Universal Health Realty Income Trust
Annual Report 2007

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 OR ¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 ofincorporation or organization) (I.R.S. EmployerIdentification Number)Universal Corporate Center367 South Gulph RoadP.O. Box 61558King of Prussia, Pennsylvania 19406-0958(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 ClassShares of beneficial interest, $.01 par value Name of each exchange on which registeredNew York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨¨ No xx Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨¨ No xx Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes xx No ¨¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (check one): Large accelerated filer ¨¨ Accelerated filer xx Non-accelerated filer ¨¨ Smaller reporting company ¨¨ (Do not check if a smaller reportingcompany) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No x Aggregate market value of voting shares and non-voting shares held by non-affiliates as of June 29, 2007: $390,347,761. Number of shares of beneficialinterest outstanding of registrant as of January 31, 2008: 11,842,129 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for our 2008 Annual Meeting of Shareholders, which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 2007 (incorporated by reference under Part III). Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST2007 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS PART IItem 1 Business 1Item 1A Risk Factors 10Item 1B Unresolved Staff Comments 17Item 2 Properties 18Item 3 Legal Proceedings 23Item 4 Submission of Matters to a Vote of Security Holders 23PART IIItem 5 Market for the Registrant’s Common Equity and Related Stockholder Matters 23Item 6 Selected Financial Data 26Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 28Item 7A Quantitative and Qualitative Disclosures About Market Risk 46Item 8 Financial Statements and Supplementary Data 47Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47Item 9A Controls and Procedures 47Item 9B Other Information 50PART IIIItem 10 Directors, Executive Officers and Corporate Governance 50Item 11 Executive Compensation 50Item 12 Security Ownership of Certain Beneficial Owners and Management 50Item 13 Certain Relationships and Related Transactions, and Director Independence 50Item 14 Principal Accounting Fees and Services 50PART IVItem 15 Exhibits, Financial Statement Schedules 51SIGNATURES 53Index to Financial Statements and Schedule 54Exhibit Index 85Exhibit 10.2 — Advisory Agreement renewal Exhibit 21 — Subsidiaries of Registrant Exhibit 23.1 — Consent of KPMG LLP Exhibit 31.1 — Section 302 Certification of the Chief Executive Officer Exhibit 31.2 — Section 302 Certification of the Chief Financial Officer Exhibit 32.1 — Section 906 Certification of the Chief Executive Officer Exhibit 32.2 — Section 906 Certification of the Chief Financial Officer Table of ContentsThis Annual Report on Form 10-K is for the year ended December 31, 2007. This Annual Report modifies and supersedes documents filed prior to thisAnnual Report. Information that we file with the SEC in the future will automatically update and supersede information contained in this Annual Report. Inthis Annual Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust. In this Annual Report, the term “revenues” does notinclude the revenues of the unconsolidated limited liability companies in which we have various non-controlling equity interests ranging from 33% to 99%. Wecurrently account for our share of the income/loss from these investments by the equity method (see Note 9 to the Consolidated Financial Statements includedherein).Table of ContentsPART I ITEM 1.Business General We are a real estate investment trust (“REIT”) which commenced operations in 1986. We invest in health care and human service related facilitiesincluding acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers and medicaloffice buildings (“MOB”s). As of December 31, 2007 we have forty-six real estate investments or commitments located in fourteen states in the United Statesconsisting of: (i) six hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and one sub-acute; (ii) thirty-six MOBs(including three being constructed), and; (iii) four preschool and childcare centers. Available Information We have our principal executive offices at Universal Corporate Center, 367 South Gulph Road, King of Prussia, PA 19406. Our telephone number is(610) 265-0688. Our website is located at http://www.uhrit.com. Copies of the annual, quarterly and current reports we file with the SEC, and anyamendments to those reports, are available free of charge on our website. Additionally, we have adopted governance guidelines, a Code of Business Conductand Ethics applicable to all of our officers and directors, a Code of Ethics for Senior Officers and charters for each of the Audit Committee, CompensationCommittee and Nominating and Corporate Governance Committee of the Board of Trustees. These documents are also available free of charge on our website.Copies of such reports and charters are available in print to any shareholder who makes a request. Such requests should be made to our Secretary at our Kingof Prussia, PA corporate headquarters. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers of anyprovision of our Code of Ethics for Senior Officers by promptly posting this information on our website. The information posted on our website is notincorporated into this Annual Report. In accordance with Section 303A.12(a) of The New York Stock Exchange Listed Company Manual, we submitted our CEO’s Certification to the NewYork Stock Exchange in 2007. Additionally, contained in Exhibits 31.1 and 31.2 of this Annual Report are our CEO’s and CFO’s certifications regarding thequality of our public disclosure under Section 302 of the Sarbanes-Oxley Act of 2002. Overview of Facilities As of December 31, 2007, we have investments or commitments in forty-six facilities, including three new MOBs being constructed, located in fourteenstates and consisting of the following: Facility Name Location Type of Facility Ownership GuarantorSouthwest Healthcare System, Inland Valley Campus (A) Wildomar, CA Acute Care 100% Universal Health Services, Inc.McAllen Medical Center (A) McAllen, TX Acute Care 100% Universal Health Services, Inc.The Bridgeway (A) N.Little Rock, AR Behavioral Health 100% Universal Health Services, Inc.Wellington Regional Medical Center (A) W. Palm Beach, FL Acute Care 100% Universal Health Services, Inc.Kindred Hospital Chicago Central (B) Chicago, IL Sub-Acute Care 100% Kindred Healthcare, Inc.HealthSouth Deaconess Rehabilitation Hospital (E) Evansville, IN Rehabilitation 100% HealthSouth CorporationFamily Doctor’s Medical Office Bldg. (B) Shreveport, LA MOB 100% HCA Inc.Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX MOB 100% St. Lukes Episcopal Health Sys.Professional Bldgs. at Kings Crossing (B) Kingwood, TX MOB 100% —Chesterbrook Academy (B) Audubon, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Chesterbrook Academy (B) New Britain, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Chesterbrook Academy (B) Newtown, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Chesterbrook Academy (B) Uwchlan, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Southern Crescent Center I (B) Riverdale, GA MOB 100% —Southern Crescent Center, II (B) Riverdale, GA MOB 100% —Desert Samaritan Hospital MOBs (C) Mesa, AZ MOB 76% —Suburban Medical Plaza II (C) Louisville, KY MOB 33% — 1Table of ContentsFacility Name Location Type of Facility Ownership GuarantorDesert Valley Medical Center (C,G) Phoenix, AZ MOB 90% —Thunderbird Paseo Medical Plaza I & II (C) Glendale, AZ MOB 75% —Cypresswood Professional Center (B) Spring, TX MOB 100% —Papago Medical Park (C) Phoenix, AZ MOB 89% —Edwards Medical Plaza (C,G) Phoenix, AZ MOB 90% —Desert Springs Medical Plaza (D) Las Vegas, NV MOB 99% Community Health Systems, Inc.Orthopaedic Specialists of Nevada Bldg. (B) Las Vegas, NV MOB 100% —Santa Fe Professional Plaza (C,G) Scottsdale, AZ MOB 90% —Sheffield Medical Building (B) Atlanta, GA MOB 100% —Centinela Medical Building Complex (C,G) Inglewood, CA MOB 90% —Summerlin Hospital MOB (D,H) Las Vegas, NV MOB 95% —Summerlin Hospital MOB II (D,F) Las Vegas, NV MOB 98% —Medical Center of Western Connecticut (B) Danbury, CT MOB 100% —Mid Coast Hospital MOB (C) Brunswick, ME MOB 74% —Deer Valley Medical Office II (C) Phoenix, AZ MOB 90% —Rosenberg Children’s Medical Plaza (C) Phoenix, AZ MOB 85% —700 Shadow Lane & Goldring MOBs (D) Las Vegas, NV MOB 98% —St. Mary’s Professional Office Building (C) Reno, NV MOB 75% —Apache Junction Medical Plaza (C) Apache Junction, AZ MOB 85% —Spring Valley Medical Office Building (D) Las Vegas, NV MOB 95% —Spring Valley Hospital Medical Office Building II (D,I) Las Vegas, NV MOB 95% —Sierra San Antonio Medical Plaza (C) Fontana, CA MOB 95% —Phoenix Children’s East Valley Care Center (C,J) Phoenix, AZ MOB 95% —Centennial Hills Medical Office Building I (D,I) Las Vegas, NV MOB 95% —Canyon Springs Medical Plaza (C,J) Gilbert, AZ MOB 95% —Palmdale Medical Plaza (D,F,K) Palmdale, CA MOB 95% —Cobre Valley Medical Plaza (C) Globe, AZ MOB 95% —Deer Valley Medical Office Building III (C,M) Phoenix, AZ MOB 95% —Summerlin Hospital Medical Office Building III (D,L) Las Vegas, NV MOB 95% — (A)Real estate assets owned by us and leased to subsidiaries of Universal Health Services, Inc. (“UHS”).(B)Real estate assets owned by us and leased to an unaffiliated third-party or parties.(C)Real estate assets owned by a limited liability company (“LLC”) in which we have a non-controlling interest as indicated above.(D)Real estate assets owned by a LLC in which we have a non-controlling interest as indicated above and include tenants who are unaffiliated third-parties or subsidiaries of UHS.(E)The lessee on the HealthSouth Deaconess Rehabilitation Hospital (“Deaconess”) is HealthSouth/Deaconess L.L.C., a joint venture between HealthSouth Properties Corporation and Deaconess Hospital, Inc. The leasewith Deaconess is scheduled to expire in June of 2009.(F)Tenants of this medical office building include subsidiaries of UHS. Pursuant to FIN 46R, as a result of our related party relationship with UHS and a master lease agreement between UHS and this property, thisLLC is considered to be a variable interest entity. Consequently, we consolidate the results of operations of this LLC in our consolidated financial statements.(G)The membership interests of this entity are held by a master LLC in which we hold a 90% non-controlling ownership interest.(H)The membership interests of this entity are held by a master LLC in which we hold a 95% non-controlling ownership interest.(I)This building, tenants of which may include subsidiaries of UHS, was completed and opened during 2007.(J)This building was completed and opened during 2007.(K)This building, which is under construction and may include tenants which are subsidiaries of UHS, is scheduled to be completed and opened during the second quarter of 2008.(L)This building, which is under construction and may include tenants which ware subsidiaries of UHS, is scheduled to be completed and opened during the third quarter of 2008.(M)This building is under construction and is scheduled to be completed and opened during the third quarter of 2008. 2008 Acquisition In February, 2008, we purchased Kindred Hospital; Corpus Christi, an unaffiliated 74-bed long-term acute care hospital located in Corpus Christi,Texas for a total purchase price of $8.1 million. We paid $4.7 million in cash and assumed $3.4 million of third-party mortgage debt that is non-recourse tous. The lease payments on this facility are unconditionally guaranteed by Kindred Healthcare, Inc. until the scheduled expiration in June, 2019. Other Information Included in our portfolio at December 31, 2007 are six hospital facilities with an aggregate investment of $133.9 million. The leases with respect to thesehospital facilities comprised approximately 65%, 58% and 56% of our revenues in 2007, 2006 and 2005, respectively, and as of December 31, 2007, theseleases have fixed terms with an average of 4.2 years remaining and include renewal options ranging from two to four, five-year terms. 2Table of ContentsWe believe a facility’s earnings before interest, taxes, depreciation, amortization and lease rental expense (“EBITDAR”) and a facility’s EBITDARdivided by the sum of minimum rent plus additional rent payable to us (“Coverage Ratio”), which are non-GAAP financial measures, are helpful to us andour investors as a measure of the operating performance of a hospital facility. EBITDAR, which is used as an indicator of a facility’s estimated cash flowgenerated from operations (before rent expense, capital additions and debt service), is used by us in evaluating a facility’s financial viability and its ability topay rent. For the hospital facilities owned by us as of December 31, 2007, the combined Coverage Ratio was approximately 4.6 (ranging from 3.3 to 7.0)during 2007, 5.5 (ranging from 3.8 to 8.3) during 2006 and 7.2 (ranging from 5.0 to 13.6) during 2005. The Coverage Ratio for individual facilities varies.See “Relationship with Universal Health Services, Inc.” below for Coverage Ratio information related to the four hospital facilities leased to subsidiaries ofUHS. Pursuant to the terms of our leases for our hospital facilities, each lessee, including subsidiaries of UHS, is responsible for building operations,maintenance, renovations and property insurance. We, or the LLCs in which we have invested, are responsible for the building operations, maintenance andrenovations of the preschool and childcare centers and the MOBs, however, a portion, or in some cases all, of the expenses associated with the MOBs arepassed on directly to the tenants. Cash reserves have been established to fund required building maintenance and renovations at the multi-tenant MOBs.Lessees are required to maintain all risk, replacement cost and commercial property insurance policies on the leased properties and we, or the LLC in whichwe have invested, are also named insureds on these policies. In addition, we, UHS or the LLCs in which we have invested, maintain property insurance on allproperties. For additional information on the terms of our leases, see “Relationship with Universal Health Services, Inc.” See our consolidated financial statements and accompanying notes to the consolidated financial statements included in this Annual Report for our totalassets, liabilities, debt, revenues, income and other operating information. Relationship with Universal Health Services, Inc. (“UHS”) Leases: We commenced operations in 1986 by purchasing certain subsidiaries from UHS and immediately leasing the properties back to therespective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years with up to sixadditional 5-year renewal terms, with base rents set forth in the leases effective for all but the last two renewal terms. In 1998, the lease for McAllen MedicalCenter was amended to provide that the last two renewal terms would also be fixed at the initial agreed upon base rental. This