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 March 31, 1998 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 April 30, 1998 - 8,954,840 Page One of Twelve Pages
2 UNIVERSAL HEALTH REALTY INCOME TRUST I N D E X <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PAGE NO. <S> <C> Item 1. Financial Statements Condensed Statements of Income Three Months Ended -- March 31, 1998 and 1997............................. Three Condensed Balance Sheets -- March 31, 1998 and December 31, 1997..................................................... Four Condensed Statements of Cash Flows Three Months Ended March 31, 1998 and 1997................................ Five Notes to Condensed Financial Statements........................................ Six & Seven Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... Eight & Nine PART II. OTHER INFORMATION AND SIGNATURE ..................................... Ten </TABLE> Page Two of Twelve Pages
3 PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH REALTY INCOME TRUST STATEMENTS OF INCOME (amounts in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------- 1998 1997 ------ ------ <S> <C> <C> Revenues (Note 2): Base rental - UHS facilities $3,433 $3,433 Base rental - Non-related parties 1,576 1,290 Bonus rental 846 774 Interest 2 203 ------ ------ 5,857 5,700 ------ ------ EXPENSES: Depreciation & amortization 967 925 Interest expense 743 726 Advisory fees to UHS 273 269 Other operating expenses 453 334 ------ ------ 2,436 2,254 ------ ------ Income before equity in limited liability companies 3,421 3,446 Equity in income of limited liability companies 148 212 ------ ------ NET INCOME $3,569 $3,658 ====== ====== NET INCOME PER SHARE - BASIC $ 0.40 $ 0.41 ====== ====== NET INCOME PER SHARE - DILUTED $ 0.40 $ 0.41 ====== ====== Weighted average number of shares outstanding - basic 8,952 8,952 Weighted average number of share equivalents 24 11 ------ ------ Weighted average number of shares and equivalents outstanding - diluted 8,976 8,963 ====== ====== </TABLE> The accompanying notes are an integral part of these financial statements. Page Three of Eleven Pages
4 UNIVERSAL HEALTH REALTY INCOME TRUST Consolidated Balance Sheets (amounts in thousands) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, ASSETS: 1998 1997 --------------- ---------------- (unaudited) <S> <C> <C> REAL ESTATE INVESTMENTS: Buildings & improvements $ 143,742 $ 143,600 Accumulated depreciation (31,242) (30,280) --------- --------- 112,500 113,320 Land 20,255 20,255 Reserve for investment losses (106) (89) --------- --------- Net Real Estate Investments 132,649 133,486 OTHER ASSETS: Cash 494 1,238 Bonus rent receivable from UHS 728 653 Rent receivable from non-related parties 152 80 Investments in limited liability companies 23,697 11,075 Deferred charges and other assets, net 185 223 --------- --------- $ 157,905 $ 146,755 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Bank borrowings $ 52,500 $ 41,200 Note payable to UHS 1,164 1,147 Accrued interest 195 217 Accrued expenses & other liabilities 1,133 1,130 Tenant reserves, escrows, deposits and prepaid rental 442 268 Minority interest 101 101 COMMITMENTS AND CONTINGENCIES 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: 1998 - 8,954,840 1997 - 8,954,840 90 90 Capital in excess of par value 128,653 128,650 Cumulative net income 115,690 112,121 Cumulative dividends (142,063) (138,169) --------- --------- Total Shareholders' Equity 102,370 102,692 ---------- --------- $ 157,905 $ 146,755 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. Page Four of Twelve Pages
5 UNIVERSAL HEALTH REALTY INCOME TRUST Condensed Statements of Cash Flows (amounts in thousands, unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------------- 1998 1997 ---------- ---------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,569 $ 3,658 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 967 925 Amortization of interest rate cap 31 31 Provision for investment losses 75 40 Changes in assets and liabilities: Rent receivable (147) (133) Accrued expenses & other liabilities 3 56 Tenant escrows, deposits & deferred rents 174 11 Mortgage loan interest receivable -- (61) Accrued interest (22) 186 Deferred charges & other (38) (34) -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,612 4,679 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in limited liability companies (12,842) -- Acquisition of real property (142) (7) Cash distribution in excess of income from LLCs 222 -- Payments made for Construction in progress -- (561) Advances under construction note receivable -- (344) Repayments under mortgage note receivable -- 86 -------- ------- NET CASH USED IN INVESTING ACTIVITIES (12,762) (826) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional borrowings 11,300 -- Repayments of long-term debt -- (100) Dividends paid (3,894) (3,806) -------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,406 (3,906) -------- ------- Decrease in cash (744) (53) Cash, beginning of period 1,238 137 -------- ------- CASH, END OF PERIOD $ 494 $ 84 ======== ======= </TABLE> <TABLE> <S> <C> <C> - -------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid $ 717 $ 493 - -------------------------------------------------------------------------------------------- </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 MARCH 31, 1998 (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, 1997. In February 1997, the Financial Accounts Standards Board issued Statement No. 128, "Earnings per Share" (SFAS 128). SFAS 128 establishes standards for computing and presenting earnings per share (EPS). 