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, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........ to ......... Commission file number 1-9321 UNIVERSAL HEALTH REALTY INCOME TRUST ------------------------------------------------------ (Exact name of registrant as specified in its charter) MARYLAND 23-6858580 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) UNIVERSAL CORPORATE CENTER 367 SOUTH GULPH ROAD KING OF PRUSSIA, PENNSYLVANIA 19406 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 265-0688 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of common shares of beneficial interest outstanding at October 31, 1997 - 8,954,840 Page One of Twelve Pages
2 UNIVERSAL HEALTH REALTY INCOME TRUST INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PAGE NO. -------- <S> <C> Item 1. Financial Statements Condensed Statements of Income Three Months Ended -- September 30, 1997 and 1996 ..........................Three Nine Months Ended -- September 30, 1997 and 1996 Condensed Balance Sheets -- September 30, 1997 and December 31, 1996.........................................................Four Condensed Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996.................................Five Notes to Condensed Financial Statements....................................Six & Seven Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... Eight, Nine & Ten PART II. OTHER INFORMATION AND SIGNATURE .............................Eleven & Twelve </TABLE> Page Two of Twelve 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, ------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> REVENUES (Note 2): Base rental - UHS facilities $ 3,432 $ 3,433 $10,298 $10,298 Base rental - Non-related parties 1,437 1,401 4,064 3,385 Bonus rental 617 590 2,179 2,094 Interest 74 187 488 556 ------- ------- ------- ------- 5,560 5,611 17,029 16,333 ------- ------- ------- ------- EXPENSES: Depreciation & amortization 961 930 2,806 2,704 Interest expense 702 705 2,146 1,828 Advisory fees to UHS 276 271 819 772 Other operating expenses 357 390 1,020 813 ------- ------- ------- ------- 2,296 2,296 6,791 6,117 ------- ------- ------- ------- Income before equity in limited liability corporations 3,264 3,315 10,238 10,216 Equity in income of limited liability corporations 78 151 312 423 ------- ------- ------- ------- Net Income $ 3,342 $ 3,466 $10,550 $10,639 ======= ======= ======= ======= Net Income Per Share $ 0.37 $ 0.39 $ 1.18 $ 1.19 ======= ======= ======= ======= Weighted average number of shares and equivalents 8,975 8,959 8,966 8,958 ======= ======= ======= ======= </TABLE> See accompanying notes to these condensed financial statements. Page Three of Twelve Pages
4 UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Balance Sheets (amounts in thousands) <TABLE> <CAPTION> September 30, December 31, ASSETS: 1997 1996 ----------- ---------- (unaudited) <S> <C> <C> REAL ESTATE INVESTMENTS: Buildings & improvements $ 142,362 $ 138,400 Accumulated depreciation (29,317) (26,540) --------- --------- 113,045 111,860 Land 19,873 19,683 Mortgage loans receivable, net -- 6,405 Construction loan and interest receivable 3,933 398 Construction in progress 940 1,246 Reserve for investment losses (97) (151) --------- --------- Net Real Estate Investments 137,694 139,441 OTHER ASSETS: Cash 143 137 Bonus rent receivable from UHS 633 634 Rent receivable from non-related parties 105 32 Investments in limited liability corporations 9,453 7,932 Deferred charges and other assets, net 278 390 --------- --------- $ 148,306 $ 148,566 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Bank borrowings $ 42,300 $ 42,000 Note payable to UHS 1,131 1,082 Accrued interest 244 234 Accrued expenses & other liabilities 878 686 Tenant reserves, escrows, deposits and prepaid rental 524 515 Minority interest 108 67 SHAREHOLDERS' EQUITY: Preferred shares of beneficial interest, $.01 par value; 5,000,000 shares authorized; none outstanding -- -- Common shares, $.01 par value; 95,000,000 shares authorized; issued and outstanding: 1997 - 8,954,840 1996 - 8,952,340 90 90 Capital in excess of par value 128,646 128,643 Cumulative net income 108,704 98,154 Cumulative dividends (134,319) (122,905) --------- --------- Total Shareholders' Equity 103,121 103,982 --------- --------- $ 148,306 $ 148,566 ========= ========= </TABLE> See accompanying notes to these condensed financial statements. Page Four of Twelve Pages
5 UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Statements of Cash Flows (amounts in thousands, unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,550 $ 10,639 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 2,806 2,704 Amortization of interest rate cap 93 93 Provision for investment losses 120 -- Changes in assets and liabilities: Rent receivable (72) 10 Accrued expenses & other liabilities 192 88 Tenant escrows, deposits & prepaid rents 9 20 Mortgage loan interest receivable -- -- Accrued interest 10 72 Payments made for investment losses (174) (78) Deferred charges & other 9 (40) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,543 13,508 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in limited liability corporations (1,926) (6,069) Acquisition of real property (1,358) (10,195) Payments made for construction in progress (2,466) -- Advances under construction note receivable (3,535) -- Repayments under mortgage note receivable 6,457 -- Cash distributions in excess of income from LLCs 405 -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (2,423) (16,264) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional borrowings 300 14,155 Dividends paid (11,414) (11,369) -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (11,114) 2,786 -------- -------- Increase in cash 6 30 Cash, beginning of period 137 139 -------- -------- CASH, END OF PERIOD $ 143 $ 169 ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 1,994 $ 1,618 </TABLE> See accompanying notes to these condensed financial statements. Page Five of Twelve Pages