lease amendment was inconnection with certain concessions granted by UHS with respect to the renewal of other leases. The base rents are paid monthly and each lease also providesfor additional or bonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to acorresponding quarter in the base year. The leases with subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another. The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 54% of our total revenue for the five yearsended December 31, 2007 (approximately 57% for the year ended December 31, 2007). Including 100% of the revenues generated at the unconsolidated LLCsin which we have various non-controlling equity interests ranging from 33% to 99%, the leases on the UHS hospital facilities accounted for approximately25% of the combined consolidated and unconsolidated revenue for the five years ended December 31, 2007 (approximately 24% for the year endedDecember 31, 2007). In addition, seven MOBs (plus two additional MOBs currently under construction) owned by LLCs in which we hold various non-controlling equity interests, include tenants which are subsidiaries of UHS. For the four hospital facilities currently owned by us and leased to subsidiaries ofUHS, the combined Coverage Ratio was approximately 4.5, 5.7 and 7.4 for the years ended December 31, 2007, 2006 and 2005, respectively. The CoverageRatio for individual facilities vary and range from 3.3 to 7.0 in 2007, 3.8 to 8.3 in 2006 and 5.0 to 13.6 in 2005. We cannot predict whether the leases withsubsidiaries of UHS, which have renewal options at existing lease rates, or any of our other leases, will be renewed at the end of their lease terms. If the leasesare not renewed at their current 3Table of Contentsrates, we would be required to find other operators for those facilities and/or enter into leases on terms potentially less favorable to us than the current leases. Pursuant to the Master Lease Document by and among us and certain subsidiaries of UHS, dated December 24, 1986 (the “Master Lease”), whichgoverns the leases of all hospital properties with subsidiaries of UHS, UHS has the option to renew the leases at the lease terms described below by providingnotice to us at least 90 days prior to the termination of the then current term. In addition, UHS has rights of first refusal to: (i) purchase the respective leasedfacilities 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 respectiveleased 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. UHS also has the right topurchase the respective leased facilities at the end of the lease terms or any renewal terms at the appraised fair market value. In addition, during 2006, as partof the overall exchange and substitution proposal relating to Chalmette Medical Center (“Chalmette”), as discussed below, as well as the early five year leaserenewals on Southwest Healthcare System-Inland Valley Campus (“Inland Valley”), Wellington Regional Medical Center (“Wellington”), McAllen MedicalCenter (“McAllen”) and The Bridgeway (“Bridgeway”), we agreed to amend the Master Lease to include a change of control provision. The change of controlprovision grants UHS the right, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the four leased hospitalproperties at their appraised fair market value. During the third quarter of 2005, Chalmette, a 138-bed acute care hospital located in Chalmette, Louisiana, was severely damaged and closed as a resultof Hurricane Katrina. At that time, the majority of the real estate assets of Chalmette were leased from us by a subsidiary of UHS and, in accordance with theterms of the lease, and as part of an overall evaluation of the leases between subsidiaries of UHS and us, UHS offered substitution properties rather thanexercise its right to rebuild the facility or offer cash for Chalmette. Independent appraisals were obtained by us and UHS which indicated that the pre-hurricanefair market value of the leased facility was $24.0 million. During the third quarter of 2006, we completed the asset exchange and substitution pursuant to the Asset Exchange and Substitution Agreement(“Agreement”) with UHS whereby we agreed to terminate the lease between us and Chalmette and to transfer the real property assets and all rights attendantthereto (including insurance proceeds) of Chalmette to UHS in exchange and substitution for newly constructed real property assets owned by UHS (“CapitalAdditions”) at Wellington, Bridgeway and Inland Valley, in satisfaction of the obligations under the Chalmette lease. The Capital Additions consist ofproperties which were recently constructed on, or adjacent to, facilities already owned by us as well as a recently constructed Capital Addition at Inland Valleywhich was completed and opened during the third quarter of 2007. Pursuant to section 1033(a)(1) of the Internal Revenue Code of 1986, as amended (the“IRC”), we recognized no gain for federal income tax purposes based upon the transaction as agreed upon in the Agreement. The total cost of the 44-bed Capital Addition at Inland Valley amounted to $11.7 million, which exceeded the $11.0 million threshold included in theAgreement. Pursuant to the terms of the Agreement, the $760,000 of cost in excess of the $11.0 million threshold has been paid to UHS in cash and UHS willpay incremental rent on the $760,000 excess cost at a rate of 6.75%. The table below details the renewal options and terms for each of the four UHS hospital facilities: Hospital Name Type of Facility AnnualMinimumRent End ofLease Term RenewalTerm(years) McAllen Medical Center Acute Care $5,485,000 December, 2011 20(a)Wellington Regional Medical Center Acute Care $3,030,000 December, 2011 20(b)Southwest Healthcare System, Inland Valley Campus Acute Care $2,648,000(d) December, 2011 20(b)The Bridgeway Behavioral Health $930,000 December, 2014 10(c) 4Table of Contents (a)UHS has four 5-year renewal options at existing lease rates (through 2031).(b)UHS has two 5-year renewal options at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through2031).(c)UHS has two 5-year renewal options at fair market value lease rates (2015 through 2024).(d)Includes incremental rent on the $760,000 of Capital Addition cost in excess of $11.0 million. See Note 2 to the consolidated financial statements-Relationship with UHS and Related Party Transactions for additional disclosure related to ourleases with subsidiaries of UHS. UHS Legal Proceedings: We have been advised by UHS that UHS, together with its South Texas Health System affiliates, which operate McAllenMedical Center, were served with a subpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and HumanServices (“OIG”). At that time, the Civil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigationunder the False Claims Act regarding compliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and thesolicitation of patient referrals from physicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS hasadvised us that since January of 2006, documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including anadditional March 9, 2007 subpoena. On February 16, 2007, UHS’s South Texas Health System affiliates were served with a search warrant in connectionwith what UHS has been advised is a related criminal Grand Jury investigation concerning the production of documents. At that time, the government obtainedvarious documents and other property related to the facilities. Follow-up Grand Jury subpoenas for documents and witnesses and other requests forinformation were subsequently served on South Texas Health System facilities and certain UHS employees and former employees. UHS’s legal representatives continue to meet with representatives of the civil and criminal divisions of the United States Attorney’s Office for theSouthern District of Texas to discuss the status of these matters. UHS’s representatives have been advised that the government is continuing its investigations.UHS understands that, based on those discussions and its investigations to date, the government is focused on certain arrangements entered into by the SouthTexas Health System affiliates which, the government believes, may have violated Medicare and Medicaid rules and regulations pertaining to payments tophysicians and the solicitation of patient referrals from physicians and other matters relating to payments to various individuals which may have constitutedimproper or illegal payments. UHS understands that the government is also focusing its investigation to determine whether the South Texas Health Systemaffiliates and certain individuals illegally failed to fully comply with the original OIG subpoena. UHS is investigating these matters, cooperating with theinvestigations and responding to the matters raised with them. UHS continues to produce documents on a rolling basis to the government based on its requestspursuant to its investigations. UHS expects to continue their discussions with the government to attempt to resolve these matters in a manner satisfactory toUHS and the government. There is no assurance that UHS will be able to do so, and, at this time, UHS is unable to evaluate the extent of any potentialfinancial or other exposure in connection with these matters which are related to the subject of the government’s investigations. UHS has advised us that it monitors all aspects of its business and that it has developed a comprehensive ethics and compliance program that isdesigned to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmentalinvestigation or litigation may result in interpretations that are inconsistent with industry practices, including UHS’s. Although UHS believes its policies,procedures and practices comply with governmental regulations, no assurance can be given that UHS will not be subjected to further inquiries or actions, orthat UHS will not be faced with sanctions, fines or penalties in connection with the investigation of their South Texas Health System affiliates. Even if UHSwere to ultimately prevail, the government’s inquiry and/or action in connection with this matter could have a material adverse effect on UHS’s futureoperating results and on the future operating results of McAllen Medical Center. While the base rentals are guaranteed by UHS through the end of the existinglease term, should this matter adversely impact the future revenues and/or operating results of McAllen Medical Center, the future 5Table of Contentsbonus rental earned by us on this facility may be materially, adversely impacted. Bonus rental revenue earned by us from McAllen Medical Center amountedto $1.7 million during 2007 and $1.9 million during 2006. We can provide no assurance that this matter will not have a material adverse impact onunderlying value of McAllen Medical Center or on the future base rental earned on this facility should the existing lease not be renewed pursuant to its currentlease rates after its December, 2011 scheduled expiration of the existing lease term. Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an AdvisoryAgreement (the “Advisory Agreement”) dated December 24, 1986. Under the Advisory Agreement, the Advisor is obligated to present an investment programto us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity tous), to provide administrative services to us and to conduct our day-to-day affairs. In performing its services under the Advisory Agreement, the Advisor mayutilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. TheAdvisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Trustees who are unaffiliated withUHS (the “Independent Trustees”), that the Advisor’s performance has been satisfactory. The Advisory Agreement may be terminated for any reason uponsixty days written notice by us or the Advisor. The Advisory Agreement has been renewed for 2008. All transactions between us and UHS must be approvedby the Independent Trustees. The Advisory Agreement provides that the Advisor is entitled to receive an annual advisory fee equal to 0.60% of our average invested real estate assets,as derived from our consolidated balance sheet. The advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financialstatements. In addition, the Advisor is entitled to an annual incentive fee equal to 20% of the amount by which cash available for distribution to shareholdersfor each year, as defined in the Advisory Agreement, exceeds 15% of our equity as shown on our consolidated balance sheet, determined in accordance withgenerally accepted accounting principles without reduction for return of capital dividends. The Advisory Agreement defines cash available for distribution toshareholders as net cash flow from operations less deductions for, among other things, amounts required to discharge our debt and liabilities and reserves forreplacement and capital improvements to our properties and investments. Advisory fees incurred and paid (or payable) to UHS amounted to $1.4 million foreach of 2007, 2006 and 2005. No incentive fees were paid during 2007, 2006 or 2005. Officers and Employees: Our officers are all employees of UHS and although as of December 31, 2007 we had no salaried employees, our officers doreceive stock-based compensation from time-to-time. Share Ownership: As of December 31, 2007, UHS owned 6.7% of our outstanding shares of beneficial interest. SEC reporting requirements of UHS: UHS is subject to the reporting requirements of the SEC and is required to file annual reports containingaudited financial information and quarterly reports containing unaudited financial information. Since the leases on the hospital facilities leased to wholly-owned subsidiaries of UHS comprised approximately 57% of our consolidated revenues for the year ended December 31, 2007, and since UHS is ourAdvisor, you are encouraged to obtain the publicly available filings for UHS, Inc. from the SEC’s website at www.sec.gov. These filings are the soleresponsibility of UHS and are not incorporated by reference herein. Taxation We believe we have operated in such a manner as to qualify for taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code of1986, as amended, and we intend to continue to operate in such a manner. If we qualify for taxation as a REIT, we will generally not be subject to federalcorporate income taxes on our net income that is currently distributed to shareholders. This treatment substantially eliminates the “double taxation”, e.g. at thecorporate and shareholder levels, that usually results from investment in the stock of a corporation. Please see the heading “If we fail to maintain our REITstatus, we will become subject to federal income tax on our taxable income at regular corporate rates” under “Risk Factors” for more information. 