Universal Health Realty Income Trust Annual Report 1999

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 registeredShares of beneficial interest, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark whether the registrant (1) has filed all reports to befiled by Section 13 or 15(d) of the Securities and Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes [x] No [ ]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 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 January31, 2000: 8,991,563. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive proxy statement for its 2000 AnnualMeeting of Shareholders, which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 1999 (incorporated by referenceunder Part III). 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: Facility Name Location Type of Facility Guarantor---------------------------------------------------------------------------------------------------------------------------------- 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 CorporationFresno 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 ---(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(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. 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 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 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 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 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 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. 7Item 2. PropertiesThe following table shows the Trust's investments in hospital facilities leasedto Universal Health Services, Inc. and other non-related parties. The table onthe next page provides information related to various properties in which theTrust has significant investments, some of which are accounted for by the equitymethod. The capacity in terms of beds (for the hospital facilities) and thefive-year occupancy levels are based on information provided by the lessees. Lease Term ----------------------------- Number of End of available Average Occupancy (1) initial RenewalHospital Facility Type of beds @ ---------------------------------------- Minimum or renewed term Name and Location facility 12/31/99 1999 1998 1997 1996 1995 rent term (years)------------------------------------------------------------------------------------------------------------------------------------ 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, TexasTri-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) 8Item 2. Properties (continued) Lease Term ------------------------------------- End of Average Occupancy (1) initial RenewalHospital 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 BuildingKelsey-Seybold Clinic at King's Crossing 100% 100% 100% 100% 100% 264,000 2005 10Professional 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 BuildingThe Cypresswood Professional Medical Center Spring, Texas (9) Office Building 100% 100% 96% - - 545,000 2002 -2007 variousDesert Springs Medical Plaza Medical 99% 100% - - - 1,655,000 2000-2006 various Las Vegas, Nevada (10) Office BuildingOrthopaedic Specialists of Nevada Las Vegas, Medical 100% - - - - 183,000 Bldg. 2009 20 Nevada (11) Office Building 20,000 Ground 2049 non-renewableSheffield Medical Office Building Medical 90% - - - - 1,371,000 2000-2012 various Atlanta, Georgia (12) Office BuildingThe Southern Crescent Center II Medical N/A - - - - 415,000 2010 10 Atlanta, Georgia (13) Office Building 9 (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 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 (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 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: 1999 1998 ------------------------------------ --------------------------------------- High Price Low Price High Price Low Price ----------------- ------------------ -------------------- ------------------ 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 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: 1999 1998 1997 1996 1995 --------- --------- --------- -------- -------- 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 ========= ========= ========= ======== ======== 13 Item 6. SELECTED FINANCIAL DATA Financial highlights for the Trust for the five years ended December 31, 1999 were as follows: (000s except per share amounts) ----------------------------------------------------------------------------------------- 1999 (1) 1998 (1) 1997 (1) 1996 1995 ----------------------------------------------------------------------------------------------------------------------- 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 (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: (000s) ------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------- 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 ======= ======= ======= ======= ======= ----------------------------------------------------------------------------------------------- At End of Period 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------- Total Assets $178,821 $169,406 $146,755 $148,566 $132,770 Debt $ 76,889 $ 66,016 $ 42,347 $ 43,082 $ 26,396 14 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 $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 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 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 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 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 Maturity Date, Fiscal Year Ending December 31 --------------------------------------------- There- (Dollars in thousands) 2000 2001 2002 2003 2004 after Total ---- ---- ---- ---- ---- ----- ----- 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 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 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 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 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 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 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 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 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PageReport of Independent Public Accountants F-2Consolidated Balance Sheets - December 31, 1999 and December 31, 1998 F-3Consolidated Statements of Income - Years Ended December 31, 1999,1998 and 1997 F-4Consolidated Statements of Shareholders' Equity - Years EndedDecember 31, 1999, 1998 and 1997 F-5Consolidated Statements of Cash Flows - Years Ended December 31,1999, 1998 and 1997 F-6Notes to the Consolidated Financial Statements - December 31, 1999 F-7Schedule II - Valuation and Qualifying Accounts -Years Ended December 31, 1999, 1998 and 1997 F-20Schedule III - Real Estate and Accumulated Depreciation -December 31, 1999 F-21Notes to Schedule III - December 31, 1999 F-22 F-1 Report of Independent Public AccountantsTo The Shareholders and Board of Trustees ofUniversal Health Realty Income Trust:We have audited the accompanying consolidated balance sheets of Universal HealthRealty Income Trust and Subsidiaries (a Maryland real estate investment trust)as of December 31, 1999 and 1998 and the related consolidated statements ofincome, shareholders' equity and cash flows for each of the three years in theperiod ended December 31, 1999. These consolidated financial statements and theschedules referred to below are the responsibility of the Trust's management.Our responsibility is to express an opinion on these consolidated financialstatements and schedules based on our audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofUniversal Health Realty Income Trust and Subsidiaries, as of December 31, 1999and 1998 and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended December 31, 1999, in conformitywith generally accepted accounting principles in the United States.Our audits were made for the purpose of forming an opinion on the basicconsolidated financial statements taken as a whole. The schedules listed in theIndex to Financial Statements and Schedules on Page F-1 are presented for thepurpose of complying with the Securities and Exchange Commission's rules and arenot a required part of the basic consolidated financial statements. Theseschedules have been subjected to the auditing procedures applied in our audit ofthe basic consolidated financial statements and, in our opinion, fairly state inall material respects the financial data required to be set forth therein inrelation to the basic consolidated financial statements taken as a whole.Philadelphia, Pennsylvania Arthur Andersen LLP January 19, 2000 F-2 Universal Health Realty Income Trust Consolidated Balance Sheets (amounts in thousands) December 31, December 31,Assets: 1999 1998 --------- --------- 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 38,165Other 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 87Shareholders' 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 ========= =========The accompanying notes are an integral part of these financial statements. F-3 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): 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 8,952Weighted average number of share equivalents 21 22 15 ------- ------- -------Weighted average number of shares and equivalents outstanding - Diluted 8,977 8,974 8,967 ======= ======= =======The accompanying notes are an integral part of these financial statements. F-4 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 -------------------------------------------------------------------------------------- January 1, 1997 8,952 $90 $128,643 $98,154 ($122,905)Net Income -- -- -- 13,967 --Issuance of shares ofbeneficial 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 ofbeneficial 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 ofbeneficial interest 35 -- 570 -- --Dividends ($1.810/share) -- -- -- -- (16,215)------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 8,991 $90 $129,255 $140,430 ($170,100)==============================================================================================================================The accompanying notes are an integral part of these financial statements. F-5 Universal Health Realty Income Trust Consolidated Statements of Cash Flows (amounts in thousands) Year ended December 31, ------------------------------------ 1999 1998 1997 -------- -------- --------Cash flows from operating activities: 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 ======== ======== ========The accompanying notes are an integral part of these financial statements. F-6 Universal Health Realty Income Trust Notes to the Consolidated Financial Statements December 31, 1999(1) Summary of Significant Accounting PoliciesNature of OperationsUniversal Health Realty Income Trust and Subsidiaries (the "Trust") is organizedas a Maryland real estate investment trust. As of December 31, 1999 the Trusthad investments in thirty-six facilities located in thirteen states consistingof investments in healthcare and human service related facilities includingacute care hospitals, behavioral healthcare facilities, rehabilitationhospitals, sub-acute care facilities, surgery centers, childcare centers andmedical office buildings. Seven of the Trust's hospital facilities and twomedical office buildings are leased to subsidiaries of Universal HealthServices, Inc., ("UHS").Federal Income TaxesNo provision has been made for federal income tax purposes since the Trustqualifies as a real estate investment trust under Sections 856 to 860 of theInternal 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 investmenttaxable 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 ordinaryincome plus 95% of any capital gain income for the calendar year over cashdistributions during the calendar year, as defined. No provision for excise taxhas been reflected in the financial statements as no tax