6 UNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (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, 1996. Certain prior year amounts have been reclassified to conform with current year financial statement presentation. The Financial Accounting Standards Board recently issued Statement 128, Earnings per Share, which is effective for financial statements for periods ending December 15, 1997. Adoption of Statement 128 would have had no material effect on the Trust's earnings per share for three and nine month periods ended September 30, 1997 and 1996. (2) RELATIONSHIP WITH UNIVERSAL HEALTH SERVICES, INC. Approximately 73% and 72% for the three month periods ended September 30, 1997 and 1996 and 72% and 74% for the nine month periods ended September 30, 1997 and 1996, respectively, of the Trust's revenues were earned under the terms of the leases with wholly-owned subsidiaries of Universal Health Services, Inc. ("UHS"). UHS has unconditionally guaranteed the obligations of its subsidiaries under the leases. Below is the detailed listing of the revenues received from UHS and other non-related parties for the three and nine months ended September 30, 1997 and 1996: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Base rental - UHS facilities $ 3,432,000 $ 3,433,000 $10,298,000 $10,298,000 Base rental - Non-related parties 1,437,000 1,401,000 4,064,000 3,385,000 ----------- ----------- ----------- ----------- Total base rental 4,869,000 4,834,000 14,362,000 13,683,000 ----------- ----------- ----------- ----------- Bonus rental - UHS facilities 617,000 590,000 1,950,000 1,865,000 Bonus rental-Non-related parties -- -- 229,000 229,000 ----------- ----------- ----------- ----------- Total bonus rental 617,000 590,000 2,179,000 2,094,000 ----------- ----------- ----------- ----------- Interest- Non-related parties 74,000 187,000 488,000 556,000 ----------- ----------- ----------- ----------- Total revenues $ 5,560,000 $ 5,611,000 $17,029,000 $16,333,000 =========== =========== =========== =========== </TABLE> Page Six of Twelve Pages
7 Certain of the Trust's facilities leased to subsidiaries of UHS have had earnings before interest, taxes, depreciation, amortization and lease and rental expense (EBITDAR) of less than 1.5 times the rent payable to the Trust. For the twelve months ended September 30, 1997, three of the UHS facilities did not generate sufficient EBITDAR to cover the annual rent expense payable to the Trust. The leases on these facilities, one which matures in 2000 and two which mature in 2001, generated 27% of the Trust's rental income for the twelve month period ending September 30, 1997. UHS has not advised the Trust whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates, will be renewed at the end of their initial lease terms. The Trust is also unable to predict whether any of its other leases will be renewed at the end of their initial 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. UHS owned approximately 8% percent of the Trust's outstanding shares of beneficial interest as of September 30, 1997. 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. (3) ACQUISITIONS During the third quarter of 1997, construction was completed on a substantial portion of the Cypresswood Professional Center located in Houston, Texas. Commencing in 1996, the Trust began providing construction financing to a limited partnership in which the Trust has a 77% controlling equity interest during the construction period which will increase to 98% upon final completion and occupancy of the building. As of September 30, 1997, in accordance with provisions of the agreement, the Trust funded a total of $3.7 million ($2.5 million in 1997 and $1.2 million in 1996) for construction of the facility and reclassified a total of $2.8 million into property ($2.6 million into building and improvements and $176,000 into land) during the third quarter of 1997. Construction on the remainder of the facility is expected to be completed during the fourth quarter of 1997. (4) DIVIDENDS A dividend of $.425 per share or $3,805,000 in the aggregate was declared by the Board of Trustees on September 2, 1997 and was paid on September 30, 1997 to shareholders of record as of September 15, 1997. Page Seven of Twelve 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., and that a substantial portion of the Trust's leases and mortgagors are involved in the healthcare industry which is undergoing substantial changes and is subject to pressure from government reimbursement programs and other third party payors. In August, 1997, a five year budget plan was approved which calls for $115 billion reduction in the rate of increase in Medicare spending over the next five years. Included in the proposal are reductions in the future rate of increases to payments made to hospitals. 