6Table of ContentsCompetition We compete for the acquisition, leasing and financing of health care related facilities. Our competitors include, but are not limited to, other REITs,banks and other companies, including UHS. Some of these competitors are larger and have a lower cost of capital than we do. Additionally, the potential forconsolidation at the REIT or operator level appears to have increased. These developments could result in fewer investment opportunities for us and lowerspreads over our cost of our capital, which would hurt our growth. In most geographical areas in which our facilities operate, there are other facilities that provide services comparable to those offered by our facilities. Inaddition, some competing facilities are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported by endowments andcharitable contributions and exempt from property, sale and income taxes. Such exemptions and support are not available to our facilities. In some markets,certain competing facilities may have greater financial resources, be better equipped and offer a broader range of services than those available at our facilities.Certain hospitals that are located in the areas served by our facilities are specialty hospitals that provide medical, surgical and behavioral health services,facilities and equipment that are not available at our hospitals. The increase in outpatient treatment and diagnostic facilities, outpatient surgical centers andfreestanding ambulatory surgical centers also increases competition for us. In McAllen, Texas, the location of our largest facility, McAllen Medical Center (which is operated by a subsidiary of UHS), intense competition hascontinued from other healthcare providers, including physician-owned facilities. As a result, the facility has experienced significant declines in patient volumeand profitability. In response to these competitive pressures, UHS has, among other things, undertaken significant capital investment in the market includinga new dedicated 120-bed children’s facility, which was completed and opened during the first quarter of 2006, as well as a 134-bed replacement behavioralhealth facility, which was completed and opened during the second quarter of 2006. We do not have an ownership interest in the real estate assets of either ofthese newly constructed UHS facilities. During the fourth quarter of 2007, newly constructed capacity at a physician owned hospital was completed andopened which unfavorably impacted the patient volumes, net revenues and profitability at McAllen Medical Center during the quarter. The future patientvolumes, net revenues and profitability at McAllen Medical Center are expected to continue to be unfavorably impacted as a result of this increased competitorcapacity and expansion of services. A continuation of the provider competition in this market, as well as the additional capacity recently completed by UHSand others, could result in additional erosion of the net revenues and financial operating results of McAllen Medical Center which may negatively impact thebonus rentals earned by us on this facility and may potentially have a negative impact on the future lease renewal terms (current lease expires in December,2011) and the underlying value of the property. In addition, the number and quality of the physicians on a hospital’s staff are important factors in determining a hospital’s competitive advantage.Typically, physicians are responsible for making hospital admissions decisions and for directing the course of patient treatment. The operators of our facilitiesalso compete with other health care providers in recruiting and retaining qualified hospital management, nurses and other medical personnel. The operators ofour acute care and behavioral health care facilities are experiencing the effects of a shortage of skilled nursing staff nationwide, which has caused and maycontinue to cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Our operators may experience difficulties attracting andretaining qualified physicians, nurses and medical support personnel. We anticipate that our operators, including UHS, will continue to encounter increasedcompetition in the future that could lead to a decline in patient volumes and harm their businesses, which in turn, could harm our business. A large portion of our non-hospital properties consist of MOBs which are located either close to or on the campuses of hospital facilities. Theseproperties 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 officespace and market rental rates. To improve our competitive position, we anticipate that we will continue investing in additional healthcare related facilities andleasing the facilities to qualified operators, perhaps including UHS and subsidiaries of UHS. 7Table of ContentsRegulation and Other Factors During 2007, 2006 and 2005, 53%, 48% and 47%, respectively, of our revenues were earned pursuant to leases with operators of acute care serviceshospitals, all of which are subsidiaries of UHS. A significant portion of the revenue earned by the operators of our acute care hospitals is derived from federaland state healthcare programs, including Medicare and Medicaid (excluding managed Medicare and Medicaid programs). The healthcare industry is subject to numerous laws, regulations and rules including, among others, those related to government healthcare participationrequirements, various licensure and accreditations, reimbursement for patient services, health information privacy and security rules, and Medicare andMedicaid fraud and abuse provisions (including, but not limited to, federal statutes and regulations prohibiting kickbacks and other illegal inducements topotential referral sources, false claims submitted to federal health care programs and self-referrals by physicians). Providers that are found to have violatedany of these laws and regulations may be excluded from participating in government healthcare programs, subjected to significant fines or penalties and/orrequired to repay amounts received from government for previously billed patient services. This government regulation of the healthcare industry affects usbecause: (i)The financial ability of lessees to make rent payments to us may be affected by governmental regulations such as licensure, certification forparticipation in government programs, and government reimbursement, and; (ii)Our bonus rents are based on our lessees’ net revenues which in turn are affected by the amount of reimbursement such lessees receive from thegovernment. Although UHS and the other operators of our acute care facilities believe that their policies, procedures and practices comply with governmentalregulations, no assurance can be given that they will not be subjected to governmental inquiries or actions, or that they would not be faced with sanctions,fines or penalties if so subjected. Because many of these laws and regulations are relatively new, in many cases, our operators don’t have the benefit ofregulatory or judicial interpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject theircurrent or past practices to allegations of impropriety or illegality or could require them to make changes in the facilities, equipment, personnel, services,capital expenditure programs and operating expenses. Even if they were to ultimately prevail, a significant governmental inquiry or action under one of theabove laws, regulations or rules could have a material adverse effect upon them, and in turn, us. See Relationship with Universal Health Services, Inc.-UHS Legal Proceedings for disclosure related to McAllen Medical Center. A significant portion of the revenue earned by the operators of our acute care hospitals is derived from federal and state healthcare programs, includingMedicare and Medicaid. Under the statutory framework of the Medicare and Medicaid programs, many of the general acute care operations are subject toadministrative rulings, interpretations and discretion that may affect payments made under either or both of such programs as well as by other third partypayors. The federal government makes payments to participating hospitals under its Medicare program based on various formulas. For inpatient services, theoperators of our acute care hospitals are subject to a prospective payment system (“PPS”). Under inpatient PPS, hospitals are paid a predetermined fixedpayment amount for each hospital discharge. The fixed payment amount is based upon each patient’s diagnosis related group (“DRG”). Every DRG isassigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. Theserates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. The DRG rates are adjustedannually based on geographic region. DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to adjust the DRG rates, known as the“hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services. Generally, however, thepercentage increases in the DRG payments have been lower than the projected increase in the cost of goods and services purchased by 8Table of Contentshospitals. For federal fiscal years 2007, 2006 and 2005, the update factors were 3.4%, 3.7% and 3.3%, respectively. For 2008, the update factor is 3.3%.Hospitals are allowed to receive the full basket update if they provide the Centers for Medicare and Medicaid Services (“CMS”) with specific data relating tothe quality of services provided. The operators of our acute care hospital facilities have complied fully with this requirement and intend to comply fully infuture periods. For outpatient services, both general acute and behavioral health hospitals are paid under an outpatient PPS according to ambulatory procedure codes.Outpatient services were traditionally paid at the lower of customary charges or on a reasonable cost basis. The outpatient PPS rate is an unadjusted nationalpayment amount that includes the Medicare payment and the beneficiary co-payment. Special payments under the outpatient PPS may be made for certain newtechnology items and services through transitional pass-through payments and special reimbursement rates. Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals whoare unable to afford care. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individualhospitals. Amounts received under the Medicaid program are generally significantly less than a hospital’s customary charges for services provided. In additionto revenues received pursuant to the Medicare program, our operators receive a large portion of their revenues either directly from Medicaid programs or frommanaged care companies managing Medicaid. In addition to Medicare and Medicaid, our operators, including UHS, receive payments from private payors, including managed care companies,commercial insurance providers and individuals. The ability of our operators to negotiate favorable service contracts with purchasers of group health careservices significantly affects the revenues and operating results of our facilities. A primary collection risk for our operators relates to uninsured patients andthe portion of the bill that is the patient’s responsibility, which primarily includes co-payments and deductibles. Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels ofMedicare and Medicaid funding, which could also adversely affect future payments received by operators of our facilities. In addition to statutory andregulatory changes to the Medicare and each of the state Medicaid programs, our operators’ operations and reimbursement may be affected by administrativerulings, new or novel interpretations and determinations of existing laws and regulations, post-payment audits, requirements for utilization review and newgovernmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and thetiming of payments to our facilities. In addition, we cannot predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation orregulations may take or what their impact may be. An increasing number of legislative initiatives have been introduced or proposed in recent years that wouldresult in major changes in the health care delivery system on a national or a state level. Among the proposals that have been introduced are price controls onhospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer healthinsurance coverage to their employees and the creation of government health insurance plans that would cover all citizens and increase payments bybeneficiaries. We cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, these proposals would have on operators and, thus,our business. 9Table of ContentsExecutive Officers of the Registrant Name Age PositionAlan B. Miller 70 Chairman of the Board, Chief Executive Officer and PresidentCharles F. Boyle 48 Vice President and Chief Financial OfficerCheryl K. Ramagano 45 Vice President, Treasurer and SecretaryTimothy J. Fowler 52 Vice President, Acquisition and Development Mr. Alan B. Miller has been our Chairman of the Board and Chief Executive Officer since our inception in 1986 and was appointed President inFebruary of 2003. He had previously served as our President until 1990. Mr. Miller has been Chairman of the Board, President and Chief Executive Officer ofUHS since its inception in 1978. Mr. Miller also serves as a Director of Penn Mutual Life Insurance Company. Mr. Charles F. Boyle was appointed Chief Financial Officer in February of 2003 and has served as our Vice President and Controller since 1991.Mr. Boyle has held various positions at UHS since 1983 and currently serves as its Vice President and Controller. He was appointed Controller of UHS in2003 and had served as its Assistant Vice President-Corporate Accounting since 1994. Ms. Cheryl K. Ramagano was appointed Secretary in February of 2003 and served as our Vice President and Treasurer since 1992. Ms. Ramagano hasheld various positions at UHS since 1983 and currently serves as its Vice President and Treasurer. She was appointed Treasurer of UHS in 2003 and hadserved as its Assistant Treasurer since 1994. Mr. Timothy J. Fowler was elected as our Vice President of Acquisition and Development upon the commencement of his employment with UHS in1993. Prior thereto, he served as a Vice President of The Chase Manhattan Bank, N.A. since 1986. ITEM 1A.Risk Factors We are subject to numerous known and unknown risks, many of which are described below and elsewhere in this Annual Report. Any of the eventsdescribed below could have a material adverse effect on our business, financial condition and results of operations. Additional risks and uncertainties that weare not aware of, or that we currently deem to be immaterial, could also impact our business and results of operations. A substantial portion of our revenues are dependent upon one operator. If UHS experiences financial difficulties, or otherwise fails to makepayments to us, our revenues will significantly decline. For the year ended December 31, 2007, UHS accounted for 57% of our revenues. In addition, as of December 31, 2007, subsidiaries of UHS leasedfour of the six hospital facilities owned by us with terms expiring in 2011 or 2014. We cannot assure you that UHS will continue to satisfy its obligations tous. The failure or inability of UHS to satisfy its obligations to us could materially reduce our revenues and net income, which could in turn reduce the amountof dividends we pay and cause our stock price to decline. Our relationship with UHS may create conflicts of interest. In addition to being dependent upon UHS for a substantial portion of our revenues and leases, since 1986, UHS of Delaware, Inc. (the “Advisor”), awholly-owned subsidiary of UHS, has served as our Advisor. Pursuant to our Advisory Agreement, the Advisor is obligated to present an investment programto