was due.Earnings and profits, which will determine the taxability of dividends toshareholders, will differ from net income reported for financial reportingpurposes due to the differences for federal tax purposes in the cost basis ofassets and in the estimated useful lives used to compute depreciation and therecording of provision for investment losses.Real Estate PropertiesThe Trust records acquired real estate at cost and uses the straight-line methodof depreciation for buildings and improvements over estimated useful lives of 25to 45 years.It is the Trust's policy to review the carrying value of long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. Measurement of theimpairment loss is based on the fair value of the asset. Generally, fair valuewill be determined using valuation techniques such as the present value ofexpected future cash flows.The Trust invests primarily in healthcare-related facilities and, therefore, issubject to certain industry risk factors, which directly impact the operatingresults of its lessees. In recent years, an increasing number of legislativeinitiatives have been introduced or proposed in Congress and in statelegislatures that would effect major changes in the healthcare system, eithernationally or at the state level. In addition, the healthcare industry has beencharacterized in recent years by increased competition and consolidation. F-7In assessing the carrying value of the Trust's real estate investments forpossible impairment, management reviews estimates of future cash flows expectedfrom each of its facilities and evaluates the creditworthiness of its lesseesbased on their current operating performance and on current industry conditions.During 1999, the operating performance declined significantly at one of theTrust's behavioral health services facilities operated by, and leased to, awholly-owned subsidiary of UHS. Changes in CHAMPUS utilization and theincreasing influence of managed care have led to shorter lengths of stay forpatients at this facility which is operated as an adolescent residentialtreatment center. During the twelve months ended December 31, 1999 patient daysand average length of stay at this facility decreased 7% and 20%, respectively,as compared to the comparable prior year period. In the twelve month periodended December 31, 1999, this facility had earnings before interest, taxes,depreciation, amortization and base rental expense (EBITDAR) of 0.8 times theannual rent payable to the Trust. The lease on this facility expires inDecember, 2000 and represented 5% of the Trust's rental revenue for the twelvemonth period ended December 31, 1999. Although management of the Trust isactively negotiating the sale/lease of the property with UHS as well asnon-related parties, management of the Trust has concluded that, based on ananalysis of future cash flows, there has been a permanent impairment in thecarrying value of this facility. As a result, the Trust recorded a $2.6 millionprovision for investment loss during 1999.Also during 1999, the Trust sold the real estate assets of Lakeshore Hospitalfor net proceeds of $998,000. Since the book value of this facility was reducedto zero in a prior year, this amount was recorded as a gain and netted againstthe provision for investment loss during 1999.Management of the Trust is unable to predict the effect, if any, that theindustry factors discussed above will have on the operating results of itslessees or on their ability to meet their obligations under the terms of theirleases with the Trust. In addition, management of the Trust cannot predictwhether any of the leases will be renewed on their current terms or at all. As aresult, management's estimate of future cash flows from its leased propertiescould be materially affected in the near term, if certain of the leases are notrenewed at the end of their lease terms.Investments in Limited Liability CompaniesThe consolidated financial statements of the Trust include the accounts of itscontrolled investments. In accordance with the American Institute of CertifiedPublic Accountants' Statement of Position 78-9 "Accounting for Investments inReal Estate Ventures" and Emerging Issues Task Force Issue 96-16, "Investor'sAccounting for an Investee When the Investor Has a Majority of the VotingInterest but the Minority Shareholder or Shareholders Have Certain Approval orVeto Rights", the Trust accounts for its investment in limited liabilitycompanies which it does not control using the equity method of accounting. Theseinvestments, which represent 33% to 99% non-controlling ownership interests, arerecorded initially at the Trust's cost and subsequently adjusted for the Trust'snet equity in income and cash contributions and distributions.Earnings Per ShareBasic earnings per share are based on the weighted average number of commonshares outstanding during the year. Diluted earnings per share are based on theweighted average number of common shares during the year adjusted to give effectto common stock equivalents. F-8Stock-Based CompensationStatement of Financial Accounting Standards ("SFAS") No. 123, "Accounting forStock-Based Compensation" encourages a fair value based method of accounting foremployee stock options and similar equity instruments, which generally wouldresult in the recording of additional compensation expense in the Trust'sfinancial statements. The Statement also allows the Trust to continue to accountfor stock-based employee compensation using the intrinsic value-based method ofaccounting as prescribed by Accounting Principals Board ("APB") Opinion No. 25,"Accounting for Stock Issued to Employees." The Trust has adopted thedisclosure-only provisions of SFAS No. 123. Accordingly, no compensation costhas been recognized for the stock option plans in the accompanying financialstatements.Statements of Cash FlowsFor purposes of the Consolidated Statements of Cash Flows, the Trust considersall highly liquid investment instruments with original maturities of threemonths or less to be cash equivalents.Interest Rate Protection AgreementsIn managing interest rate exposure, the Trust at times enters into interest rateswap agreements and interest rate cap agreements. When interest rates change,the differential to be paid or received under the Trust's interest rate swapagreements is accrued as interest expense. Premiums paid for purchased interestrate cap agreements are amortized to interest expense over the terms of thecaps. Unamortized premiums are included in deferred charges in the accompanyingbalance sheet. Amounts receivable under the cap agreements are accrued as areduction of interest expense.Fair Value of Financial InstrumentsThe fair value of the Trust's interest rate swap agreements and investments arebased on quoted market prices. The carrying amounts reported in the balancesheet for cash, accrued liabilities, and short-term borrowings approximate theirfair values due to the short-term nature of these instruments. Accordingly,these items have been excluded from the fair value disclosures includedelsewhere in these notes to consolidated financial statements.Comprehensive IncomeNet income as reported by the Trust reflects total comprehensive income for theyears ended December 31, 1999, 1998 and 1997.Use of EstimatesThe preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates. F-9Accounting Pronouncement Not Yet AdoptedIn June 1999, the FASB issued SFAS No. 137, "Accounting for DerivativeInstruments and Hedging Activities - Deferral of the Effective Date of SFAS No.133", which deferred the effective date of SFAS No. 133 for one year. TheStatement establishes accounting and reporting standards requiring that everyderivative instrument (including certain derivative instruments embedded inother contracts) be recorded in the balance sheet as either an asset orliability measured at its fair value. The Statement requires that changes in thederivative's fair value be recognized currently in earnings unless specifichedge accounting criteria are met. Special accounting for qualifying hedgesallows a derivative's gains and losses to offset related results on the hedgeditem in the income statement, and requires that a company must formallydocument, designate, and assess the effectiveness of transactions that receivehedge accounting.The Trust will be required to adopt SFAS No. 133 effective as of January 1, 2001and has not yet quantified the impact of adopting this statement on itsfinancial statements. Further, the Trust has not determined the method ofadoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility inearnings and other comprehensive income.ReclassificationsCertain prior year amounts have been reclassified to conform with current yearfinancial statement presentation.(2) Related Party TransactionsUHS of Delaware, Inc. (the "Advisor"), a wholly-owned subsidiary of UHS, servesas Advisor to the Trust under an Advisory Agreement dated December 24, 1986between the Advisor and the Trust (the "Advisory Agreement"). Under the AdvisoryAgreement, the Advisor is obligated to present an investment program to theTrust, to use its best efforts to obtain investments suitable for such program(although it is not obligated to present any particular investment opportunityto the Trust), to provide administrative services to the Trust and to conductthe Trust's day-to-day affairs. In performing its services under the AdvisoryAgreement, the Advisor may utilize independent professional services, includingaccounting, legal and other services, for which the Advisor is reimburseddirectly by the Trust. The Advisory Agreement expires on December 31st of eachyear; however, it is renewable by the Trust, subject to a determination by theIndependent Trustees that the Advisor's performance has been satisfactory. TheAdvisory Agreement may be terminated for any reason upon sixty days writtennotice by the Trust or the Advisor. The Advisory Agreement has been renewed for2000. All transactions with UHS must be approved by the Independent Trustees.The Advisory Agreement provides that the Advisor is entitled to receive anannual advisory fee equal to .60% of the average invested real estate assets ofthe Trust, as derived from its consolidated balance sheet from time to time. Inaddition, the Advisor is entitled to an annual incentive fee equal to 20% of theamount by which cash available for distribution to shareholders, as defined inthe Advisory Agreement, for each year exceeds 15% of the Trust's equity as shownon its balance sheet, determined in accordance with generally acceptedaccounting principles without reduction for return of capital dividends. Noincentive fees were paid during 1999, 1998 and 1997. The advisory fee is payablequarterly, subject to adjustment at year end based upon audited financialstatements of the Trust. F-10For 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 leaseswith wholly-owned subsidiaries of UHS. Including 100% of the revenues generatedat the unconsolidated LLCs in which the Trust has various non-controlling equityinterests 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 unconsolidatedrevenues. The leases to subsidiaries of UHS are guaranteed by UHS andcross-defaulted with one another.During the third quarter of 1998, wholly-owned subsidiaries of UHS exercisedfive-year renewal options on four hospitals owned by the Trust which werescheduled 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 asthe initial leases. As part of the renewal agreement, the Trust also agreed togrant additional fixed rate renewal options to a wholly-owned subsidiary of UHScommencing in 2022 on the real property of McAllen Medical Center. Management ofthe Trust can not predict whether the leases with subsidiaries of UHS, whichhave renewal options at existing lease rates, or any of the Trust's otherleases, will be renewed at the end of their initial term or first five-yearrenewal term.In recent