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. In addition, certain of the Trust's facilities leased to subsidiaries of UHS have had EBITDAR of less than 1.5 times the rent payable to the Trust (see Note 2). UHS has not advised the Trust whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates, will be renewed at the end of their initial lease terms. The Trust is also unable to predict whether any of its other leases will be renewed at the end of their initial 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. RESULTS OF OPERATIONS The Trust has investments in twenty-six facilities located in twelve states. The Trust invests in healthcare and human service related facilities including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute care facilities, surgery centers, child-care centers and medical office buildings. The third quarter dividend of $.425 per share or $3,805,000 in the aggregate was paid on September 30, 1997. For the quarters ended September 30, 1997 and 1996 net income totaled $3,342,000 and $3,466,000 or $.37 and $.39 per share on net revenues of $5,560,000 and $5,611,000, respectively. For the nine months ended September 30, 1997 and 1996 net income totaled $10,550,000 and $10,639,000 or $1.18 and $1.19 per share on net revenues of $17,029,000 and $16,333,000, respectively. The $51,000 decrease in net revenue during the 1997 third quarter as compared to the comparable prior year quarter was primarily attributable to a $113,000 decrease in interest income, partially offset by a $36,000 increase in base rental from non-related parties and a $27,000 increase in bonus rental from UHS facilities. The decrease in the interest income was due to the repayment of a $6.5 million mortgage loan receivable which was repaid in full to the Trust in June, 1997. The $696,000 increase in net revenue for the nine months ended September 30, 1997 over the comparable prior year period was due primarily to a $679,000 increase in base rentals from non-related parties due to the acquisitions of four preschool and child-care centers and a multi-tenant medical office building acquired during the second quarter of 1996. Page Eight of Twelve Pages
9 Interest expense increased $318,000 or 17% for the nine months ended September 30, 1997 as compared to the comparable prior year period due to the increased borrowings used to finance the new investments during 1996 and 1997. Depreciation and amortization expense increased $31,000 or 3% for the three months ended September 30, 1997 and $102,000 or 4% for the nine months ended September 30, 1997 over the comparable prior year periods due primarily to the depreciation expense related to the additional property acquired by the Trust during 1996 and 1997. Other operating expenses decreased $33,000 or 8% during the third quarter of 1997 and increased $207,000 or 25% during the 1997 nine month period as compared to the comparable prior year periods due primarily to the expenses related to the medical office buildings acquired by the Trust during the second quarter of 1996. The expenses relating to the medical office buildings, which totaled $196,000 and $245,000 for the three month periods ended September 30, 1997 and 1996 and $569,000 and $418,000 for the nine month periods ended September 30, 1997 and 1996, respectively, are passed on directly to the tenants of these buildings and are included as revenue in the Trust's statements of income. Also included in other operating expenses was an increase in the reserve established for future expenses related to Lake Shore Hospital amounting to $40,000 for each of the three month periods ended September 30, 1997 and 1996 and $120,000 and $80,000 for the nine month periods ended September 30, 1997 and 1996, respectively. Included in the Trust's financial results was $78,000 and $151,000 for the three months ended September 30, 1997 and 1996 and $312,000 and $423,000 for the nine months ended September 30, 1997 and 1996, respectively, of income generated from the Trust's ownership in limited liability corporations which own medical office buildings in Arizona and Kentucky. Funds from operations ("FFO"), which is the sum of net income plus depreciation expenses related to consolidated investments and unconsolidated affiliates, and amortization of interest rate cap expense totaled $4.6 million and $4.5 million for the three months ended September 30, 1997 and 1996 and $14.1 million and $13.6 million for the nine months ended September 30, 1997 and 1996, 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 Net cash provided by operating activities was $13.5 million in each of the nine month periods ended September 30, 1997 and 1996. During the first nine months of 1997, the $13.5 million of cash generated from operating activities and the $6.5 million of cash received for the repayment under a mortgage note receivable was primarily used to: (i) pay dividends ($11.4 million); (ii) finance construction on two new medical office buildings which will be owned by limited liability corporations and limited partnerships in which the Trust will own an equity interest ($6.0 million); (iii) purchase a 75% equity interest in a limited liability corporation ($1.9 million), and; (iv) acquire additional properties ($1.4 million). Page Nine of Twelve Pages
10 As of September 30, 1997 the Trust had approximately $25 million of unused borrowing capacity under the terms of its $70 million revolving credit agreement. This agreement matures on September 30, 2001 at which time all amounts then outstanding are required to be repaid. Page Ten of Twelve Pages
11 PART II. OTHER INFORMATION UNIVERSAL HEALTH REALTY INCOME TRUST ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Universal Health Realty Income Trust 1997 Incentive Plan 27. Financial Data Schedule (b) Reports on Form 8-K All other items of this report are inapplicable. Page Eleven of Twelve Pages
12 UNIVERSAL HEALTH REALTY INCOME TRUST Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 11, 1997 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 Twelve of Twelve Pages