us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity tous), to provide administrative services to us and to conduct our day-to-day affairs. Further, all of our officers are all employees of UHS. As of December 31,2007, we had no salaried employees. We believe that the quality and depth of the management and advisory services provided to us by our Advisor 10Table of Contentsand UHS could not be replicated by contracting with unrelated third parties or by being self-advised without considerable cost increases. We believe that theserelationships have been beneficial to us in the past, but we cannot guarantee that will not become detrimental to us in the future. All transactions with UHS must be approved by a majority of our Independent Trustees. We believe that our current leases and business dealings withUHS have been entered into on commercially reasonable terms. However, because of our historical and continuing relationship with UHS and its subsidiaries,in the future, our business dealings may not be on the same or as favorable terms as we might achieve with a third party with whom we do not have such arelationship. Disputes may arise between us and UHS that we are unable to resolve or the resolution of these disputes may not be as favorable to us as aresolution we might achieve with a third party. We hold significant, non-controlling equity ownership interests in various LLCs. For the year ended December 31, 2007, 59% of our consolidated and unconsolidated revenues were generated by LLCs in which we hold a majority,non-controlling equity ownership interest. Our level of investment and lack of control exposes us to potential losses of our investments and revenues. Althoughour ownership arrangements have been beneficial to us in the past, we cannot guarantee that they will continue to be beneficial in the future. We cannot be certain of the availability and terms of external sources of capital to fund the growth of our business when needed. To retain our status as a REIT, we are required to distribute 90% of our taxable income to shareholders and, therefore, we generally cannot use incomefrom operations to fund our growth. Accordingly, our growth strategy depends, in part, upon our ability to raise additional capital at reasonable costs to fundnew investments. We believe we will be able to raise additional debt and equity capital at reasonable costs to refinance our debts at or prior to their maturitiesand to invest at yields which exceed our cost of capital. We cannot predict, however, whether financing will be available to us on satisfactory terms whenneeded, which could harm our business. Our growth strategy is not assured and may fail. In addition, the degree to which we are, or in the future may become, leveraged, our ability to obtain financing could be adversely impacted and couldmake us more vulnerable to competitive pressures. Our ability to meet existing and future debt obligations, depends upon our future performance and ourability to secure additional financing on satisfactory terms, each of which is subject to financial, business and other factors that are beyond our control. Anyfailure by us to meet our financial obligations would harm our business. The bankruptcy, default, insolvency or financial deterioration of our tenants could significantly delay our ability to collect unpaid rents orrequire us to find new operators. Our financial position and our ability to make distributions to our shareholders may be adversely affected by financial difficulties experienced by anyof our major tenants, including bankruptcy, insolvency or a general downturn in the business. We are exposed to the risk that our operators may not be able tomeet their obligations, which may result in their bankruptcy or insolvency. Although our leases and loans provide us the right to terminate an investment, evictan operator, demand immediate repayment and other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy orreorganization. An operator in bankruptcy may be able to restrict our ability to collect unpaid rents or interest during the bankruptcy proceeding. Real estate ownership creates risks and liabilities that may result in unanticipated losses or expenses. Our business is subject to risks associated with real estate acquisitions and ownership, including: • general liability, property and casualty losses, some of which may be uninsured; 11Table of Contents • the illiquid nature of real estate and the real estate market that impairs our ability to purchase or sell our assets rapidly to respond to changingeconomic conditions; • real estate market factors, such as the supply and demand of office space and market rental rates, changes in interest rates as well as an increase inthe development of medical office condominiums in certain markets; • costs that may be incurred relating to maintenance and repair, and the need to make expenditures due to changes in governmental regulations,including the Americans with Disabilities Act; • environmental hazards at our properties for which we may be liable, including those created by prior owners or occupants, existing tenants,mortgagors or other persons, and; • defaults and bankruptcies by our tenants. In addition to the foregoing risks, we cannot predict whether the leases on our properties, including the leases on the properties leased to subsidiaries ofUHS, which have options to purchase the respective leased facilities at the end of the lease or renewal terms at the appraised fair market value, will be renewedat their current rates at the end of the lease terms in 2011 or 2014. If the leases are not renewed, we may be required to find other operators for these facilitiesand/or enter into leases with less favorable terms. The exercise of purchase options for our facilities may result in a less favorable rate of return for us than therental revenue currently earned on such facilities. Further, the purchase options and rights of first refusal granted to the respective lessees to purchase or leasethe respective leased facilities, after the expiration of the lease term, may adversely affect our ability to sell or lease a facility, and may present a potentialconflict of interest between us and UHS since the price and terms offered by a third-party are likely to be dependent, in part, upon the financial performanceof the facility during the final years of the lease term. Significant potential liabilities and rising insurance costs and availability may have an adverse effect on the operations of our operators,which may negatively impact their ability to meet their obligations to us. As is typical in the healthcare industry, in the ordinary course of business, our operators, including UHS, are subject to medical malpractice lawsuits,product liability lawsuits and other legal actions. Some of these actions may involve large claims, as well as significant defense costs. If their ultimate liabilityfor professional and general liability claims could change materially from current estimates, if such policy limitations should be partially or fully exhausted inthe future, or payments of claims exceed estimates or are not covered by insurance, it could have a material adverse effect on the operations of our operators. In addition, the malpractice expenses of our operators, including UHS, have increased in recent years which may increase their self-insured exposure forprofessional and general liability claims. There can be no assurance that insurance will continue to be available at reasonable prices that allow them tomaintain adequate coverage. If these trends continue, they could have a material adverse effect on their operations. Property insurance rates, particularly forearthquake insurance in California, have also continued to increase. Three LLCs that own properties in California, in which we have various non-controllingequity interests, could not obtain earthquake insurance at rates which are economically beneficial in relation to the risks covered. Our tenants and operators, including UHS, may be unable to fulfill their insurance, indemnification and other obligations to us under their leases andmortgages and thereby potentially expose us to those risks. In addition, our tenants and operators may be unable to pay their lease or mortgage payments,which could potentially decrease our revenues and increase our collection and litigation costs. Moreover, to the extent we are required to foreclose on the affectedfacilities, our revenues from those facilities could be reduced or eliminated for an extended period of time. In addition, we may in some circumstances benamed as a defendant in litigation involving the actions of our operators. Although we have no involvement in the activities of our operators and our standardleases generally require our operators to carry insurance to cover us in certain cases, a significant judgment against us in such litigation could exceed our andour operators’ insurance coverage, which would require us to make payments to cover the judgment. 12Table of ContentsIncreased competition in the health care industry has resulted in lower revenues and higher costs for our operators, including UHS, andmay affect our revenues, property values and lease renewal terms. The health care industry is highly competitive and competition among hospitals and other health care providers for patients has intensified in recentyears. In most geographical areas in which our facilities are operated, there are other facilities that provide services comparable to those offered by our facilities.In addition, some competing facilities are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported by endowmentsand charitable contributions and exempt from property, sale and income taxes. Such exemptions and support are not available to our operators. In somemarkets, certain competing facilities may have greater financial resources, be better equipped and offer a broader range of services than those available at ourfacilities. Certain hospitals that are located in the areas served by our operators’ facilities are specialty or large hospitals that provide medical, surgical andbehavioral health services, facilities and equipment that are not available at our operators’ hospitals. The increase in outpatient treatment and diagnosticfacilities, outpatient surgical centers and freestanding ambulatory surgical centers also increases competition for our operators. In McAllen, Texas, the location of our largest facility, McAllen Medical Center (which is operated by a subsidiary of UHS), intense competition hascontinued from other healthcare providers, including physician-owned facilities. As a result, the facility has experienced significant declines in patient volumeand profitability. In response to these competitive pressures, UHS has, among other things, undertaken significant capital investment in the market includinga new dedicated 120-bed children’s facility, which was completed and opened during the first quarter of 2006, as well as a 134-bed replacement behavioralhealth facility, which was completed and opened during the second quarter of 2006. We do not have an ownership interest in the real estate assets of either ofthese newly constructed UHS facilities. During the fourth quarter of 2007, newly constructed capacity at a physician owned hospital was completed andopened which unfavorably impacted the patient volumes, net revenues and profitability at McAllen Medical Center during the quarter. The future patientvolumes, net revenues and profitability at McAllen Medical Center are expected to continue to be unfavorably impacted as a result of this increased competitorcapacity and expansion of services. A continuation of the provider competition in this market, as well as the additional capacity recently completed by UHSand others, could result in additional erosion of the net revenues and financial operating results of McAllen Medical Center which may negatively impact thebonus rentals earned by us on this facility and may potentially have a negative impact on the future lease renewal terms (current lease expires in December,2011) and the underlying value of the property. In addition, the number and quality of the physicians on a hospital’s staff are important factors in determining a hospital’s competitive advantage.Typically, physicians are responsible for making hospital admissions decisions and for directing the course of patient treatment. The operators of our facilitiesalso compete with other health care providers in recruiting and retaining qualified hospital management, nurses and other medical personnel. The operators ofour acute care and behavioral health care facilities are experiencing the effects of a shortage of skilled nursing staff nationwide, which has caused and maycontinue to cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Our operators may experience difficulties attracting andretaining qualified physicians, nurses and medical support personnel. We anticipate that our operators, including UHS, will continue to encounter increasedcompetition in the future that could lead to a decline in patient volumes and harm their businesses, which in turn, could harm our business. Operators that fail to comply with governmental reimbursement programs such as Medicare or Medicaid, licensing and certificationrequirements, fraud and abuse regulations or new legislative developments may be unable to meet their obligations to us. Our operators, including UHS and its subsidiaries, are subject to numerous federal, state and local laws and regulations that are subject to frequent andsubstantial changes (sometimes applied retroactively) resulting from legislation, adoption of rules and regulations, and administrative and judicialinterpretations of existing law. The 13Table of Contentsultimate timing or effect of these changes cannot be predicted. Government regulation may have a dramatic effect on our operators’ costs of doing business andthe amount of reimbursement received by both government and other third-party payors. The failure of any of our operators to comply with these laws,requirements and regulations could adversely affect their ability to meet their obligations to us. These regulations include, among other items: • hospital billing practices; • relationships with physicians and other referral sources; • adequacy of medical care; • quality of medical equipment and services; • qualifications of medical and support personnel; • confidentiality, maintenance and security issues associated with health-related information and patient medical records; • the screening, stabilization and transfer of patients who have emergency medical conditions; • licensure and accreditation of our facilities; • hospital rate or budget review; • operating policies and procedures, and; • construction or expansion of facilities and services. If our operators fail to comply with applicable laws and regulations, they could be subjected to liabilities, including criminal penalties, civil penalties(including the loss of their licenses to operate one or more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid andother federal and state health care programs. The imposition of such penalties could