years, an increasing number of legislative initiatives have beenintroduced or proposed in Congress and in state legislatures that would effectmajor changes in the healthcare system, either nationally or at the state level.In addition, the healthcare industry had been characterized in recent years byincreased competition and consolidation. Management of the Trust is unable topredict the effect, if any, these industry factors will have on the operatingresults of its lessees, including the facilities leased to subsidiaries of UHS,or on their ability to meet their obligations under the terms of their leaseswith 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 $13,731Base 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 2,615Bonus 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 ofbeneficial interest were held by UHS. The Trust has granted UHS the option topurchase Trust shares in the future at fair market value to enable UHS tomaintain a 5% interest in the Trust.During December of 1993, UHS, the former lessee and operator of BelmontCommunity Hospital, sold the operations of the facility to THC-Chicago, Inc., anindirect wholly-owned subsidiary of Community Psychiatric Centers ("CPC").Concurrently, the Trust purchased certain related real F-11property from UHS for $1 million in cash and a note payable with a carryingvalue of $1.3 million (including accrued interest) at December 31, 1999. Thenote payable has a face value of $1 million and is due on December 31, 2001. Theamount of interest payable on this note is contingent upon the financialperformance of this leased facility and its estimated fair value at the end ofthe initial lease term. The Trust has estimated the total amount payable underthe terms of this note and has discounted the payments to their net presentvalue using a 6% rate.During 1999, the Trust paid $5.0 million to acquire a 98% interest in a limitedliability company that owns the Summerlin Hospital Medical Office Building,which was constructed in 1997 and is connected to the Summerlin Hospital MedicalCenter in Las Vegas, Nevada. Summerlin Hospital Medical Center is owned by alimited liability company in which UHS holds a 72% ownership interest. SummerlinHospital Medical Office Building was owned by this same limited liabilitycompany prior to the sale to the limited liability company in which the Trustholds a 98% ownership interest.Also during 1999, the Trust acquired the Orthopaedic Specialists of NevadaBuilding in Las Vegas, Nevada for $1.6 million. The ground lease on this medicaloffice building is based upon an agreement between Valley Health Systems, LLC (aUHS subsidiary) and the Trust.The Trust's officers are all employees of UHS and as of December 31, 1999, theTrust 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 Dispositions2000 - Subsequent to the year ended December 31, 1999, the Trust invested $6.4million, including a $4.5 million non-recourse mortgage, in a medical officebuilding in Danbury, Connecticut. Additionally, during the first quarter of2000, UHT purchased a 95% equity interest for $1.8 million in a LLC that ownsand operates the Skypark Professional Medical Building on the campus of theTorrance Memorial Medical Center in Torrance, California.1999 - During 1999, the Trust added five new investments to its portfolioconsisting of the following: (i) the purchase of a 95% equity interest in alimited liability company ("LLC") that owns the Santa Fe Professional Plazalocated in Scottsdale, Arizona ($1.2 million); (ii) the purchase of a 98% equityinterest in a LLC that owns the Summerlin Hospital Medical Office Buildinglocated in Las Vegas, Nevada ($5.0 million); (iii) the purchase of a 75% equityinterest 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 OrthopaedicSpecialists of Nevada Building, and; (v) a multi-tenant medical office buildinglocated in Atlanta, Georgia ($11.5 million).1998 - During 1998, the Trust added five new investments to its portfolioconsisting 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 ($10.1million); (ii) the purchase of a 95% equity interest in a LLC that owns theEdwards Medical Plaza located in Phoenix, Arizona ($3.8 million); (iii) thepurchase of a 95% equity interest in a LLC that owns the Pacifica Palms MedicalPlaza 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 locatedin Fullerton, California ($1.4 million), and; (v) the purchase of an 80% equityinterest in a LLC that owns the Rio Rancho Medical Center, a medical F-12office building located in Rio Rancho, New Mexico ($900,000). In connection withthe purchase of equity interest in LLCs that own the Pacifica Palms MedicalPlaza, 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 threeseparate LLCs. The loans, which earned interest at a combined average annualrate of 9% during 1998, were fully repaid to the Trust during 1999.1997 - During 1997, the Trust added new investments to its portfolio consistingof the following: (i) the purchase of a capital addition to one of its medicaloffice buildings and two additional properties located in Louisiana and Georgia($1.4 million); (ii) the purchase of a 75% equity interest in a LLC thatpurchased the Thunderbird Paseo Medical Plaza ($1.9 million); (iii) thecompletion of construction of The Cypresswood Professional Center, located inHouston, Texas in which the Trust has a 77% controlling equity interest ($4.4million including $1.2 million of construction in progress capitalized during1996), and; (iv) the completion of construction of Samaritan West Valley MedicalCenter located in Goodyear, Arizona in which the Trust owns a 89% equityinterest in a LLC which owns the real estate assets of the facility ($1.8million).(4) LeasesAll of the Trust's leases are classified as operating leases with initial termsranging from 5 to 15 years with up to six five-year renewal options. Under theterms of the leases, the Trust earns fixed monthly base rents and may earnperiodic additional rents (see Note 2). The additional rent payments aregenerally computed as a percentage of the facility's net patient revenue or CPIincrease in excess of a base amount. The base year amount is typically netpatient revenue for the first full year of the lease. The Trust records theseadditional rents on a pro rata basis over the annual lease period if theachievement 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 alloperating costs of the properties including property insurance and real estatetaxes. Tenants of the medical office buildings generally are required to paytheir pro-rata share of the property's operating costs above a stipulatedamount. F-13(5) DebtDuring 1999, the Trust amended its unsecured, non-amortizing revolving creditagreement (the "Agreement"), which expires on June 24, 2003, to increase itsborrowing capacity to $100 million from $80 million. The Agreement provides forinterest at the Trust's option, at the certificate of deposit rate plus 5/8% to1 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 thecertificate of deposit rate, Eurodollar rate and the commitment fee are basedupon the Trust's debt to total capital ratio as defined by the Agreement. AtDecember 31, 1999 the applicable margin over the certificate of deposit andEurodollar rates were 7/8% and 5/8%, respectively, and the commitment fee was.20%. There are no compensating balance requirements. The Agreement contains aprovision whereby the commitments will be reduced by 50% of the proceedsgenerated from any new equity offering. At December 31, 1999, the Trust hadapproximately $21 million of available borrowing capacity.The average amounts outstanding under the revolving credit agreement during1999, 1998 and 1997 were $62,042,000, $49,195,000 and $40,774,000, respectively,with corresponding effective interest rates, including commitment fees but notincluding the effect of interest rate swaps of 5.9%, 6.3% and 6.4%. The maximumamounts 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 aminimum tangible net worth and specified financial ratios, limit the Trust'sability to incur additional debt, limit the aggregate amount of mortgagereceivables and limit the Trust's ability to increase dividends in excess of 95%of cash available for distribution, unless additional distributions are requiredto comply with the applicable section of the Internal Revenue Code and relatedregulations governing real estate investment trusts.The Trust has entered into interest rate swap agreements and an interest ratecap agreement which are designed to reduce the impact of changes in interestrates on its floating rate revolving credit notes. At December 31,1999, theTrust had five outstanding swap agreements for notional principal amounts of$35,580,000 which mature from May, 2001 through November, 2006. These swapagreements effectively fix the interest rate on $35,580,000 of variable ratedebt at 6.64% including the revolver spread of .625%. The Trust had one interestrate cap, for which the Trust paid $622,750, which matured in June, 1999 andfixed the maximum rate on $15 million of variable rate revolving credit notes at7.625% including the revolver spread of .625%. The interest rate swap and capagreements were entered into in anticipation of certain borrowing transactionsmade by the Trust. The effective rate on the Trust's revolving credit notesincluding commitment fees and interest rate swap expense was 6.2%, 6.7% and 6.9%during 1999, 1998 and 1997, respectively. Additional interest expense recordedas a result of the Trust's hedging activity, which is included in the effectiveinterest rates shown above, was $135,000, $136,000 and $118,000 in 1999, 1998and 1997, respectively. The Trust is exposed to credit loss in the event ofnonperformance by the counterparties to the interest rate swap agreements. Thesecounterparties are major financial institutions and the Trust does notanticipate nonperformance by the counterparties which are rated A or better byMoody's Investors Service. Termination of the interest rate swaps at December31, 1999 would have resulted in payments from the counterparties to the Trust ofapproximately $862,000. The fair value of the interest rate swap agreements atDecember 31, 1999 reflects the estimated amounts that the Trust would pay orreceive to terminate the contracts and are based on quotes from thecounterparties. F-14(6) DividendsDividends of $1.81 per share were declared and paid in 1999, of which $1.4664per share was ordinary income and $.3436 per share was a return of capitaldistribution. Dividends of $1.755 per share were declared and paid in 1998, ofwhich $1.682 per share was ordinary income and $.073 per share was a return ofcapital distribution. Dividends of $1.705 per share were declared and paid in1997, of which $1.624 per share was ordinary income and $.081 per share was areturn of capital distribution(7) Incentive PlansIn 1991, the Trustees adopted a share compensation plan for Trustees who areneither employees nor officers of the Trust ("Outside Trustees"). Pursuant tothe plan, each Outside Trustee may elect to receive, in lieu of all or a portionof the quarterly cash compensation for services as a Trustee, shares of theTrust based on the closing price of the shares on the date of issuance. As ofDecember 31, 1999 no shares have been issued under the terms of this plan.During 1992 and 1993, the Trust granted options pursuant to the 1988Non-Statutory Stock Option Plan. Pursuant to the terms of this plan, whichexpired in December of 1998, the granted options vested ratably 25% per yearbeginning one year after the date of grant and expired ten years from the grantdate. As of December 31, 1999, 58,024 options were outstanding and exercisableat an aggregate purchase price of $973,137 or $16.77 per share.During 1997, the Trust's Board of Trustees approved the Universal Health RealtyIncome Trust 1997 Incentive Plan ("The Plan"), which is a newly created stockoption and dividend equivalents rights