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 outstanding during the year adjusted to give effect to common stock equivalents. The per share amounts for the three months ended March 31, 1997 have been restated to conform to SFAS 128. (2) RELATIONSHIP WITH UNIVERSAL HEALTH SERVICES, INC. During the first three months of 1998 and 1997, approximately 71% and 72%, 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 months ended March 31, 1998 and 1997: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Base rental - UHS facilities $3,433,000 $3,433,000 Base rental - Non-related parties 1,576,000 1,290,000 ---------- ---------- Total base rental 5,009,000 4,723,000 ---------- ---------- Bonus rental - UHS facilities 734,000 662,000 Bonus rental - Non-related parties 112,000 112,000 ---------- ---------- Total bonus rental 846,000 774,000 ---------- ---------- Interest - Non-related parties 2,000 203,000 ---------- ---------- Total revenues $5,857,000 $5,700,000 ========== ========== </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 March 31, 1998, two of the UHS facilities did not generate sufficient EBITDAR to cover the annual rent expense payable to the Trust. The leases on these facilities, which mature in 2001, generated 22% of the Trust's rental income for the twelve months ended March 31, 1998. One additional UHS facility had EBITDAR for the twelve month period ended March 31, 1998 which was less than 1.5 times the annual rent payable to the Trust. The lease on this facility, which matures in 2000, generated 5% of the Trust's rental income for the twelve month period ended March 31, 1998. Management of the Trust cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates, or any of the Trust's other leases, will be renewed at the end of their initial lease terms. Representatives of UHS and the Trustees who are unaffiliated with UHS have commenced informal discussions regarding the terms under which UHS would be willing to extend the leases on those facilities with terms expiring in 1999 through 2003, some of which have had EBITDAR of less than 1.0 times the rent payable to the Trust. There is no assurance that an agreement will be reached or, if an agreement is reached, what terms will be agreed upon. 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 March 31, 1998. 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. The Trust's officers and directors have received options to purchase shares of beneficial interest and associated dividend equivalent rights pursuant to the terms of a new plan which has been unanimously approved by the Trust's Board of Trustees and is contingent upon shareholder approval. (3) DIVIDENDS A dividend of $.435 per share or $3.9 million in the aggregate was declared by the Board of Trustees on March 5, 1998 and was paid on March 31, 1998 to shareholders of record as of March 16, 1998. (4) ACQUISITIONS During the first quarter of 1998 the Trust paid $9 million to acquire a 99% interest in a limited liability company that owns the Desert Springs Medical Plaza located in Las Vegas, Nevada. The medical office building which is located on the campus of Desert Springs Hospital is master leased by the limited liability company which owns the hospital and is guaranteed by Quorum Health Group, Inc. Also during the quarter, the Trust paid $3.8 million for a 95% equity interest in a limited liability company that owns the Edwards Medical Plaza which is located in Phoenix, Arizona. This multi-tenant medical office building is located on the campus of the Good Samaritan Regional Medical Center. Page Seven of Twelve Pages
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Trust has investments in twenty-eight facilities located in thirteen 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 first quarter dividend of $.435 per share or $3.9 million in the aggregate was paid on March 31, 1998. For the quarters ended March 31, 1998 and 1997, net income totaled $3.6 million and $3.7 million or $.40 and $.41 per share (basic & diluted), respectively. Net revenues for the three month periods ended March 31, 1998 and 1997 were $5.9 million and $5.7 million, respectively. The $200,000 increase in net revenues during the 1998 first quarter as compared to the 1997 quarter was due primarily to an increase in base rentals from non-related parties due to the completion and occupancy during the third quarter of 1997 of the Cypresswood Professional Center, located in Houston, Texas in which the Trust has a 77% controlling equity interest. Interest expense increased slightly in the first quarter of 1998 as compared to 1997 and depreciation and amortization expense increased $42,000 or 5% due primarily to the opening of the newly constructed Cypresswood Professional Center during the third quarter of 1997. Other operating expenses increased $119,000 to $453,000 for the three months ended March 31, 1998 as compared to $334,000 for the three months ended March 31, 1997. Included in the Trust's other operating expenses were the expenses related to the medical office buildings in