jeopardize that operator’s ability to make lease or mortgage payments to usor to continue operating its facility. In addition, our bonus rents are based on our operators net revenues, which in turn are affected by the amount ofreimbursement that such lessees receive from the government. Although UHS and the other operators of our acute care facilities, believe that their policies, procedures and practices comply with governmentalregulations, no assurance can be given that they will not be subjected to governmental inquiries or actions, or that they would not be faced with sanctions,fines or penalties if so subjected. Because many of these laws and regulations are relatively new, in many cases, our operators don’t have the benefit ofregulatory or judicial interpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject theircurrent or past practices to allegations of impropriety or illegality or could require them to make changes in the facilities, equipment, personnel, services,capital expenditure programs and operating expenses. Even if they were to ultimately prevail, a significant governmental inquiry or action under one of theabove laws, regulations or rules could have a material adverse effect upon them, and in turn, us. UHS Legal Proceedings: We have been advised by UHS that UHS, together with its South Texas Health System affiliates, which operate McAllenMedical Center, were served with a subpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and HumanServices (“OIG”). At that time, the Civil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigationunder the False Claims Act regarding compliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and thesolicitation of patient referrals from physicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS hasadvised us that since January of 2006, documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including anadditional March 9, 2007 subpoena. On February 16, 2007, UHS’s South Texas 14Table of ContentsHealth System affiliates were served with a search warrant in connection with what UHS has been advised is a related criminal Grand Jury investigationconcerning the production of documents. At that time, the government obtained various documents and other property related to the facilities. Follow-up GrandJury subpoenas for documents and witnesses and other requests for information were subsequently served on South Texas Health System facilities and certainUHS employees and former employees. UHS’s legal representatives continue to meet with representatives of the civil and criminal divisions of the United States Attorney’s Office for theSouthern District of Texas to discuss the status of these matters. UHS’s representatives have been advised that the government is continuing its investigations.UHS understands that, based on those discussions and its investigations to date, the government is focused on certain arrangements entered into by the SouthTexas Health System affiliates which, the government believes, may have violated Medicare and Medicaid rules and regulations pertaining to payments tophysicians and the solicitation of patient referrals from physicians and other matters relating to payments to various individuals which may have constitutedimproper or illegal payments. UHS understands that the government is also focusing its investigation to determine whether the South Texas Health Systemaffiliates and certain individuals illegally failed to fully comply with the original OIG subpoena. UHS is investigating these matters, cooperating with theinvestigations and responding to the matters raised with them. UHS continues to produce documents on a rolling basis to the government based on its requestspursuant to its investigations. UHS expects to continue their discussions with the government to attempt to resolve these matters in a manner satisfactory toUHS and the government. There is no assurance that UHS will be able to do so, and, at this time, UHS is unable to evaluate the extent of any potentialfinancial or other exposure in connection with these matters which are related to the subject of the government’s investigations. UHS has advised us that it monitors all aspects of its business and that it has developed a comprehensive ethics and compliance program that isdesigned to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmentalinvestigation or litigation may result in interpretations that are inconsistent with industry practices, including UHS’s. Although UHS believes its policies,procedures and practices comply with governmental regulations, no assurance can be given that UHS will not be subjected to further inquiries or actions, orthat UHS will not be faced with sanctions, fines or penalties in connection with the investigation of their South Texas Health System affiliates. Even if UHSwere to ultimately prevail, the government’s inquiry and/or action in connection with this matter could have a material adverse effect on UHS’s futureoperating results and on the future operating results of McAllen Medical Center. While the base rentals are guaranteed by UHS through the end of the existinglease term, should this matter adversely impact the future revenues and/or operating results of McAllen Medical Center, the future bonus rental earned by uson this facility may be materially, adversely impacted. Bonus rental revenue earned by us from McAllen Medical Center amounted to $1.7 million during2007 and $1.9 million during 2006. We can provide no assurance that this matter will not have a material adverse impact on underlying value of McAllenMedical Center or on the future base rental earned on this facility should the existing lease not be renewed pursuant to its current lease rates after its December,2011 scheduled expiration of the existing lease term. Medicare, Medicaid and Private Payor Reimbursement: A significant portion of the revenue earned by the operators of our acute care hospitals isderived from federal and state healthcare programs, including Medicare and Medicaid. Given increasing budget deficits, the federal government and manystates are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect futurepayments received by operators of our facilities. In addition to statutory and regulatory changes to the Medicare and each of the state Medicaid programs, ouroperators’ operations and reimbursement may be affected by administrative rulings, new or novel interpretations and determinations of existing laws andregulations, post-payment audits, requirements for utilization review and new governmental funding restrictions, all of which may materially increase ordecrease program payments as well as affect the cost of providing services and the timing of payments to our facilities. In addition to changes in government reimbursement programs, our operators’ ability to negotiate favorable service contracts with purchasers of grouphealth services, including managed care providers, significantly 15Table of Contentsaffects the revenues and operating results of our facilities. Further, a primary collection risk for our operators relates to uninsured patients and the portion ofthe bill that is the patient’s responsibility, which primarily includes co-payments and deductibles. Health Care Reform: An increasing number of legislative initiatives have been introduced or proposed in recent years that would result in majorchanges in the health care delivery system on a national or a state level. Among the proposals that have been introduced are price controls on hospitals,insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurancecoverage to their employees and the creation of government health insurance plans that would cover all citizens and increase payments by beneficiaries. Wecannot predict whether any proposals will be adopted or, if adopted, what effect, if any, these proposals would have on operators and, thus, our business. If we fail to maintain our REIT status, we will become subject to federal income tax on our taxable income at regular corporate rates. In order to qualify as a REIT, we must comply with certain highly technical and complex Internal Revenue Code provisions. Although we believe wehave been qualified as a REIT since our inception, there can be no assurance that we have been so qualified or will remain qualified in the future. Failure toqualify as a REIT may subject us to income tax liabilities, including federal income tax at regular corporate rates. The additional income tax incurred maysignificantly reduce the cash flow available for distribution to shareholders and for debt service. In addition, if disqualified, we might be barred fromqualification as a REIT for four years following disqualification. The market value of our common stock could be substantially affected by various factors. Many factors, certain of which are outside of our control, could have an adverse effect on the share price of our common stock. These factors includecertain of the risks discussed herein, our financial condition, performance and prospects, the market for similar securities issued by REITs, demographicchanges, operating results of our operators and other hospital companies, changes in our financial estimates or recommendations of securities analysts,speculation in the press or investment community, the possible effects of war, terrorist and other hostilities, adverse weather conditions, the level of seasonalillnesses, changes in general conditions in the economy or the financial markets, or other developments affecting the health care industry. Ownership limitations and anti-takeover provisions in our declaration of trust and bylaws and under Maryland law may delay, defer orprevent a change in control or other transactions that could provide shareholders with a take-over premium. We are subject to significant anti-takeover provisions. In order to protect us against the risk of losing our REIT status for federal income tax purposes, our declaration of trust permits our Trustees to redeemshares acquired or held in excess of 9.8% of the issued and outstanding shares of our voting stock and, which in the opinion of the Trustees would jeopardizeour REIT status. In addition, any acquisition of our common or preferred shares that would result in our disqualification as a REIT is null and void. Theright of redemption may have the effect of delaying, deferring or preventing a change in control of our company and could adversely affect our shareholders’ability to realize a premium over the market price for the shares of our common stock. Our declaration of trust authorizes our Board of Trustees to issue additional shares of common and preferred stock and to establish the preferences,rights and other terms of any series of preferred stock that we issue. Although our Board of Trustees has no intention to do so at the present time, it couldestablish a series of preferred stock that could delay, defer or prevent a transaction or a change in control that might involve the payment of a premium over themarket price for our common stock or otherwise be in the best interests of our shareholders. 16Table of ContentsThese provisions could discourage unsolicited acquisition proposals or make it more difficult for a third-party to gain control of us, which couldadversely affect the market price of our securities and prevent shareholders from receiving a take-over premium. We depend heavily on key management personnel and the departure of one or more of our key executives or a significant portion of ouroperators’ local hospital management personnel could harm our business. The expertise and efforts of our senior executives and key members of our operators’ local hospital management personnel are critical to the success ofour business. The loss of the services of one or more of our senior executives or of a significant portion of our operators’ local hospital management personnelcould significantly undermine our management expertise and our operators’ ability to provide efficient, quality health care services at our facilities, whichcould harm their business, and in turn, harm our business. Increasing investor interest in our sector and consolidation at the operator or REIT level could increase competition and reduce ourprofitability. Our business is highly competitive and we expect that it may become more competitive in the future. We compete for the acquisition, leasing andfinancing of health care related facilities. Our competitors include, but are not limited to, other REITs, banks and other companies, including UHS, some ofwhich are larger and have a lower cost of capital than we do. Additionally, the potential for consolidation at the REIT or operator level appears to haveincreased. These developments could result in fewer investment opportunities for us and lower spreads over our cost of our capital, which would hurt ourgrowth. We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject usto liability or negatively affect our stock price. As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developedand instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update thisprogram in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with allpotentially applicable corporate regulations. For example, we cannot provide assurance that in the future our management will not find a material weakness inconnection with its annual review of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provideassurance that we could correct any such weakness to allow our management to assess the effectiveness of our internal control over financial reporting as of theend of our fiscal year in time to enable our independent registered public accounting firm to state that such assessment will have been fairly stated in ourAnnual Report on Form 10-K or state that we have maintained effective internal control over financial reporting as of the end of our fiscal year. If we fail tocomply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we must disclose anymaterial weakness in our internal control over financial reporting, our stock price could decline. Item 1B.Unresolved Staff Comments None. 17Table of ContentsITEM 2.Properties The following table shows our investments in hospital facilities leased to UHS and other non-related parties. The table on the next page providesinformation related to various properties in which we have significant investments, some of which are accounted for by the equity method. The capacity interms of beds (for the hospital facilities) and the five-year occupancy levels are based on information provided by the lessees. Lease TermHospital Facility Name and Location Type offacility Numberofavailablebeds @12/31/07 Average Occupancy(1) Minimumrent End ofinitialorrenewedterm Renewalterm(years) 2007 2006 2005 2004 2003 Southwest Healthcare System:Inland Valley Campus(2)Wildomar, California Acute Care 122 67% 85% 87% 78% 74% $2,648,000 2011 20McAllen Medical Center(3)McAllen, Texas Acute Care 441 68% 52% 59% 68% 72% 5,485,000 2011 20Wellington Regional MedicalCenterWest Palm Beach, Florida Acute Care 143 78% 77% 73% 72% 68% 3,030,000 2011 20The BridgewayNorth Little Rock, Arkansas BehavioralHealth 98 94% 92% 96% 98% 98% 930,000 2014 10Tri-State Rehabilitation