Columbia/HCA Healthcare, Corporation ("Columbia"); (v) ownership of a medical office building on the campus of a hospital owned by Columbia; (vi) ownership of one single tenant and two multi-tenant medical office buildings located in Kingwood, Texas; (vii) a mortgage loan made to Crouse Irving Memorial Properties for the purchase of the real assets of the Madison Irving Medical Center, an ambulatory treatment center; (viii) a 50% interest in a limited liability corporation which owns three medical office buildings located on the campus of Desert Samaritan Hospital in Phoenix, Arizona; (ix) ownership of four preschool and child-care centers located in southeastern Pennsylvania; (x) a 33% equity interest in a limited liability corporation which owns a medical office building on the campus of Columbia's 260 bed Suburban Medical Center located in Louisville, Kentucky; (xi) ownership of a multi-tenant medical office building located adjacent to the Southern Regional Medical Center in Riverdale, Georgia; (xii) a 50% equity interest in a limited liability corporation which owns two medical office buildings on the campus of Maryvale Samaritan Hospital located in Phoenix, Arizona, and; (xiii) ownership of the real estate assets of Lake Shore Hospital, to which the Trust received free and clear title during 1995. The Trust has been, and will continue to, actively market the property of Lake Shore Hospital in an effort to sell or lease the facility to a qualified operator. The leases to the subsidiaries of UHS are guaranteed by UHS and are cross- defaulted with one another. The lease to the subsidiary of HEALTHSOUTH Corporation is guaranteed by HEALTHSOUTH Corporation, the lease on the sub-acute care facility to THC is guaranteed by CPC and the leases to the outpatient surgery center and the medical office buildings on the campuses of Columbia hospitals, are guaranteed by Columbia. The lease on the single tenant medical office building located in Kingwood, Texas is guaranteed by Columbia. Page Eight of Eleven Pages
9 The third quarter dividend of $.425 per share or $3,805,000 in the aggregate was paid on September 30, 1996. For the quarters ended September 30, 1996 and 1995 net income totaled $3,466,000 and $3,451,000 or $.39 and $.38 per share on net revenues of $5,611,000 and $5,215,000, respectively. For the nine months ended September 30, 1996 and 1995 net income totaled $10,639,000 and $10,206,000 or $1.19 and $1.14 per share on net revenues of $16,333,000 and $15,258,000, respectively. The $396,000 increase in net revenue during the 1996 third quarter as compared to the comparable prior year quarter was primarily attributable to a $599,000 increase in base rental from non-related parties, partially offset by a $143,000 decrease bonus rental and a $67,000 decrease in interest income. The increase in base rentals from non-related parties resulted primarily from the various acquisitions made by the Trust during the fourth quarter of 1995 and the second quarter of 1996. The decrease in bonus rental was due primarily to the timing of the bonus rentals earned on Tri-State Rehabilitation Hospital and the decrease in interest income was due to the 1995 period including interest earned on the construction financing loan for medical office buildings located in Texas which were purchased by the Trust upon their completion and occupancy during the fourth quarter of 1995. The $1,075,000 increase in net revenue for the nine months ended September 30, 1996 over the comparable prior year period was due primarily to a $1,074,000 increase in base rentals from non-related parties due to the various acquisitions made by the Trust during the fourth quarter of 1995 and the second quarter of 1996. Approximately $10,000 and $26,000 for the three month periods ended September 30, 1996 and 1995 and $30,000 and $91,000 for the nine month periods ended September 30, 1996 and 1995, respectively, of the Trust's bonus rentals were attributable to special Medicaid reimbursement programs which relate to an acute care hospital owned by the Trust. The facility, which participates in the Texas Medical Assistance Program, became eligible and received additional reimbursements from the state's disproportionate share hospital fund since the facility met certain conditions of participation and served a disproportionately high share of the state's low income patients. This program is scheduled to terminate in August, 1997 and the Trust cannot predict whether this program will continue beyond the scheduled termination date. Interest expense increased $214,000 and $494,000 for the three and nine