which the Trust has a controlling ownership interest which totaled $231,000 for the three months ended March 31, 1998 and $188,000 for the three months ended March 31, 1997. The $43,000 increase was due primarily to the operating expenses on the Cypresswood Professional Center which was completed and opened during the third quarter of 1997. The majority of the expenses associated with the medical office buildings are passed on directly to the tenants and are included as revenues in the Trust's statements of income. Also included in the Trust's other operating expenses were the expenses related to the maintenance of Lake Shore Hospital which amounted to $75,000 and $140,000 for the three month periods ended March 31, 1998 and 1997, respectively. Included in the Trust's financial results for the three months ended March 31, 1998 and 1997 was $148,000 and $212,000 of income generated from the Trust's ownership in limited liability companies which own medical office buildings in Arizona and Kentucky. 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 $4.8 million for the three months ended March 31, 1998 and $4.7 million for the three months ended March 31, 1997. FFO does not represent cash flows from operations as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Trust's operating performance or to cash flows as a measure of liquidity. Page Eight of Twelve Pages
9 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $4.6 million for the three months ended March 31, 1998 and $4.7 million for the three months ended March 31, 1997. During the first three months of 1998, the $4.6 million of cash generated from operating activities and the $11.3 million of additional borrowings were used primarily to: (i) purchase a 99% interest in a limited liability company that owns the Desert Springs Medical Plaza located in Las Vegas, Nevada ($9.0 million); (ii) purchase a 95% equity interest in a limited liability company that owns the Edwards Medical Plaza in Phoenix, Arizona ($3.8 million), and; (iii) pay dividends ($3.9 million). As of March 31, 1998 the Trust had approximately $14 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. GENERAL The matters discussed in this report, as well as the news releases issued from time to time by the Trust, include certain statements containing the words "believes", "anticipates", "intends", "expects", and words of similar import, which constitute "forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance achievements of the Trust 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 fact that a substantial portion of the Trust's revenues are dependent on one operator, Universal Health Services, Inc., ("UHS") and that a substantial portion of the Trust's leases 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 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. 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. 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. Page Nine of Twelve Pages
10 Management of the Trust cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates, or any of the Trust's other leases, will be renewed at the end of their initial lease terms. Representatives of UHS and the Trustees who are unaffiliated with UHS have commenced informal discussions regarding the terms under which UHS would be willing to extend the leases on those facilities with terms expiring in 1999 through 2003, some of which have had EBITDAR of less than 1.0 times the rent payable to the Trust (see Note 2). There is no assurance that an agreement will be reached or, if an agreement is reached, what terms will be agreed upon. 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. Management of the Trust recognizes the need to evaluate the impact on its operations of the change to calendar year 2000 and does not expect the total cost of required building related modifications to have a material impact on its results of operations. For the three month periods ended March 31, 1998 and 1997, approximately 71% and 72%, respectively, of the Trust's revenues were earned under the terms of the leases with wholly-owned subsidiaries of UHS. In 1997, UHS began establishing processes for evaluating and managing the risks and costs associated with this problem. These processes include arrangements with UHS's major outsourcing vendor to modify its computer system programming to allow for year 2000 processing capability. Such modifications are expected to be completed by the end of 1998. UHS also expects that certain medical and related equipment that cannot be made year 2000 compliant will need to be replaced, but does not expect the cost of such replacement to be material. Management of the Trust cannot estimate the magnitude of calendar year 2000 related issues on the operations of its non-related tenants and no estimates can be given on the potential adverse impact on the Trust's results of operations resulting from failure of its non-related tenants to adequately prepare for the year 2000. 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 Bylaws of Universal Health Realty Income Trust as amended. 27. Financial Data Schedule (b) Reports on Form 8-K All other items of this report are inapplicable. Page Eleven of Twelve Pages
12 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: May 13, 1998 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