HospitalEvansville, Indiana Rehabilitation 80 57% 53% 74% 74% 75% 885,000 2009 15Kindred Hospital Chicago CentralChicago, Illinois Sub-Acute Care 114 38% 46% 47% 47% 71% 1,373,000 2011 15 18Table of ContentsITEM 2.Properties (continued) Facility Name and Location Lease Term Type offacility Average Occupancy(1) Minimumrent End ofinitialorrenewedterm(4) Renewalterm(years) 2007 2006 2005 2004 2003 Kelsey-Seybold Clinic atKings CrossingKingwood, Texas MOB 100% 100% 100% 100% 100% 345,000 2010 noneProfessional Bldgs. at KingsCrossingKingwood, Texas MOB 86% 90% 90% 91% 82% 245,000 2008-2015 variousSouthern Crescent CenterRiverdale, Georgia MOB 26% 36% 49% 64% 70% 181,000 2011-2012 variousSouthern Crescent Center, IIRiverdale, Georgia MOB 94% 94% 94% 98% 98% 1,136,000 2010 10Cypresswood ProfessionalCenter Spring, Texas MOB 77% 92% 100% 100% 97% 348,000 2008-2012 VariousDesert Springs MedicalPlaza(5)Las Vegas, Nevada MOB 77% 96% 100% 100% 100% 1,089,000 2008-2016 variousOrthopaedic Specialists ofNevada BuildingLas Vegas, Nevada MOB 100% 100% 100% 100% 100% 232,000 2009 20Summerlin HospitalMOB(5)Las Vegas, Nevada MOB 87% 98% 100% 100% 100% 1,448,000 2008-2014 variousSummerlin HospitalMOB II(5)Las Vegas, Nevada MOB 81% 100% 100% 100% 100% 1,603,000 2008-2013 variousSheffield Medical BuildingAtlanta, Georgia MOB 82% 86% 85% 88% 99% 1,341,000 2008-2012 variousMedical Center of WesternConnecticut Danbury,Connecticut MOB 98% 85% 100% 100% 94% 830,000 2009-2017 variousChesterbrook AcademyAudubon, New Britain, Newtownand Uwchlan, Pennsylvania Preschool andChildcareCenters N/A N/A N/A N/A N/A 593,000 2010 10Family Doctor’s MedicalOffice BuildingShreveport, Louisiana MOB 100% 100% 100% 100% 100% 303,000 2011 10700 Shadow Lane andGoldring MOBs(5)Las Vegas, Nevada MOB 96% 90% 99% 99% 99% 2,096,000 2008-2017 variousSt. Mary’s ProfessionalOffice BuildingReno, Nevada MOB 95% 92% 77% — — 3,687,000 2012-2025 various 19Table of Contents N/A- Not Applicable(1)Average occupancy rate for the hospital facilities is based on the average number of available beds occupied during each of the five years endedDecember 31, 2007. Average available beds is the number of beds which are actually in service at any given time for immediate patient use with thenecessary equipment and staff available for patient care. A hospital may have appropriate licenses for more beds than are in service for a number ofreasons, including lack of demand, incomplete construction and anticipation of future needs. The average occupancy rate of a hospital is affected by anumber of factors, including the number of physicians using the hospital, changes in the number of beds, the composition and size of the population ofthe community in which the hospital is located, general and local economic conditions, variations in local medical and surgical practices and the degreeof outpatient use of the hospital services. Average occupancy rate for the multi-tenant medical office buildings is based on the occupied square footage ofeach building, including any applicable master leases.(2)In July, 2002, the operations of Inland Valley Regional Medical Center (“Inland Valley”) were merged with the operations of Rancho Springs MedicalCenter (“Rancho Springs”), an acute care hospital located in California and also operated by UHS, the real estate assets of which are not owned by us.Inland Valley, our lessee, was merged into Universal Health Services of Rancho Springs, Inc. The merged entity is now doing business as SouthwestHealthcare System (“Southwest Healthcare”). As a result of merging the operations of the two facilities, the revenues of Southwest Healthcare include therevenues of both Inland Valley and Rancho Springs. Although we do not own the real estate assets of the Rancho Springs facility, Southwest Healthcarebecame the lessee on the lease relating to the real estate assets of the Inland Valley facility. Since the bonus rent calculation for the Inland Valley campusis based on net revenues and the financial results of the two facilities are no longer separable, the lease was amended during 2002 to exclude from thebonus rent calculation the estimated net revenues generated at the Rancho Springs campus (as calculated pursuant to a percentage based allocationdetermined at the time of the merger). The average occupancy rates shown for this facility for all years were based on the combined number of bedsoccupied at the Inland Valley and Rancho Springs campuses.(3)During the first quarter of 2001, UHS purchased the assets and operations of the 60-bed McAllen Heart Hospital located in McAllen, Texas. Upon theacquisition by UHS, the Heart Hospital began operating under the same license as an integrated department of McAllen Medical Center. As a result ofcombining the operations of the two facilities, the revenues of McAllen Medical Center include revenues generated by the Heart Hospital, the real propertyof which is not owned by us. Accordingly, since the bonus rent calculation for McAllen Medical Center is based on net revenues and the financialresults of the two facilities are no longer separable, the McAllen Medical Center lease was amended during 2001 to exclude from the bonus rentcalculation, the estimated net revenues generated at the Heart Hospital (as calculated pursuant to a percentage based allocation determined at the time ofthe merger). During 2000, UHS purchased the South Texas Behavioral Health Center, a behavioral health care facility located in McAllen, Texas. Thelicense for this facility, the real property of which was not owned by us, was merged with the license for McAllen Medical Center and the financialresults of the facilities are no longer separable. During the second quarter of 2006, UHS opened a newly constructed behavioral health care facility andthe operations of South Texas Behavioral Health Center were transferred into this new facility. We do not own the real property of this newly constructedbuilding. There was no amendment to the McAllen Medical Center lease related to the operations of the South Texas Behavioral Health Center. Noassurance can be given as to the effect, if any, the consolidation of the facilities as mentioned above, had on the underlying value of McAllen MedicalCenter. Base rental commitments and the guarantee by UHS under the original lease continue for the remainder of the lease terms. The averageoccupancy rates shown for this facility in all years presented were based on the combined number of beds at McAllen Medical Center, McAllen HeartHospital and South Texas Behavioral Health Center.(4)Properties are multi-tenant MOBs which have various lease maturity dates.(5)The real estate assets of this facility are owned by a LLC in which we own a non-controlling equity interest and include tenants who are unaffiliatedthird-parties or subsidiaries of UHS. 20Table of ContentsSet forth is information detailing the rentable square feet (“RSF”) associated with each of our investments and the percentage of RSF on which leasesexpire during the next five years and thereafter: Total RSF AvailableforLeaseJan. 1,2008 Percentage of RSF with lease expirations 2008 2009 2010 2011 2012 2013andlater Hospital Investments McAllen Medical Center 532,403 0% 0% 0% 0% 100% 0% 0%Wellington Regional Medical Center 270,915 0% 0% 0% 0% 100% 0% 0%Kindred Hospital Chicago Central 115,554 0% 0% 0% 0% 100% 0% 0%Southwest Healthcare System—Inland Valley Campus 108,499 0% 0% 0% 0% 100% 0% 0%The Bridgeway 77,901 0% 0% 0% 0% 0% 0% 100%HealthSouth Deaconess Rehabilitation Hospital 77,440 0% 0% 100% 0% 0% 0% 0%Subtotal Hospitals 1,182,712 0% 0% 7% 0% 86% 0% 7%Other Investments Medical Office Buildings: Desert Samaritan Hospital MOBs (a) 200,755 8% 25% 10% 16% 14% 13% 15%Saint Mary’s Professional Office Building 190,268 4% 0% 0% 0% 0% 2% 94%Edwards Medical Plaza 141,945 12% 26% 12% 10% 1% 26% 12%700 Shadow Lane and Goldling MOBs 116,194 3% 22% 11% 15% 3% 14% 33%Desert Springs Medical Plaza 105,939 19% 13% 21% 13% 7% 7% 19%Centinela Medical Buildings 103,353 5% 19% 43% 3% 14% 0% 16%Suburban Medical Plaza II 102,818 3% 2% 12% 0% 34% 2% 46%Thunderbird Paseo Medical Plaza I & II 96,569 0% 44% 10% 11% 17% 14% 4%Centennial Hills Medical Office Building I 96,815 41% 0% 0% 0% 0% 28% 32%Summerlin Hospital Medical Office Building II (b) 92,313 0% 0% 0% 37% 23% 31% 9%Canyon Springs Medical Plaza 91,957 10% 0% 0% 0% 0% 14% 75%Summerlin Hospital Medical Office Building 89,636 3% 13% 38% 24% 12% 7% 3%Papago Medical Park 79,251 8% 10% 47% 8% 2% 0% 25%Deer Valley Medical Office II 77,264 0% 1% 6% 7% 0% 61% 26%Mid Coast Hospital MOB 74,629 0% 0% 0% 0% 45% 0% 55%Sheffield Medical Building 71,940 23% 11% 15% 14% 9% 28% 0%Rosenberg Children’s Medical Plaza 66,231 0% 0% 0% 23% 7% 7% 62%Sierra San Antonio Medical Plaza (‘c) 59,160 36% 0% 0% 0% 18% 5% 41%Spring Valley Medical Office Building 57,830 3% 0% 47% 15% 11% 6% 19%Spring Valley Medical Office Building II 57,500 50% 0% 0% 0% 0% 50% 0%Southern Crescent Center II (d) 53,680 6% 0% 8% 86% 0% 0% 0%Desert Valley Medical Center 53,625 9% 19% 14% 20% 26% 12% 0%Southern Crescent Center I 41,400 74% 0% 0% 0% 4% 22% 0%Cypresswood Professional Center 40,082 43% 33% 7% 0% 0% 17% 0%Medical Center of Western Connecticut 37,522 0% 0% 15% 63% 0% 0% 22%Phoenix Children’s East Valley Care Center 30,960 0% 0% 0% 0% 0% 0% 100%Apache Junction Medical Plaza 26,901 0% 9% 4% 9% 9% 13% 56%Santa Fe Professional Plaza 25,294 2% 50% 18% 18% 5% 7% 0%Cobre Valley Medical Plaza 21,882 3% 4% 5% 14% 0% 74% 0%Kelsey-Seybold Clinic at King’s Crossing 20,470 0% 0% 0% 100% 0% 0% 0%Professional Bldg at King’s Crossing 20,447 25% 15% 0% 0% 24% 7% 30%Orthopaedic Specialists of Nevada Building 11,000 0% 0% 100% 0% 0% 0% 0%Family Doctor’s MOB 9,155 0% 0% 0% 0% 100% 0% 0%Preschool and Childcare Centers: Chesterbrook Academy—Audubon 8,300 0% 0% 0% 100% 0% 0% 0%Chesterbrook Academy—Uwchlan 8,163 0% 0% 0% 100% 0% 0% 0%Chesterbrook Academy—Newtown 8,100 0% 0% 0% 100% 0% 0% 0%Chesterbrook Academy—New Britain 7,998 0% 0% 0% 100% 0% 0% 0%Sub-total Other Investments 2,397,346 11% 11% 12% 14% 9% 14% 28%Total 3,580,058 8% 7% 10% 10% 35% 9% 21% 21Table of Contents (a)The Desert Samaritan Hospital MOBs is composed of three different MOB buildings, the first of which contains a master lease provision that covers allvacancies through March 31, 2008. The remaining two MOBs do not have a master lease provision.(b)The Summerlin Hospital Medical Office Building II has a master lease provision that expires on September 30, 2010 which covers all vacancies.(c)The Sierra San Antonio Medical Plaza has a master lease provision that expires when 45,000 RSF of the building has been occupied or the expirationterm of 2011, whichever occurs first.(d)The Southern Crescent Center II has a master lease agreement that covers 46,300 RSF of space until June 30, 2010. 22Table of ContentsITEM 3.Legal Proceedings None ITEM 4.Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the year ended December 31, 2007 to a vote of security holders. PART II ITEM 5.Market for Registrant’s Common Equity and Related Stockholder Matters Market Information Our shares of beneficial interest are listed on the New York Stock Exchange. The high and low closing sales prices for our shares of beneficial interestfor each quarter in the years ended December 31, 2007 and 2006 are summarized below: 2007 2006 HighPrice LowPrice HighPrice LowPriceFirst Quarter $42.05 $34.77 $37.35 $32.08Second Quarter $38.29 $32.78 $35.95 $29.72Third Quarter $36.70 $29.23 $36.65 $31.12Fourth Quarter $38.76 $32.21 $40.24 $35.09 Holders As of January 31, 2008, there were approximately 526 shareholders of record of our shares of beneficial interest. Dividends It is our intention to declare quarterly dividends to the holders of our shares of beneficial interest so as to comply with applicable sections of the InternalRevenue Code governing REITs. Our revolving credit facility limits our ability to increase dividends in excess of 95% of cash available for distribution, asdefined in our revolving credit agreement, unless additional distributions are required to be made so as to comply with applicable sections of the InternalRevenue Code and related regulations governing REITs. In each of the past two years, dividends per share were declared as follows: 2007 2006First Quarter $.570 $.560Second Quarter .575 .565Third Quarter .575 .565Fourth Quarter .580 .570 $2.30 $2.26 23Table of ContentsSecurities Authorized for Issuance Under Equity Compensation Plans The table below provides information, as of December 31, 2007, concerning securities authorized for issuance under our equity compensation plans. Equity Compensation Plan Information Plan category Number of securitiesto be issued uponexercise of outstandingoptions, warrants and rights(a) Weighted-average exerciseprice of outstanding options, warrants and rights Number of securitiesremaining available forfuture issuance underequity compensationplans (excluding column(a))Equity compensation plans approvedby security holders 166,000 $18.11 75,000Equity compensation plans notapproved by security holders — — — TOTAL 166,000 $18.11 75,000 24Table of ContentsStock Price Performance Graph The following graph compares our performance with that of the S&P 500 and a group of peer companies, where performance has been weighted basedon market capitalization. Companies in our peer group are as follows: HCP, Inc., Nationwide Health Properties, Inc., Omega Healthcare Investors, Inc., HealthCare REIT, Inc., Healthcare Realty Trust, Inc., LTC Properties, Inc., National Health Investors, Inc. and National Health Realty, Inc. (included through2006). The Stock Price Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference in this Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate thisinformation by reference, and shall not otherwise be deemed filed under such Acts. The total cumulative return on investment (change in the year-end stock price plus reinvested dividends) for each of the periods for us, the peer groupand the S&P 500 composite is based on the stock price or composite index at the end of fiscal 2002. Company Name / Index BasePeriodDec 02 INDEXED RETURNSYears Ending Dec 03 Dec 04 Dec 05 Dec 06 Dec 07Universal Health Realty Income Trust $100 $123.07 $140.03 $146.03 $193.49 $187.77S&P 500 Index $100 $128.68 $142.69 $149.70 $173.34 $182.86Peer Group $100 $147.83 $177.91 $172.22 $247.21 $247.04 25Table of ContentsITEM 6.Selected Financial Data The following table contains our selected financial data for, or at the end of, each of the five years ended December 31, 2007. You should read this tablein conjunction with our consolidated financial statements and related notes contained elsewhere in this Annual Report and Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations. (000s, except per share amounts) 2007 2006 2005 2004 2003 Operating Results: Total revenue(1) $27,960 $31,714 $32,590 $31,013 $26,307 Income from continuing operations 19,664 34,428 25,131 21,425 23,137 Income from discontinued operations, net (including gain on sale of realproperty of $2,270 during 2007 and $833 during 2004) 2,527 269 292 2,246 1,288 Net income $22,191 $34,697 $25,423 $23,671 $24,425 Balance Sheet Data: Real estate