plan for employees of the Trust,including officers and directors. There are 400,000 shares reserved for issuanceunder The Plan. All stock options were granted with an exercise price equal tothe fair market value on the date of the grant. The options granted vest ratablyat 25% per year beginning one year after the date of grant, and expire in tenyears. Dividend equivalent rights reduce the exercise price of the 1997Incentive Plan options by an amount equal to the cash or stock dividendsdistributed subsequent to the date of grant. Since inception through December31, 1999, there have been 80,000 stock options with dividend equivalent rightsgranted to officers and trustees of the Trust. Subsequent to December 31, 1999,an additional 25,000 stock options with dividend equivalent rights were grantedat an original exercise price of $14.75. The Trust recorded expenses relating tothe dividend equivalent rights of $132,000 in 1999, $123,000 in 1998 and $60,000in 1997. As of December 31, 1999, there were 35,000 options exercisable underThe Plan with an average exercise price, adjusted to give effect to the dividendequivalent rights, of $14.40 per share. F-15SFAS No. 123 requires the Trust to disclose pro-forma net income and pro-formaearnings per share as if compensation expense were recognized for optionsgranted beginning in 1995. Because the SFAS No. 123 method of accounting has notbeen applied to options granted prior to January 1, 1995 and since there were nostock options granted by the Trust during 1995 or 1996, no pro forma disclosuresare required. Using this approach, the Trust's net earnings and earnings pershare 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 $13,898Earnings 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 $ 1.55The fair value of each option grant was estimated on the date of grant using theBlack-Scholes option-pricing model with the following range of assumptions usedfor the four option grants that occurred during 1998 and 1997. No options weregranted during 1999, therefore the following table is not applicable ("N/A") forthe 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 7.9Forfeiture rate N/A 2% 2%-------------------------------------------------------------------Stock-based compensation costs on a pro forma basis would have reduced netincome by $139,000 in 1999, $136,000 in 1998 and $69,000 in 1997. Because theSFAS No. 123 method of accounting has not been applied to options granted priorto January 1, 1995, the resulting pro forma disclosures may not berepresentative of that to be expected in future years. F-16Stock options to purchase shares of beneficial interest have been granted toofficers and directors of the Trust under various plans. Information withrespect to these options is summarized as follows: Number of Shares Average Option Price Range Outstanding Options (High-Low)------------------------------------------------------------------------------------------------------------- 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------------------------------------------------------------------------------------------------------------- (8) Summarized Financial Information of Equity AffiliatesThe following table represents summarized unaudited financial information of thelimited liability companies ("LLCs") accounted for by the equity method. Amountspresented 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 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 445As of December 31, 1999, these LLCs had $79.3 million of non-recourse debtpayable to third-party lending institutions. Aggregate maturities ofnon-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(9) Quarterly Results (unaudited - amounts in thousands, except per share amounts) 1999------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total------------------------------------------------------------------------------------------------------------------------ Revenues $6,056 $5,885 $5,782 $6,142 $23,865Net Income $3,928 $3,811 $2,266 $3,967 $13,972Earnings Per Share-Basic $0.44 $0.43 $0.25 $0.44 $1.56Earnings Per Share-Diluted $0.44 $0.42 $0.25 $0.44 $1.56During the third quarter of 1999, the Trust recorded a net provision forinvestment loss of $1.6 million or $.18 per share, (basic and diluted). Includedin 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 servicesfacility which has a lease expiration date of December, 2000. The provision forinvestment loss was partially offset by a $1.0 million cash gain realized on thesale of Lakeshore Hospital. 1998------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total------------------------------------------------------------------------------------------------------------------------ Revenues $5,857 $5,793 $5,694 $5,890 $23,234Net Income $3,569 $3,528 $3,471 $3,769 $14,337Earnings Per Share-Basic $0.40 $0.39 $0.39 $0.42 $1.60Earnings Per Share-Diluted $0.40 $0.39 $0.39 $0.42 $1.60 F-19 Universal Health Realty Income Trust Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- (amounts in thousands) Balance at Charged to Balance beginning costs and at end Description of period expenses Other of periodReserve for Investment Losses: 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 ======== ======== ======= =======(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 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 iableDescription Land & Improv. Improv. Land Improv. Total Dec. 31, 1999 renovation Acquired Life 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, LouisianaInland Valley Regional Medical Center Wildomar, California 2,050 10,701 2,868 2,050 13,569 15,619 3,465 1986 1986 43 YearsMcAllen Medical Center McAllen, Texas 4,720 31,442 10,188 6,281 40,069 46,350 10,207 1994 1986 42 YearsWellington Regional Medical Center West Palm Beach, Florida 1,190 14,652 4,822 1,663 19,001 20,664 4,799 1986 1986 42 YearsThe Bridgeway North Little Rock, Arkansas 150 5,395 499 150 5,894 6,044 2,173 1983 1986 35 YearsMeridell Achievement Center Austin, Texas 1,350 3,782 1,558 1,350 5,340 6,690 2,996 1991 1986 28 YearsTri-State Rehabilitation Hospital Evansville, Indiana 500 6,945 1,062 500 8,007 8,507 2,023 1993 1989 40 YearsVencor Hospital-Chicago Chicago, Illinois 158 6,404 1,837 158 8,241 8,399 3,869 1993 1986 25 YearsFresno-Herndon Medical Plaza Fresno, California 1,073 5,266 24 1,073 5,290 6,363 598 1992 1994 45 YearsFamily Doctor's Medical Office Building Shreveport, Louisiana 54 1,526 494 54 2,020 2,074 188 1991 1995 45 YearsKelsey-Seybold Clinic at King's Crossing 439 1,618 6 439 1,624 2,063 153 1995 1995 45 YearsProfessional Center at King's Crossing 439 1,837 43 439 1,880 2,319 170 1995 1995 45 Years Kingwood, TexasChesterbrook Academy Audubon, Pennsylvania 307 996 - 307 996 1,303 81 1996 1996 45 YearsCarefree Learning Center New Britain, Pennsylvania 250 744 - 250 744 994 61 1991 1996 45 YearsCarefree Learning Center Uwchlan, Pennsylvania 180 815 - 180 815 995 66 1992 1996 45 YearsCarefree Learning Center Newtown, Pennsylvania 195 749 - 195 749 944 61 1992 1996 45 YearsThe Southern Crescent Center 1,130 5,092 21 1,130 5,113 6,243 400 1994 1996 45 YearsThe Southern Crescent Center II - - 806 806 - 806 - 1998 1998 35 Years Riverdale, GeorgiaThe Cypresswood Professional Center Spring, Texas 573 3,842 187 573 4,029 4,602 288 1997 1997 35 YearsOrthopaedic Specialists of Nevada Building Las Vegas, Nevada - 1,579 - - 1,579 1,579 16 1999 1999 25 YearsSheffield 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 ======= ======== ======= ======= ======== ======== ======= F-21 Universal Health Realty Income Trust Notes to Schedule III December 31, 1999 ----------------- (amount in thousands)(1) Reconciliation of Real Estate PropertiesThe following table reconciles the Real Estate Properties from January 1, 1997to December 31, 1999: 1999 1998 1997 --------- --------- --------- Balance at January 1 $163,932 $163,855 $158,083Additions and acquisitions 16,639 158 4,526SFAS 121 asset write-down (2,581) -- --Reclasses from construction in progress -- -- 1,246Dispositions (70) (81) -- --------- --------- ---------Balance at December 31 $177,920 $163,932 $163,855 ========= ========= =========(2) Reconciliation of Accumulated DepreciationThe following table reconciles the Accumulated Depreciation from January 1, 1997to December 31, 1999: 1999 1998 1997 -------- -------- --------Balance at January 1 $34,006 $30,280 $26,540Current year depreciation expense 3,832 3,807 3,740Dispositions (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 incometax 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, 2000Mr. Alan B. MillerPresidentUHS of Delaware, Inc.367 South Gulph RoadKing of Prussia, PA 19406Dear Alan: The Board of Trustees of Universal Health Realty Income Trust at theirDecember 1, 1999, meeting authorized the renewal of the current AdvisoryAgreement between the Trust and UHS of Delaware, Inc. ("Agreement") upon thesame terms and conditions. This letter constitutes the Trust's offer to renew the Agreement untilDecember 31, 2000, upon the same terms and conditions. Please acknowledge UHS ofDelaware, Inc.'s acceptance of this offer by signing in the space provided belowand returning one copy of this letter to me. Sincerely yours, /s/ Kirk E. Gorman Kirk E. Gorman President and Secretarycc: Warren J. Nimetz, Esq. Charles BoyleAgreed 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 Table of Contents PageARTICLE 1 AGREEMENT FOR PURCHASE AND SALE.......................1ARTICLE 2 PURCHASE PRICE........................................2ARTICLE 3 PHYSICAL CONDITION OF PROJECT.........................2ARTICLE 4 TITLE TO PROPERTY.....................................2ARTICLE 5 TITLE INSURANCE.......................................3ARTICLE 6 CLOSING...............................................4ARTICLE 7 DOCUMENTS REQUIRED AT CLOSING.........................5ARTICLE 8 APPORTIONMENTS AND ADJUSTMENTS........................7ARTICLE 9 REMEDIES..............................................8ARTICLE 10 BROKERS...............................................9ARTICLE 11 NOTICES...............................................9ARTICLE 12 ASSIGNMENT...........................................10ARTICLE 13 REPRESENTATIONS......................................11ARTICLE 14 CONDITIONS PRECEDENT TO CLOSING......................16ARTICLE 15 POST-CLOSING OBLIGATIONS.............................17ARTICLE 16 MISCELLANEOUS........................................18ARTICLE 17 SECURITY DEPOSIT.....................................20 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 liabilitycompany having an office at 1827 Powers Ferry Road, Building 13, Atlanta,Georgia 30339 ("Seller"), HEALTHAMERICA REALTY GROUP, LLC, a Georgia limitedliability company ("HRG"), and UNIVERSAL HEALTH REALTY INCOME TRUST, having anoffice 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, andPurchaser agrees to purchase, the following property (collectively, the"Project"): (a) The real property located in the City of Atlanta, State ofGeorgia, and more particularly described on Exhibit A annexed hereto (the"Land"), together with all existing improvements thereon, consisting of an eightstory medical office building containing 71.903 rentable square feet, anattached three and one-half story, 194 car parking space, parking garage and anadjoining 76 car parking space, .73 acre surface area parking lot, knowncollectively as the "Sheffield Medical Building", and located at 1938 PeachtreeStreet, N.W., Atlanta, Georgia (collectively, together with the Land, called the"Property"); (b) All of Seller's right, title and interest in and to allTenant Leases (as hereinafter defined) affecting the Property; (c) All of Seller's right, title and interest in and to alltangible and intangible personal property now or hereafter owned or held bySeller in connection with its ownership of the Project, including but notlimited to