month periods ended September 30, 1996, respectively, over the comparable prior year periods, due to additional borrowings used to finance the purchase of limited liability corporation interests during the first and second quarters of 1996, the purchase of the preschool and child-care centers during the second quarter of 1996, and the medical office buildings acquired by the Trust during the third and fourth quarters of 1995. Partially offsetting the additional interest expense generated by the increased borrowings used to finance these acquisitions was a .7% decrease in the Trust's effective borrowing rate during each of the three and nine month periods ended September 30, 1996 as compared to the comparable 1995 periods. Depreciation and amortization expense increased $70,000 and $194,000 for the three and nine month periods ended September 30, 1996, respectively, as compared to the comparable prior year periods, due to the depreciation expense related to the medical office buildings acquired by the Trust during the fourth quarter of 1995 and the second quarter of 1996. Page Nine of Eleven Pages
10 Other operating expenses increased $220,000 and $313,000 for the three and nine month periods ended September 30, 1996, respectively, over the comparable prior year periods, due primarily to the expenses related to the medical office buildings acquired by the Trust during the fourth quarter of 1995 and the second quarter of 1996. These expenses, which are passed on directly to the tenants of the medical office buildings, are included as revenue in the Trust's statements of income. Included in the Trust's financial results for the three and nine months ended September 30, 1996 was $151,000 and $423,000, respectively, of income generated from the Trust's ownership in limited liability corporations which own medical office buildings in Phoenix, Arizona. Funds from operations ("FFO"), which is the sum of net income plus depreciation expense and amortization of interest rate cap expense totaled $4.4 million and $4.3 million for the three months ended September 30, 1996 and 1995 and $13.4 million and $12.8 million for the nine months ended September 30, 1996 and 1995, respectively. FFO does not represent cash flows from operations as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Trust's operating performance or to cash flows as a measure of liquidity. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1996, net cash provided by operating activities was $13.5 million as compared to $12.5 million in the 1995 nine month period. The $960,000 increase in net cash provided by operating activities was due primarily to a $627,000 increase in net income plus the addback of the non-cash depreciation and amortization expense. During the first nine months of 1996, the $13.5 million of net cash provided by operating activities and the $14.2 million of additional borrowings were used primarily to: (i) acquire a 50% interest in a limited liability corporation which owns three medical office buildings located on the campus of Desert Samaritan Hospital in Phoenix, Arizona ($4.7 million); (ii) the purchase of four preschool and child-care centers located in Pennsylvania ($3.9 million); the purchase of a multi-tenant medical office building located in Riverdale, Georgia ($6.2 million); (iii) the purchase of a 50% equity interest in a limited liability corporation which owns two medical office buildings in Phoenix, Arizona ($1.4 million), and; (iv) the payment of dividends ($11.4 million). During the third quarter of 1996, the Trust's non-amortizing revolving credit agreement was amended increasing the borrowing capacity to $70 million and extending the expiration date to September 30, 2001. As of September 30, 1996 the Trust had approximately $30.5 million of unused borrowing capacity under the terms of its amended revolving credit agreement. Page Ten of Eleven Pages
11 PART II. OTHER INFORMATION UNIVERSAL HEALTH REALTY INCOME TRUST Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Amendment to Credit Agreement dated as of September 27, 1996 by and among Universal Health Realty Income Trust, CoreStates Bank, N.A. as agent, NationsBank, N.A. and First Union National Bank. 27. Financial Data Schedule All other items of this report are inapplicable. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 8, 1996 UNIVERSAL HEALTH REALTY INCOME TRUST (Registrant) /s/ Kirk E. Gorman -------------------------------------- Kirk E. Gorman, President, Chief Financial Officer, Secretary and Trustee (Principal Financial Officer and Duly Authorized Officer.) Page Eleven of Eleven Pages