any leases, contracts, leasing materials and forms, keys, records andcorrespondence 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 alleasements, licenses, appurtenances, rights, privileges and hereditamentsbelonging or appertaining to the Project; and (e) All fixtures and articles of personal property attached orappurtenant to or used in connection with the Project which are owned by Sellerand located at, in or on the Property, including, without limiting thegenerality of the foregoing, any and all equipment, machinery, computer hardwareand software, plumbing, heating and lighting fixtures, mail boxes, surveillance and security systems, watering systems, tools, andmaintenance equipment and supplies owned by Seller and located at, in or on theProperty. ARTICLE 2 PURCHASE PRICE The purchase price for the Project shall be ELEVEN MILLION FIVE HUNDREDTHOUSAND DOLLARS ($11,500,000) (the "Purchase Price"), plus or minus theadjustments provided for in this Agreement (the "Closing Payment"), to be paidto Seller in immediately available federal funds in such manner, place andaccount as Seller may reasonably request, at or prior to the Closing (ashereinafter defined). ARTICLE 3 PHYSICAL CONDITION OF PROJECTPurchaser agrees to purchase the Project in its "AS IS" condition on the ClosingDate, subject to, and in reliance upon, Seller's representations and warrantiesas set forth in this Agreement. Purchaser has not relied upon, and Seller is notliable or bound in any manner by, any verbal or written statements,representations, real estate brokers' "set-ups" or other information pertainingto 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 thatany 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, marketableand indefeasible fee simple title to the Property, subject only to the PermittedEncumbrances (as hereinafter defined). 4.2 Purchaser agrees to accept good, marketable and indefeasible feesimple 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- 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 betweenSeller and Purchaser at closing based on their relative periods of ownership ofthe Property during the year. If the Property is subject to any retroactivereassessment or if there is any change in property taxes for the year ofclosing, then upon the request of either such party, the property taxes for theyear of closing shall re re-prorated based on new or final tax bills, and theparty who paid or was debited with less than its share based on final prorationshall promptly pay the other any difference due. Any increase in property taxesfor 1998 or prior years shall be solely the responsibility of Seller. The termsand 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 othernationally recognized title insurance company selected by, or acceptable to,Purchaser (the "Title Company") to issue an owner's policy of title insurance onthe 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 orencumbrances other than the Permitted Encumbrances or those which are permittedby this Agreement shall be deemed to be Permitted Encumbrances if the TitleCompany will insure Purchaser's title free and clear of the matter or willinsure against the enforcement of such matter out of the Property, on thecondition that Purchaser's counsel shall agree to accept title with suchinsurance. Any unpaid liens for real estate and personal property taxes foryears prior to the fiscal year in which the Closing Date occurs and any othermatter which Seller is obligated to pay and discharge at the Closing shall notbe deemed objections to title, but the amount thereof chargeable to Seller, plusinterest and penalties thereon, if any, shall be shown as chargeable to Sellerin Purchaser's and Seller's settlement statement on the Closing Date and paid tothe Title Company for the payment of such matters. 5.3 Purchaser shall pay any costs for obtaining the Title Commitmentand the title insurance premium for obtaining standard insurance coverage underthe Title Policy in a minimum amount equal to the Purchase Price. Purchasershall also pay the cost of a current, as-built boundary survey of the Landprepared by a reputable and established surveyor in the Atlanta area, to beobtained by Purchaser by the Closing Date (the "Survey"), which Survey shalldisclose no encumbrances on title to, or ownership of, the Property, except forPermitted -3-Encumbrances. Seller shall pay the Georgia Real Property Transfer tax on thedeed. Purchaser shall pay all recording fees. 5.4 If and to the extent that such materials are in the possession orcontrol of Seller, Seller shall deliver or cause to be delivered to Purchaser onthe Closing Date the following additional documents: (a) all architectural drawings and plans and specificationsfor the Improvements, including an "as built" set of plans, if available; (b) a copy of the paid real estate tax bill for the mostrecent 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 oragreements relating to or affecting the Project; (d) true and complete copies of any engineering and asbestosreports with respect to the Property; (e) true and correct copies of operating statements for theProperty for the period commencing with the date of Seller's occupancy throughSeptember 30, 1999 as well as escalation statements for operations, taxes,electric, utilities and other expenses relating to the Property during the sameperiod; (f) true and complete copies of any real estate taxinformation available to the Seller relating to the Property for the year ofClosing and the previous year as well as a schedule of any tax reductionproceedings relating to the Property; (g) a copy of the present 1999 operating budget of theProperty as well as a copy of any projections for future operating budgetsrelating to the Property; (h) true and complete copies of any certificate of occupancyfor the Property as well as a true and complete copy of any other permitsrelating to the Project; provided, however, that nothing contained herein shallrequire Seller to deliver certificates or permits obtained or required to beobtained 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 dateas to which Seller and Purchaser may mutually agree (the "Closing Date") at11:00 a.m. at the offices of King & Spalding, Atlanta, Georgia, legal counsel tothe Purchaser, or in such other manner or at such other place as the parties mayagree upon. -4- 6.2 Upon Purchaser's receipt or delivery of all required documents andinstruments and its payment of the balance of the Purchase Price and otheramounts required herein, Purchaser and Seller shall prepare and sign a closingstatement reflecting the adjustments and payments made and agreements inconnection therewith (the "Closing Statement"). 6.3 Notwithstanding anything contained in this Agreement to thecontrary, Purchaser and Seller acknowledge that the requirements for the Closingset forth in this Agreement may be supplemented by a written settlementstatement executed by both Seller and Purchaser. ARTICLE 7 DOCUMENTS REQUIRED AT CLOSING 7.1 At the Closing, Seller shall execute and deliver the following toPurchaser: (a) a Limited Warranty Deed to the Property, based on thelegal description thereof set forth on Exhibit A attached hereto, to besubstantially in the form annexed hereto as Exhibit D (the "Limited WarrantyDeed"), and a Quitclaim Deed with respect to (i) the sewer easement created bythat certain Easement from Piedmont Hospital, Inc., a Georgia corporation, toRockfield, Inc., a Georgia corporation, dated January 18, 1957, filed for recordJanuary 22, 1957, and recorded in Deed Book 3188, page 407 et seq. in therecords of Fulton County, Georgia, and (ii) the property description derivedfrom the Survey, to be substantially in the form of Exhibit O attached hereto(the "Quitclaim Deed"; the Limited Warranty Deed and the Quitclaim Deedhereinafter collectively called the "Deed"), pursuant to which Seller shallconvey the Property to Purchaser; (b) a Bill of Sale, to be substantially in the form annexedhereto as Exhibit E, pursuant to which Seller shall assign and convey toPurchaser all personal property covered by this Agreement, with any applicablesales tax to be paid by Seller; (c) an Assignment and Assumption of the Tenant Leases, to besubstantially in the form annexed hereto as Exhibit F, pursuant to which Sellershall assign to Purchaser its interest in (i) all Tenant Leases and (ii) allguaranties relating thereto; (d) an Assignment and Assumption of Warranties and ServiceContracts, to be substantially in the form annexed hereto as Exhibit G, pursuantto which Seller shall assign to Purchaser its interest in (i) all servicecontracts relating to the Property and (ii) all transferable guaranties andwarranties relating to the Property; (e) a written notice of the acquisition of the Property byPurchaser, originally executed by Seller and Purchaser, which Purchaser or HRGmay transmit, but upon their failure to do so, Seller may transmit, to alltenants and to other parties affected by the sale and purchase of the Property(the "Tenant Notices"). Such Tenant Notices shall be prepared by HRG insubstantially the form annexed hereto as Exhibit I, and shall inform theaddressees of the sale and transfer of the Property to Purchaser and containappropriate instructions relating to the payment of future rentals, the givingof future notices, the naming of Purchaser as an additional -5-insured on each tenant's insurance policies and other matters reasonablyrequired by Purchaser. The Tenant Notices shall specify that unapplied securitydeposit under the tenant leases have been delivered to Purchaser; (f) a non-foreign status affidavit for Seller complying withthe requirements of Internal Revenue Code Section 1445(f)(3) and the regulationspromulgated thereunder in substantially the form annexed hereto as Exhibit J; (g) all costs and fees required to be paid by Seller pursuantto Articles 4 or 8 hereof; (h) a mechanics' lien and general title affidavit, verifyingit to be the fact that, as of the Closing Date, there are no unpaid bills forwork, labor, service or materials furnished to the real property upon therequest or order of Seller which may be made the basis of a lien, and thatSeller is in possession of the Project, subject only to the rights of tenants inpossession under the Tenant Leases, to be substantially in the form annexedhereto as Exhibit N and otherwise acceptable to the Title Company; (i) estoppel certificates from all tenants under the TenantLeases, as provided in Article 14 hereof; provided, however, that if less thanall tenants execute estoppel certificates, Purchaser's sole remedy shall be toclose 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 ofeach affected Tenant Lease) or terminate this Agreement, whereupon Seller shallreturn the Security Deposit and neither party shall have any further obligationsunder this Agreement. (j) such other documents and instruments as may be reasonablyrequired by the Title Company in order to issue the Title Policy or as Purchaseror its legal counsel may reasonably request from Seller in order to consummatethe transactions described in this Agreement in accordance with the termshereof; provided, however, that such other documents and instruments do notimpose any material expense or risk on Seller. 7.2 At the Closing, Purchaser shall execute, where appropriate, anddeliver the following to Seller: (a) the Closing Payment; (b) the Assignment and Assumption of Tenant Leases; (c) the Assignment and Assumption of Warranties and ServiceAgreements; (d) such other documents and instruments as Seller or itslegal counsel may reasonably request in order to consummate the transactionsdescribed in this Agreement in accordance with the terms hereof; provided,however, that such other documents and instruments do not impose any materialexpense or risk on Purchaser. -6- 7.3 If at any time after the Closing it becomes apparent to eitherparty hereto that any necessary closing documents were either not delivered orimproperly executed or that any closing adjustments were improperly calculated,the parties shall act in good faith and take all such steps including theexecution or re-execution of documents and the payment of monies as may bereasonably necessary to rectify such errors or miscalculations. The provisionsof 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 beresponsible for and shall pay all accrued expenses with respect to the Projectaccruing up to 11:59 p.m. on the Closing Date and shall be entitled to receiveand retain all revenue from the Project accruing up to the Closing Date. 8.2 On the Closing Date, the following adjustments and apportionmentsshall 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 tenantsfor any period prior to the Closing Month (the "Rent Arrearages"), then afterrequest made by Seller subsequent to the Closing Date, Purchaser shall bill alltenants for such sums, provided, however, that Purchaser shall have no liabilityor responsibility for the collection of any such Rent Arrearages. Seller shallbe entitled to those funds received by Purchaser from tenants having RentArrearages after the Closing Date, only where such funds are in payment of suchRent Arrearages and are excess of amounts then owing or otherwise required to bepaid to Purchaser from such tenants. Notwithstanding the foregoing, for any"pass-through" expenses which are collected from tenants on the basis ofSeller's estimates of such expenses, promptly following the end of the fiscalperiod for which such estimated expenses are allocable, Seller and Purchasershall determine the actual expenses allocable to such period and shall adjustfor any difference between the estimated expenses and the actual expenses andthe responsible party promptly shall pay the other the amount of any suchdifference. (b) Real estate taxes, ad valorem taxes, school taxes, annualassessments and personal property, intangible and use taxes, if any; (c) Charges under service contracts affecting the Projectwhich Purchaser has agreed in writing to assume on the Closing Date; and (d) Water and sewer charges on the basis of the period forwhich assessed; provided that if a final bill is not available at Closing, areasonable estimate will be made based on prior bills and an amount reasonablyestimated to be adequate to pay such charges through the Closing Date shall beescrowed with the Purchaser pending receipt of final bills. -7- 8.3 At the Closing, Purchaser will receive a further credit against thePurchase Price in an amount equal to all existing tenant and/or common areaimprovement allowances for any work that is in process in an aggregate amountequal to the total sums which Seller has contracted to pay the affected tenantsunder existing Tenant Leases. The foregoing shall not apply, however, to tenantimprovements scheduled to be made to (or any leasing commission owing in respectof) Suite 303 (1,344 RSF), for Northwest Nephrology Clinic, and as to suchsuite, Purchaser shall assume and pay such costs. 8.4 At the Closing, Purchaser will receive a further credit against thePurchase Price in an amount equal to all unapplied security deposits (andinterest, if any) payable to tenants under Tenant Leases in effect on theClosing Date. Upon making such credit, Purchaser will be deemed to have receivedall such security deposits and shall be fully responsible for the same as if acash amount equal to such security deposits were actually delivered toPurchaser. During the period prior to the Closing, Seller agrees to obtainPurchaser's prior written consent, such consent not to be unreasonably withheld,before applying any security deposit(s), or portions thereof, against any tenantdefault pursuant to the terms of the defaulting tenant's lease. 8.5 If the Purchase Price is transmitted by wire transfer pursuant toSeller'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 receivethe benefit of the Rents and the burden of Property expenses for the day ofclosing. If transmitted thereafter, Seller will receive the benefit of the Rentsand the burden of Property expenses for the day of closing. 8.6 At the Closing, Purchaser will receive a further credit against thePurchase Price in the amount of any prepaid rents in respect of the TenantLeases. 8.7 At the Closing, a further credit to the Purchase Price shall bemade 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 titleand the delivery of the Deed. ARTICLE 9 REMEDIES 9.1 If Purchaser defaults in its obligation to purchase the Projectpursuant to this Agreement, then Seller shall have the right, in addition to anyother remedies available to it at law or in equity, to terminate this Agreementby giving Purchaser written notice thereof and, upon receipt of such notice,this Agreement shall wholly cease and terminate, no party to this Agreementshall have any further claim, agreement, or obligation to any other party tothis Agreement (except for Seller's right to retain the Security Deposit), andany lien of Purchaser against the Project shall automatically cease, terminateand be released. 9.2 If the sale contemplated by this Agreement is not consummatedbecause of Seller's failure to perform its obligations hereunder, Purchasershall be entitled, as its exclusive remedies, to elect either (a) to terminatethis Agreement or (b) to enforce specific performance of Seller's obligationsunder this Agreement; provided, however, that Seller shall not be required to -8-expend any money other than the amounts provided in Article 8, or take anyaction other than delivery of the items provided in Article 7, in connectionwith such specific performance. ARTICLE 10 BROKERS 10.1 Purchaser and Seller mutually represent and warrant to each otherthat 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 otherbrokerage fee in connection with the transactions described in this Agreementother than HRG, which entity Seller has agreed to pay the sum of $230,000 atClosing pursuant to separate agreement, and which Seller shall pay at theClosing (and provide evidence thereof to Purchaser). HRG only represents Sellerin 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 anyreason, including without limitation default of either party, termination asprovided under this Agreement or mutual termination or rescission by Seller andPurchaser. Purchaser and Seller each agree to indemnify, defend and hold theother harmless of and from and against any loss, costs, damage or expense(including reasonable attorneys' fees and court costs) arising out of (i) anyinaccuracy in the representation and warranty contained in the immediatelypreceding sentence or (ii) the claims of any broker or finder (or anyoneclaiming to be a broker or finder) regarding any services claimed to have beenrendered to the indemnifying party in connection with the transactionscontemplated by this Agreement. 10.2 The provisions of this Article shall survive the closing of titleand the delivery of the Deed and any prior termination of this Agreement for anyreason whatsoever. ARTICLE 11 NOTICES Any notice given or required to be given pursuant to any provision ofthis Agreement shall be in writing and shall either be personally delivered,sent by facsimile or sent by a reputable commercial courier service guaranteeingovernight delivery, and shall be deemed to have been given upon receipt. Theaddress 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 -9-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 Presidentand 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 Presidentwith 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 forthabove, change the address to which notices shall be sent to it, provided thatany such change of address shall be effective when received. The attorney foreach party to this Agreement may give notices on behalf of its client with thesame 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 affiliateof Purchaser without Seller's consent. Seller may not assign its interest underthis Agreement. -10- ARTICLE 13 REPRESENTATIONS Seller and Purchaser hereby make the following mutual representationsand warranties to each other, which representations and warranties arematerially true and accurate in every respect as of the date hereof and shall bematerially true and accurate as of the Closing Date and shall survive thedelivery of the Deed and the Closing for one (1) year thereafter: 13.1 Of Seller: (a) Authority. Seller has the full and unrestricted power andcapacity to enter into and carry out the terms of this Agreement and all otheragreements referred to herein. This Agreement constitutes, and all otheragreements, documents and instruments to be executed by Seller pursuant hereto,when executed and delivered by Seller, will each constitute a valid and bindingobligation of Seller enforceable in accordance with its terms; (b) No Defaults. Neither the execution, delivery orperformance of this Agreement or any other agreement contemplated hereby, thefulfillment of and compliance with the respective terms and provisions hereof orthereof, nor the consummation of the transactions contemplated hereby orthereby, 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 orinstrument to which Seller is a party or is subject; (ii) violate anyrestriction to which Seller is a party or is subject; (iii) constitute aviolation of any applicable law, statute, regulation, ordinance, rule, judgment,decree, writ or order; or (iv) conflict with, or contradict, any right of firstrefusal 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, tothe knowledge of Seller, threatened against or affecting Seller or the Projector any of the Tenant Leases or which question the validity of this Agreement orany 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 othergovernmental department, commission, board, bureau, agency or instrumentality. (d) Equipment. Except as otherwise stated in this Section13.1, Seller has not received any notification in writing from any governmentalagency or authority that the use and operation of the equipment of Sellerconstituting part of the Project is not in compliance with applicable laws,regulations and guidelines, except for prior notifications which have beencorrected. (e) Assessments. Seller has received no notice and has noknowledge of any pending improvements, liens or special assessments to be madeagainst the Project by any governmental authority; (f) Condemnation. There is no exercise of eminent domain orcondemnation pending, or to Seller's knowledge threatened, against or affectingthe Project (or -11-any part thereof), nor does Seller know or have reasonable grounds to know ofany basis for any of same; (g) Leases. To the best of Seller's knowledge: Seller is notin default under any Tenant Lease, nor is there in existence any condition orfact which with notice or lapse of time, or both, would constitute a defaultthereunder; Seller (or its management company) is in possession of all tenantsecurity deposits in the amounts set forth in the Tenant Leases; no such tenantsshall be entitled to any rebates, revenue participations, rent concessions, rentlimitations or free rent or renewal options, except as provided in the TenantLeases; no express written commitments have been made to any tenant for repairsor improvements, by Seller, as landlord, which remain to be completed or paidfor in full (except as provided in Section 7.3 as to Suite 303); the TenantLeases constitute the entire agreement between the landlord and tenantthereunder, and there are no side letters or other agreements between theLandlord and each of the tenants; all Tenant Leases are the result of bona fidearm's-length negotiations with persons who are not affiliates of Seller; norents due under any of said Tenant Leases have been assigned, hypothecated orencumbered (excepting therefrom any such hypothecations or encumbrances beingremoved at Closing); no rents under any Tenant Leases have been prepaid inadvance of the then current month which are not the subject of a credit underSection 8.5; and there are no fees or commissions payable to any third person orentity in regard to the subject property or any of said Tenant Leases (includingany commissions payable upon the exercise of any renewal option under the TenantLeases); no tenant under any Tenant Lease has received any financing, orcommitment to extend financing, from Seller in respect of any tenantimprovements or for any other purposes (except as provided in Section 7.3 as toSuite 303); and Seller will not, hereafter and prior to the Closing Date, modifyany Tenant Lease, accept any termination or surrender of any Tenant Lease orenter into any agreement extending the term of any Tenant Lease, without theprior written consent of Purchaser; (h) Zoning. [INTENTIONALLY OMITTED]; (i) Permits. Except as otherwise disclosed in this Section13.1, Seller has not received any notification in writing from any governmentalauthority that the Property is lacking any permits or licenses necessary for theoperation and occupancy of the Property. No notice, notification, demand,request for information, citation, summons or order has been received by Sellerand Seller has no knowledge that any complaint has been filed, penalty has beenassessed or investigation or review is pending or threatened by any governmentalauthority with respect to any alleged failure by Seller to have any permit,license or authorization required in connection with the use, maintenance andoperation of the Property, or with respect to any generation, treatment,storage, recycling, transportation, release or disposal of any "hazardoussubstances" (as hereinafter defined); (j) Certificate of Occupancy. Seller has no knowledge thatcertificates of occupancy have not been issued for the Property, including allmedical offices; however, Seller has not been able to locate or obtain copies ofall certificates of occupancy for all suites in the Project; Seller has noknowledge that any certificate of occupancy for a current tenant has beenrevoked or canceled; -12- (k) Access. To the best of Seller's knowledge, no fact orcondition exists which would result or could result in the termination orreduction of the current access from the Property to existing roads or to seweror other utility services presently serving the Property; (l) Utilities. Water, sewer, electricity and telephonefacilities have been available to the Property during Seller's ownership inadequate capacity for the purpose of using the Project for its intended purpose; (m) No Option to Purchase. No third party has an option topurchase the Project; (n) No Bankruptcy. There are no attachments, executions,assignments for the benefit of creditors or voluntary or involuntary proceedingsin bankruptcy pending, contemplated or, to the knowledge of Seller, threatenedagainst Seller (o) Service, Maintenance Agreements, etc. As of the ClosingDate, there shall be no employees employed by Seller or contractors retained bySeller in the operation of the Project; and no contracts, oral or written, withany employees nor any service contract, maintenance contract, nor any union orother contract or agreement with respect to the Project; in each case, except aslisted in Exhibit K. All such agreements (if any) listed on said Exhibit K arein full force and effect without default. Seller will not enter into any newsuch agreement or modify any such agreement prior to the Closing; (p) No Lease of Space. Seller will not, hereafter and prior tothe Closing Date, lease any space which is now or may become vacant without theprior written approval of Purchaser, not to be unreasonably withheld or delayed; (q) Seller to Maintain Premises. Seller will maintain thephysical condition of the Property in substantially the same condition as of thedate hereof through the Closing Date, reasonable wear and tear and loss by fireor other casualty excepted, and will make any ordinary repairs and continuemaintenance of the Property from the date hereof until Closing, as it would doin the normal course of operations, provided that in the event that any part ofthe Project is damaged by fire or other casualty prior to Closing and the costto repair same exceeds $20,000, then Purchaser may at its option either (i)terminate this Agreement (whereupon the Security Deposit shall be returned andneither 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 proceedsreceivable due to such casualty loss plus a payment from Seller of the amount ofthe deductible on Seller's casualty insurance policy, but provided further thatif the casualty loss is less than $20,000 the Purchaser shall proceed underoption (ii); (r) Insurance Requirements. To the best of Seller's knowledge,there are no outstanding requirements by the holder of any existing note andmortgage on the Property, or any insurance company, insurance rating board, fireunderwriting board or governmental agency requiring or recommending any repairsor work to be done at the Property or any equipment to be installed thereon withwhich Seller has not fully complied; -13- (s) Income and Operating Expenses. Seller believes that theschedule annexed hereto as Exhibit L and made a part hereof accurately setsforth the income and expenses of the Project on an annual basis for the periodended December 31, 1998, and for the current year through September 30, 1999.However, such statements were prepared by HRG (which itself is making norepresentation or warranty to Purchaser in respect thereof), are unaudited andhave not been independently verified by Seller. To the best of Seller'sknowledge, there was no tax abatement or exemption in effect for the Propertyduring said period. To the best of Seller's knowledge, there has been nomaterial adverse change in the operation or income of the Property sinceSeptember 30, 1999; (t) Employees. There are no employees employed directly bySeller and stationed on site in the operation and maintenance of the Property; (u) No Defective Condition. Except as otherwise may bedescribed herein and in that certain Property Condition Assessment dated January17, 1997 prepared for Fletcher Fright Company - Atlanta, by Asset AdvisoryServices, Inc. and the Building and Site Assessment, dated May 17, 1999,prepared for HRG by CDH Partners, Inc. relative to the Property (the terms ofwhich are hereby incorporated by reference into this Agreement), Seller has notbeen advised and is not aware that (considering the age of the Project): (I)there is any substantial defective condition, structural or otherwise, in thebuildings or other improvements on the Property; or (II) that all heating,electrical, plumbing, air conditioning, and other mechanical and electricalsystems are not in reasonably good condition and working order, or (III) thatthere are any substantial roof leaks. Nevertheless, Seller believes that theProperty does not comply with the Americans With Disabilities Act, and Sellerfurther discloses that it is possible that the buildings and improvements andthe plumbing, electrical and mechanical systems of the Project do not fullycomply with current codes and ordinances. During its ownership of the Property,Seller has been required to upgrade some of such systems when preparing suitesfor tenant occupancy; (v) Hazardous Substances. When it was purchased by Seller, theProject contained asbestos containing materials, and Seller undertook to removesame, 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 theProject normally procure, store, use and dispose of hazardous materials in thecourse of business and medical practice, and Seller makes no representationsabout the use or disposal of hazardous materials by tenants. Otherwise, to thebest of Seller's knowledge, except as otherwise may be described in that certainPhase I Environmental Site Assessment and Limited Asbestos Survey dated February27, 1997, prepared for Fletcher Bright Company-Atlanta by United ConsultingGroup, Ltd. relative to the Property, as supplemented by that certain Phase IIEnvironmental Site Assessment, dated March 13, 1997, likewise prepared forFletcher Bright Company-Atlanta, by United Consulting Group, Ltd.; or the PhaseI Environmental Site Assessment dated May 16, 1999, prepared for HRG by AhlbergEngineering, Inc. ("Ahlberg") relative to the Property, as supplemented by thatcertain Phase II Environmental Site Assessment, dated September 17, 1999,likewise prepared for HRG by Ahlberg relative to Property (the terms of eachwhich reports are hereby incorporated by reference into this Agreement), andexcept for substances normally used in medical building -14-operations and maintenance (such as for example but without limitation cleaningfluids), the Property contains no hazardous substance, as such term is definedin the Comprehensive Environmental Response and Liability Act, 42 U.S.C. ss.9601 et seq., as amended, or under any other state or local environmentalstatues or regulations issued pursuant thereto; (w) Violations. To the best of Seller's knowledge, there areno outstanding notes or notices of violations of law or governmental ordinances,orders or requirement issued by any governmental department, agency, bureau orinstrumentality affecting the Property or any part thereof (collectively,"Property Violations"); and all Property Violations affecting the Propertydiscovered by Purchaser to exist as of the Closing Date shall be complied withand 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 SecurityDeposit and neither party shall be obligated to buy or sell hereunder; (x) Vendors. All vendors, suppliers and other contractors orpersons supplying goods or services to the Property at the instance of Seller orits property manager, have been paid in full to date or will be paid on theClosing Date; (y) No Landmark. [INTENTIONALLY OMITTED]; and (z) No Unpaid Bills. As of the Closing Date, there are nounpaid bills for work, labor, service or materials furnished to the Project uponthe request or order of Seller, which may be made the basis of a lien or, ifthere are any such bills, Seller will pay them by Closing.All of the representations or warranties of the Seller in this Article 13 orotherwise in this Agreement, except for Article 13.1(a), are made and expresslylimited to the actual, present knowledge of the Seller's Managers, withoutimputation of knowledge or notice which may be attributed to them as a matter oflaw or by virtue of the knowledge of non-executive employees of Seller orofficers or employees of the Seller's property management company (includingHRG). It is agreed that any statement made to "Seller's knowledge" or "to thebest of Seller's knowledge" or similar statements is limited as provided in thepreceding sentence. 13.2 Of Purchaser: (a) Authority. Purchaser has the full and unrestricted powerand capacity to enter into and carry out the terms of this Agreement and allother agreements referred to herein. This Agreement constitutes, and all otheragreements, documents and instruments to be executed by Purchaser pursuanthereto, when executed and delivered by Purchaser, will each constitute a validand binding obligation of Purchaser as the case may be, enforceable inaccordance with its terms; (b) No Defaults. Neither the execution, delivery orperformance of this Agreement or any other agreement contemplated hereby, thefulfillment of and compliance with the respective terms and provisions hereof orthereof, nor the consummation of the transactions contemplated hereby orthereby, will: (i) conflict with, or result in a breach of, any -15-of the terms, conditions or provisions of, or constitute any default under, anyagreement 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, tothe knowledge of Purchaser, threatened against or affecting or which questionthe validity of this Agreement or any action taken or to be taken under any ofthe provisions of this Agreement, at law or in equity, or before or by anyfederal, 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 tothe 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, byPurchaser): (a) The representations and warranties of Seller in thisAgreement shall be true and correct and the covenants and agreements of Sellercontained herein shall have been complied with as of the date of Closing; (b) Seller shall deliver the documents described in Articles 5and 7 of this Agreement; (c) There shall have been no material changes in the zoninglaws and regulations applicable to the Project; (d) Subject to the terms of Section 7.1(j), Seller shall haveobtained an estoppel certificate from tenants each of occupying the Property'sleased space under the Tenant Leases, to be substantially in the form annexedhereto as Exhibit M, setting forth that (i) there are no defaults thereunder bylandlord or tenant, (ii) their respective leases are valid, unmodified and infull force and effect, (iii) that all rent and additional rent has been paidthrough the month of Closing and (iv) such other matters as are set forth inExhibit M annexed hereto; (e) Seller shall deliver title to the Property as provided inArticle 5, and Purchaser shall have obtained a Title Policy and Surveycorresponding thereto and confirming same. 14.2 If any of the conditions precedent to closing set forth herein orany other covenant or closing obligation of Seller shall not have been compliedwith as of the Closing Date, then, in such event, Purchaser shall have theright, in addition to any other rights or remedies available to Purchaser underthis Agreement or in equity or at law, to rescind this transaction in whichevent -16-the parties shall be relieved and released from any further obligations toeach 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 $125,000with HRG, as Escrow Agent, which sum shall constitute an escrow account for thepurposes herein stated (to be effected by adjustment to the Purchase Price),which sum shall be established on its books as an escrow account. This escrowaccount, which shall hereinafter be referred to as the "Parking Revenue EscrowAccount," will be used to cover any shortfall in the Property's parking revenuethat 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 fundson deposit in the Parking Revenue Escrow Account on a monthly basis if therevenue associated with the Property's parking facilities does not meet orexceed $16,667 per month. The remaining funds in the Parking Revenue EscrowAccount will be released by HRG to the Seller once the Property's parkingfacilities meet or exceed $16,667 per month of revenue for three (3) consecutivemonths (or, at any earlier time at which the Purchaser elects, at its option, toterminate this escrow agreement). If, during any calendar month endingsubsequent to the Closing Date, parking revenues exceed $16,667, the excessthereof shall be credited against any deficiency in parking revenue (below$16,667) in the preceding or succeeding calendar month (but only in one or theother of such months, and not in any earlier or later calendar months); and anysurplusage in monthly parking revenues in excess of $16,667 remaining after anysuch 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'sobligations hereunder are strictly limited to the funds on deposit from time totime in the Parking Revenue Escrow Account. 15.2 Purchaser's right to draw upon the Parking Reserve Escrow Accountis expressly conditioned upon Purchaser making reasonable, diligent andcontinuous efforts (provided that in doing so Purchaser does not incur anymaterial expense or risk) to operate the Property's parking facilities in amanner which will provide the maximum reasonably available revenue from parking;it being understood and agreed by Seller, however, that so long as the Purchaseoperates the Property's parking facilities in substantially the same manner asoperated by Seller immediately prior to the Closing Date, then, such operationshall be deemed operated in such manner as to provide "the maximum reasonablyavailable revenue from parking"; that is, and without limitation of theforegoing, in order to comply herewith, Purchaser shall be under no obligationto increase (or reduce) parking fees, add parking spaces, change hours ofoperation or permit usage not permitted on the Closing Date. Without limitingthe foregoing, Purchaser agrees to instruct its Property management to complywith this Section. Further, Purchaser is not authorized to give any tenant freeparking (unless that tenant is receiving free parking on the Closing Date) andmust charge all tenants and others a reasonable parking fee for use of theparking facilities on the Property (with the "reasonableness" of any charge orfree to be determined in the manner provided hereinabove). If Purchaser fails tocomply with the provisions of this Section 15.2, Purchaser's right to draw onthe Parking Revenue Escrow Deposit shall terminate. Purchaser agrees to promptlyrefund to Seller any parking revenue which was withdrawn from the Escrow whilePurchaser was in violation of this Section. Purchaser shall provide to Seller nolater than the fifteenth (15th) day of each month, a parking -17-revenue report for the prior month giving in reasonable detail the amount andsources of parking revenue and any funds withdrawn from the Escrow. Seller andits agents are authorized to directly contact the Purchaser's property managerand building and parking lot personnel to make inquiries and request documentsregarding 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 suchinquiries 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, legalrepresentatives and permitted assigns. 16.2 Wherever under the terms and provisions of this Agreement the timefor performance falls upon a Saturday, Sunday or legal holiday, such time forperformance shall be extended to the second business day thereafter. 16.3 This Agreement may be executed in one or more counterparts, all ofwhich when taken together shall constitute one and the same agreement, and shallbecome effective when one or more counterparts have been executed by each of theparties hereto and delivered to each of the other parties hereto. 16.4 The captions at the beginning of the several paragraphs, Sectionsand Articles are for convenience in locating the context, but are not part ofthe context. Unless otherwise specifically set forth in this Agreement to thecontrary, all references to Exhibits contained in this Agreement refer to theExhibits which are attached to this Agreement all of which Exhibits areincorporated in, and made a part of, this Agreement by reference. Unlessotherwise specifically set forth in this Agreement to the contrary, allreferences to Articles, Sections, paragraphs and clauses refer to portions ofthis Agreement. 16.5 If any term or provision of this Agreement shall be held to beillegal, invalid, unenforceable or inoperative as a matter of law, the remainingterms and provisions of this Agreement shall not be affected thereby, but eachsuch remaining term and provision shall be valid and shall remain in full forceand effect. 16.6 This Agreement and the other writings referred to in, or deliveredpursuant to, this Agreement, embody the entire understanding and contractbetween the parties hereto with respect to the Project and supersede any and allprior agreements and understandings between the parties hereto, whether writtenor oral, formal or informal, with respect to the subject matter of thisAgreement. This Agreement has been entered into after full investigation by eachparty and its professional advisors, and neither party is relying upon anystatement, representation or warranty made by or on behalf of the other which isnot expressly set forth in this Agreement. -18- 16.7 No extensions, changes, waivers, modifications or amendments to orof this Agreement, of any kind whatsoever, shall be made or claimed by Seller,HRG or Purchaser, and no notices of any extension, change, waiver, modificationor amendment made or claimed by Seller, HRG or Purchaser shall have any force oreffect whatsoever, unless the same is contained in a writing and is fullyexecuted by the party against whom such matter is asserted. 16.8 This Agreement shall be governed and interpreted in accordancewith the laws of the State of Georgia. 16.9 Each party hereto shall pay all charges specified to be paid bythem pursuant to the provisions of this Agreement and their own attorney's feesin 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 theProperty, the Project and the Tenant Leases which it may retain in its filessubsequent to the Closing Date. 16.12 THE DECLARATION OF TRUST ESTABLISHING UNIVERSAL HEALTH REALTYINCOME TRUST, FILED AUGUST 6, 1986, A COPY OF WHICH, TOGETHER WITH ALLAMENDMENTS THERETO ("DECLARATION"), IS DULY FILED IN THE OFFICE OF THEDEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THATTHE NAME "UNIVERSAL HEALTH REALTY INCOME TRUST," REFERS TO THE TRUSTEES UNDERTHE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY ANDTHAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST SHALL BEHELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, ORCLAIM AGAINST, THE TRUST. ALL PERSONS DEALING WITH THE TRUST, IN ANY WAY,WHETHER UNDER THIS AGREEMENT OR IN ANY AGREEMENT REFERENCED HEREIN OR EXECUTEDIN CONNECTION HEREWITH, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST FOR THEPAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -19- ARTICLE 17 SECURITY DEPOSITEffective upon its execution and delivery of this Agreement, Purchaser shalldeposit in escrow with HRG the sum of $100,000 as earnest money (the "EarnestMoney Deposit"). At the Closing, the Earnest Money Deposit shall be credited tothe Purchase Price. If, by the Closing Date, Purchaser has not purchased theProperty other than because of (i) Seller's noncompliance with any terms orconditions hereof concerning such purchase or (ii) the exercise by Purchaser ofany 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 toSeller the Earnest Money Deposit as full liquidated damages and Seller'sexclusive remedy for Purchaser's default (it being understood and agreed by theparties that any actual damages suffered by Seller as a result of such defaultby Purchaser would be impracticable to ascertain and that retention of theEarnest 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 suchpurchase or (ii) the exercise by Purchaser of any right of termination extendedto it hereunder pursuant to Section 4.2(c), Section 9.2, Section 13.1(q) orSection 13.1(w); then, HRG shall return the Earnest Money Deposit to Purchaser. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to beexecuted in their names by their respective duly authorized representativesunder seal on the day and year first above written. "SELLER" FB SHEFFIELD PARTNERS, LLC, a (SEAL) Georgia limited liability company By:____________________________________ its Manager -20- "PURCHASER" UNIVERSAL HEALTH REALTY (SEAL) INCOME TRUST By:______________________________ Timothy J. Fowler Vice President -21- "HRG" HEALTHAMERICA REALTY GROUP, LLC By:________________________________ Its Manager -22- EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTSAs independent public accountants, we hereby consent to the incorporation of ourreport included in this Form 10-K, into the Trust's previously filedRegistration Statements on Forms S-8 and S-3: 1988 Non-Statutory Stock OptionPlan, Share Compensation Plan for Outside Trustees, 1997 Incentive Plan (FileNo. 333-57815) and Dividend Reinvestment Plan for Shareholders (File No.333-81763). ARTHUR ANDERSEN LLPPhiladelphia, PAMarch 29, 2000

5 0000798783 UNIVERSAL HEALTH REALTY INCOME TRUST 1,000 U.S. DOLLARS YEAR DEC-31-1999 Jan-01-1999 Dec-31-1999 1 852 0 790 0 0 0 179,167 37,800 178,821 0 76,889 0 0 90 99,585 178,821 0 26,419 0 3,003 3,857 1,583 4,004 13,972 0 13,972 0 0 0 13,972 1.56 1.56