investments, net of accumulated depreciation(1) $143,797 $143,363 $152,865 $157,601 $130,298 Investments in LLCs(1) 52,030 47,223 29,572 40,523 61,001 Total assets(1) 199,749 194,139 196,889 204,583 194,291 Total indebtedness(1)(2) 36,617 26,337 35,548 46,210 37,242 Other Data: Funds from operations(3) $29,066 $28,930 $29,202 $31,149 $30,101 Cash provided by (used in): Operating activities 22,775 24,702 25,303 26,967 26,218 Investing activities (4,336) (2,404) 8,408 11,905 (10,194)Financing activities (18,106) (23,217) (35,582) (36,387) (15,994)Per Share Data: Basic earnings per share: From continuing operations $1.66 $2.92 $2.14 $1.83 $1.98 From discontinued operations 0.21 0.02 0.02 0.19 0.11 Total basic earnings per share $1.87 $2.94 $2.16 $2.02 $2.09 Diluted earnings per share: From continuing operations $1.66 $2.90 $2.13 $1.81 $1.96 From discontinued operations 0.21 0.02 0.02 0.19 0.11 Total diluted earnings per share $1.87 $2.92 $2.15 $2.00 $2.07 Dividends per share $2.300 $2.260 $2.175 $2.000 $1.960 Other Information (in thousands) Weighted average number of shares outstanding—basic 11,818 11,784 11,764 11,744 11,713 Weighted average number of shares and share equivalents outstanding—diluted 11,875 11,866 11,841 11,813 11,779 (1)During the first quarter of 2004, pursuant to the terms of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretationof ARB No. 51, we began recording the operating results of three LLCs, in which we hold majority, non-controlling ownership interests, on aconsolidated basis. At that time, these LLCs were recorded on a consolidated basis due to certain master lease, lease assurance or lease guaranteeagreement between UHS and the properties owned by the LLCs. As a result of the expiration of the master lease arrangements between UHS and two ofthese LLCs, during the fourth quarter of 2006, we 26Table of Contents began recording the financial results of these LLCs on an unconsolidated basis. Additionally, as a result of a master lease arrangement between asubsidiary of UHS and a LLC that owns a medical office building that is currently under construction, this LLC is included in our consolidatedfinancial statements on a consolidated basis. Therefore, as of December 31, 2007, our consolidated balance sheet includes the assets, liabilities andthird-party debt (that is non-recourse to us) incurred by the LLC in connection with this newly constructed building which is scheduled to be completedand opened during the second quarter of 2008. There was no impact on our net income as a result of recording these LLCs on an unconsolidated or aconsolidated basis.(2)Excludes $214.9 million as of December 31, 2007 and $180.9 million as of December 31, 2006, of third-party debt, that is non-recourse to us,incurred by unconsolidated LLCs in which we hold various non-controlling equity interests (see Note 9 to the consolidated financial statements).(3)Funds from operations, is a widely recognized measure of REIT performance. Although FFO is a non-GAAP financial measure, we believe thatinformation regarding FFO is helpful to shareholders and potential investors. We compute FFO in accordance with standards established by the NationalAssociation of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not compute FFO inaccordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. To facilitate a clearunderstanding of our historical operating results, FFO should be examined in conjunction with net income, determined in accordance with GAAP. FFOdoes not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net incomedetermined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in accordancewith GAAP; (ii) as an alternative to cash flow from operating activities determined in accordance with GAAP; (iii) as a measure of our liquidity; (iv) noris FFO an indicator of funds available for our cash needs, including our ability to make cash distributions to shareholders. A reconciliation of ourreported net income to FFO is shown below. FFO shown above is calculated is follows: (000s) 2007 2006 2005 2004 2003 Net income $22,191 $34,697 $25,423 $23,671 $24,425 Depreciation expense: Consolidated investments 5,167 5,314 5,379 4,918 4,242 Unconsolidated affiliates 5,990 4,613 4,012 4,282 4,146 Discontinued operations — 124 124 120 119 Less gains: Previously deferred gain on sale of our interest in an unconsolidated LLC — (1,860) — — — Gain on asset exchange and substitution agreement with UHS—Chalmette (1,748) (13,958) — — — Property damage recovered from UHS-Wellington — — (4,693) — — Gains recorded by unconsolidated affiliates (264) — (1,043) (1,009) (2,831)Gain on sale of real property, included in income from discontinued operations (2,270) — — (833) — FFO $29,066 $28,930 $29,202 $31,149 $30,101 27Table of ContentsITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a real estate investment trust (“REIT”) that commenced operations in 1986. We invest in healthcare and human service related facilities includingacute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers and medical officebuildings. As of December 31, 2007, we have forty-six real estate investments or commitments in fourteen states consisting of: • six hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and one sub-acute; • thirty-six medical office buildings (including three under construction), and; • four preschool and childcare centers. In addition, in February, 2008, we purchased Kindred Hospital; Corpus Christi, an unaffiliated 74-bed long-term acute care hospital located in CorpusChristi, Texas for a total purchase price of $8.1 million. We paid $4.7 million in cash and assumed $3.4 million of third-party mortgage debt that is non-recourse to us. Forward Looking Statements This Annual Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results,performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results ofoperations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effecton our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, andthe benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similarexpressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,”“expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in futuretense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of thetimes at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or ourgood faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially fromthose expressed in the statements. Such factors include, among other things, the following: • a substantial portion of our revenues are dependent upon one operator, Universal Health Services, Inc., (“UHS”); • a subsidiary of UHS is our Advisor and our officers are all employees of UHS, which may create the potential for conflicts of interest; • lost revenues from purchase option exercises and lease expirations and renewals, loan repayments and other restructuring; • the availability and terms of capital to fund the growth of our business; • the outcome of known and unknown litigation, government investigations, and liabilities and other claims asserted against us or the operators ofour facilities, including the government’s ongoing investigation of UHS’s South Texas Health Systems affiliates, which includes McAllen MedicalCenter, as described herein; • our majority ownership interests in various LLCs in which we hold non-controlling equity interests; 28Table of Contents • real estate market factors, including without limitation the supply and demand of office space and market rental rates, changes in interest rates aswell as an increase in the development of medical office condominiums in certain markets; • government regulations, including changes in the reimbursement levels under the Medicare and Medicaid program; • the issues facing the health care industry that affect the operators of our facilities, including UHS, such as: changes in, or the ability to complywith, existing laws and government regulations; unfavorable changes in the levels and terms of reimbursement for our charges by third partypayors or government programs, including Medicare or Medicaid; demographic changes; the ability to enter into managed care provider agreementson acceptable terms; an increase in uninsured and self-pay patients which unfavorably impacts the collectibility of patient accounts; decreasing in-patient admission trends; technological and pharmaceutical improvements that may increase the cost of providing, or reduce the demand for, healthcare; the ability to attract and retain qualified medical personnel, including physicians; • the ability of operators of our facilities, particularly UHS, to obtain adequate levels of general and professional liability insurance; • three LLCs that own properties in California, in which we have various non-controlling equity interests, could not obtain earthquake insurance atrates which are economically beneficial in relation to the risks covered; • competition for our operators from other REITs; • competition from other health care providers, including physician owned facilities and other facilities owned by UHS, including, but not limited to,McAllen, Texas, the site of our largest acute care facility; • changes in, or inadvertent violations of, tax laws and regulations and other factors than can affect REITs and our status as a REIT; • fluctuations in the value of our common stock, and; • other factors referenced herein or in our other filings with the Securities and Exchange Commission. Given these uncertainties, risks and assumptions, you are cautioned not to place undue reliance on such forward-looking statements. Our actual resultsand financial condition, including the operating results of our lessees and the facilities leased to subsidiaries of UHS, could differ materially from thoseexpressed in, or implied by, the forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-lookingstatements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required bylaw. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimatesand assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. A summary of our critical accounting policies is outlined in Note 1 to the consolidated financial statements. We consider our critical accounting policiesto be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following: 29Table of ContentsRevenue Recognition: Our revenues consist primarily of rentals received from tenants, which are comprised of minimum rent (base rentals), bonusrentals and reimbursements from tenants for their pro-rata share of expenses such as common area maintenance costs, real estate taxes and utilities. The minimum rent for all hospital facilities is fixed over the initial term or renewal term of the respective leases. Rental income recorded by ourconsolidated and unconsolidated medical office buildings (“MOBs “) relating to leases in excess of one year in length, is recognized using the straight-linemethod under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resultingfrom straight-line rent adjustments is dependent on many factors including the nature and amount of any rental concessions granted to new tenants, scheduledrent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of one year. As aresult, the straight-line adjustments to rental revenue may vary from period-to-period. Bonus rents are recognized when earned based upon increases in eachfacility’s net revenue in excess of stipulated amounts. Bonus rentals are determined and paid each quarter based upon a computation that compares therespective facility’s current quarter’s net revenue to the corresponding quarter in the base year. Tenant reimbursements for operating expenses are accrued asrevenue in the same period the related expenses are incurred. Investments in Limited Liability Companies (“LLCs”): Our consolidated financial statements include the consolidated accounts of ourcontrolled investments and those investments that meet the criteria of a variable interest entity where we are the primary beneficiary. In accordance with theAmerican Institute of Certified Public Accountants’ Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” as amended by FASBStaff Position SOP 78-9-1 “Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5”, Emerging Issues Task Force Issue (EITF) 96-16,“Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have CertainApproval or Veto Rights” and EITF 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights” we account for our unconsolidated investments in LLCs which we do notcontrol using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but notlimited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 99% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, anddistributions from, the investments. Pursuant to certain agreements, allocations of profits and losses of some of the LLC investments may be allocateddisproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. ThisInterpretation, as revised (“FIN 46R”), addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. As aresult of our related party relationship with UHS, and certain master lease, lease assurance or lease guarantee arrangements between UHS and variousproperties owned by three LLCs in which we own non-controlling ownership interests ranging from 95% to 99%, these three LLCs were considered to bevariable interest entities. In addition, we were the primary beneficiary of these three LLC investments. Upon the adoption of FIN 46R on March 31, 2004, webegan consolidating the results of operations of these three LLC investments in our consolidated financial statements. As a result of the expiration of the master lease arrangements between subsidiaries of UHS and two of these three LLCs, during the fourth quarter of2006, we began recording the financial results of two LLCs on an unconsolidated basis in our consolidated financial statements. Beginning with the fourthquarter of 2006, the revenues and expenses of these two LLCs are no longer included in our consolidated revenues and expenses; instead, our share of the netincome generated from each of these two LLCs is included in our consolidated statements of income as “Equity in income of unconsolidated LLCs”. Therevenues and expenses for these two LLCs related to the periods prior to the fourth quarter of 2006 are included in our revenues and expenses in ourconsolidated statements of income. There was no impact on our net income as a result of the change in 30Table of Contentsaccounting for these LLCs. Additionally, as a result of a master lease arrangement between a subsidiary of UHS and a LLC that owns a medical officebuilding that is currently under construction, this LLC is included in our consolidated financial statements on a consolidated basis. Therefore, as ofDecember 31, 2007, our consolidated balance sheet includes the assets, liabilities and third-party debt (that is non-recourse to us) incurred by the LLC inconnection with this newly constructed building which is scheduled to be completed and opened during the second quarter of 2008. The other LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to theconsolidation requirements of FIN 46R. Federal Income Taxes: No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856 to 860 of theInternal Revenue Code of 1986, and intend to continue to remain so qualified. As such, we are exempt from federal income taxes and we are required todistribute at least 90% of our real estate investment taxable income to our shareholders. We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary incomeplus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax hasbeen reflected in the financial statements as no tax was due. Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposesdue to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording ofprovision for investment losses. Relationship with UHS and Related Party Transactions UHS is our principal tenant and through UHS of Delaware, Inc., a wholly owned subsidiary of UHS, serves as our advisor (the “Advisor”) under anAdvisory Agreement dated December 24, 1986 between the Advisor and us (the “Advisory Agreement”). Our officers are all employees of UHS and althoughas of December 31, 2007 we had no salaried employees, our officers do receive stock-based compensation from time-to-time. Under the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investments suitable forsuch program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and to conduct ourday-to-day affairs. In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, including accounting,legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement expires on December 31 of each year; however, it isrenewable by us, subject to a determination by the Independent Trustees who are unaffiliated with UHS, that the Advisor’s performance has been satisfactory.The Advisory Agreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement has been renewed for2008. All transactions between us and UHS must be approved by the Independent Trustees. The Advisor is entitled to certain advisory fees for its services.See “Relationship with Universal Health Services, Inc.” in Item 1 and Note 2 to the consolidated financial statements for additional information on theAdvisory Agreement and related fees. The leases on the hospital facilities leased to wholly-owned subsidiaries of UHS comprised approximately 53%, 48% and 47% of our revenues for theyears ended December 31, 2007, 2006 and 2005, respectively. Including 100% of the revenues generated at the unconsolidated LLCs in which we have variousnon-controlling equity interests ranging from 33% to 99%, the leases with wholly-owned UHS hospital facilities accounted for 24%, 24% and 25% of thecombined consolidated and unconsolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively. The leases to the hospital facilitiesof UHS are guaranteed by UHS and cross-defaulted with one another. 31Table of ContentsRecent Accounting Pronouncements Business Combinations: In December 2007, the FASB issued SFAS 141 (revised 2007) “Business Combinations” (“SFAS 141R”). SFAS 141Restablishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired,the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwillacquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15, 2008. We do not anticipate that the adoption of SFAS 141R will have amaterial impact on our results of operations or financial position. Noncontrolling Interests in Consolidated Financial Statements: In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements forexisting minority interests. All other requirements of SFAS 160 shall be applied prospectively. We do not anticipate that the adoption of SFAS No. 160 willhave a material impact on our results of operations or financial position. Fair Value Option for Financial Assets and Financial Liabilities: In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits acompany to choose to measure many financial instruments and certain other items at fair value at specified election dates. Most of the provisions in SFASNo. 159 are elective; however, it applies to all companies with available-for-sale and trading securities. A company will report unrealized gains and losses onitems for which the fair value option has been elected in earnings (or another performance indicator if the company does not report earnings) at each subsequentreporting date. The fair value option: (a) may be applied instrument by instrument; (b) is irrevocable (unless a new election date occurs), and; (c) is appliedonly to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year beginning afterNovember 15, 2007. We do not anticipate that the adoption of SFAS No. 159 will have a material impact on our results of operations or financial position. Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions for SFAS 157 are to be applied prospectively asof the beginning of the fiscal year in which it is initially applied, except in limited circumstances including certain positions in financial instruments that tradein active markets as well as certain financial and hybrid financial instruments initially measured under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”) using the transaction price method. In these circumstances, the transition adjustment is measured asthe difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initially applied. In February,2008, the FASB decided to issue final staff positions that will: (i) partially defer the effective date of SFAS No. 157 for one year for certain non-financialassets and non-financial liabilities, and; (ii) remove certain leasing transactions from the scope of SFAS No. 157. We do not anticipate that the adoption ofSFAS No. 157 will have a material impact on our results of operations or financial position. 32Table of ContentsResults of Operations Year ended December 31, 2007 as compared to the year ended December 31, 2006: As a result of the expiration of the master lease arrangements between subsidiaries of UHS and two LLCs in which we own non-controlling ownershipinterests of 95% and 99%, during the fourth quarter of 2006, we began recording the financial results of these LLCs on an unconsolidated basis. Prior to thefourth quarter 2006, these LLCs were included in our financial results on a consolidated basis in accordance with Financial Interpretation No. 46R,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, (“FIN 46R”). Commencing in the fourth quarter of 2006, the revenues andexpenses of these LLCs are no longer included in our consolidated revenues and expenses, but instead, our share of the net income generated from each of theseLLCs is included in our consolidated statements of income as “Equity in income of unconsolidated LLCs”. There was no impact on our net income as a resultof the change in accounting for these two LLCs. The following table shows the combined operating results for these two LLCs during the periods the resultswere recorded on a consolidated basis (“LLC Impact”). The “As Adjusted” column on the table below presents our consolidated income statement for thetwelve month period ended December 31, 2006 as if we did not consolidate these two LLCs for the twelve months ended December 31, 2006. For comparativepurposes, the amounts in the “As Adjusted” column are used in the discussions below (amounts in thousands). 2006As Reported Combined results fortwo LLCs duringperiod they wererecorded on aconsolidated basisduring 2006 (“LLCImpact”) 2006 As Adjusted 2007 As Reported Revenues $31,714 $(3,777) $27,937 $27,960 Expenses: Depreciation and amortization 5,436 (736) 4,700 5,209 Advisory fee to UHS 1,424 — 1,424 1,425 Other operating expenses 6,149 (1,615) 4,534 4,482 13,009 (2,351) 10,658 11,116 Income before equity in unconsolidated LLCs,replacement property recovered from UHS and interestexpense 18,705 (1,426) 17,279 16,844 Equity in income of unconsolidated LLCs (including therecognition of gain on sale of real property of $264during 2007 and a previously deferred gain of $1,860on sale of our interest in an unconsolidated LLCduring 2006) 4,241 711 4,952 2,821 Replacement property recovered from UHS—Chalmette 13,958 — 13,958 1,748 Interest expense (2,476) 715 (1,761) (1,749)Income from continuing operations $34,428 $— $34,428 $19,664 Total revenue decreased $3.8 million during 2007, as compared to 2006, due primarily to the $3.8 million related to the LLC Impact, as indicatedabove. During, 2007 and 2006, income from continuing operations was $19.7 million and $34.4 million, or $1.66 and $2.90 per diluted share, respectively.Income from discontinued operations totaled $2.5 million, or $.21 per diluted share during 2007, as compared to $269,000, or $.02 per diluted share during2006. Included in income from discontinued operations during 2007 was a gain of $2.3 million, or $.19 per diluted share, realized on the sale of a medicaloffice building. 33Table of ContentsThe decrease in income from continuing operations of $14.8 million, or $1.24 per diluted share, during 2007 as compared to 2006, was primarilyattributable to: • an unfavorable change of $12.2 million, or $1.03 per diluted share, resulting from the decrease in the gain recognized in connection with theChalmette asset exchange and substitution transaction, as discussed herein; • a favorable change of $264,000, or $.02 per diluted share, resulting from the gain recorded during 2007 in connection with the sale of real propertyby a LLC in which we had an 80% non-controlling equity interest; • an unfavorable change of $1.9 million, or $.16 per diluted share, resulting from a previously deferred gain which was recognized during 2006 inconnection with the sale of our interest in an unconsolidated LLC; • an unfavorable change of $509,000, or $.04 per diluted share (after giving effect to the $736,000 LLC Impact, as indicated above), resultingprimarily from increased depreciation expense recorded during 2007 on the replacement assets received from UHS in connection with the Chalmetteasset exchange and substitution transaction which was completed during the third quarter of 2007, and; • an unfavorable change of $535,000, or $.04 per diluted share (excluding gains recorded in each year and after giving effect to the $711,000 LLCimpact, as indicated above), resulting from a decrease in equity in income of unconsolidated LLCs. This decrease was partially due to anunfavorable change of $231,000, or $.02 per diluted share, representing our share of the net operating losses sustained at three newly constructedMOBs that were completed and opened during the fourth quarter of 2007. Included in our financial results was equity in income of unconsolidated LLCs of $2.8 million during 2007 and $4.2 million during 2006. After givingeffect to the $711,000 LLC Impact, as indicated above, the equity in income of unconsolidated LLCs decreased by approximately $2.1 million during 2007,as compared to 2006, primarily resulting from: (i) a decrease of $1.9 million resulting from the 2006 recognition of a deferred gain recorded in connection withthe sale of our interest in an unconsolidated LLC during 2005; (ii) a favorable change of $264,000 resulting from the gain recorded on the sale of real propertyby a LLC during 2007, and; (iii) $535,000 of other combined unfavorable changes, as mentioned above. After giving effect to the $1.6 million LLC Impact, as indicated in the table above, other operating expenses decreased $52,000 to $4.5 million during2007, as compared to 2006. Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $3.2million for both years 2007 and 2006 (after adjusting for $1.6 million LLC Impact in 2006). A portion of the expenses associated with our consolidatedmedical office buildings is passed on directly to the tenants. Tenant reimbursements for operating expenses are accrued as revenue in the same period therelated expenses are incurred and are included as tenant reimbursement revenue in our consolidated statements of income. During 2007, $2.4 million, or 74%of the expenses related to consolidated medical office buildings were passed on directly to the tenants. During 2006, $2.4 million (after adjusting for $1.3million LLC impact in 2006), or 73% of the expenses related to consolidated medical office buildings were passed on directly to the tenants. Building expensesallocated to tenants for reimbursement are dependent upon various factors such as overall building occupancy levels and terms of individual leases. After giving effect to the $715,000 LLC Impact, as indicated above, interest expense, net of interest income, decreased $12,000 during 2007, ascompared to 2006. 34Table of ContentsOur FFO increased $136,000 to $29.1 million during 2007 as compared to $28.9 million during 2006. Below is a reconciliation of our reported netincome to FFO for 2007 and 2006 (in thousands): 2007 2006 Net income $22,191 $34,697 Depreciation expense: Consolidated investments 5,167 5,314 Unconsolidated affiliates 5,990 4,613 Discontinued operations — 124 Less gains: Gain on sale of real property, included in income from discontinued operations (2,270) — Gain on LLC’s sale of real property (264) — Gain on asset exchange and substitution agreement with UHS – Chalmette (1,748) (13,958)Previously deferred gain on sale of our interest in an unconsolidated LLC — (1,860)Funds From Operations $29,066 $28,930 Year ended December 31, 2006 as compared to the year ended December 31, 2005: The following table shows the combined operating results for the two LLCs that we began recording on an unconsolidated basis during 2006, during theperiod the results were recorded on an unconsolidated basis (“LLC Impact”). The “As Adjusted” column on the table below presents our consolidated incomestatement for 2006 as if we had continued to consolidate these two LLCs through December 31, 2006. For comparative purposes, the amounts in the “AsAdjusted” column are used in the discussions below (amounts in thousands). 2006 As Reported Combinedresults fortwoLLCs duringperiod theywere recordedon anunconsolidatedbasis (“LLCImpact”) 2006 As Adjusted 2005 As Reported Revenues $31,714 $834 $32,548 $32,590 Expenses: Depreciation and amortization 5,436 172 5,608 5,499 Advisory fee to UHS 1,424 — 1,424 1,420 Other operating expenses 6,149 377 6,526 6,335 13,009 549 13,558 13,254 Income before equity in unconsolidated LLCs,replacement property recovered from UHS andinterest expense 18,705 285 18,990 19,336 Equity in income of unconsolidated LLCs (includingrecognition of previously deferred gain of $1,860during 2006 and gain on sale of real property of$1,043 during 2005) 4,241 (93) 4,148 4,602 Replacement property recovered from UHS—Chalmette 13,958 — 13,958 — Property damage recovered from UHS—Wellington — — — 4,693 Interest expense (2,476) (192) (2,668) (3,500)Income from continuing operations $34,428 $— $34,428 $25,131 35Table of ContentsTotal revenue decreased $876,000 during 2006, as compared to 2005, due primarily to the LLC Impact, as indicated above. Income from continuingoperations increased $9.3 million, or $.78 per diluted share, to $34.4 million, or $2.90 per diluted share, during 2006 as compared to $25.1 million, or$2.12 per diluted share, during 2005. Income from discontinued operations was $269,000, or $.02 per diluted share, during 2006 as compared to $292,000,or $.03 per diluted share during 2005. The increase in income from continuing operations and net income during 2006, as compared to 2005, was primarilyattributable to: • a favorable change of $14.0 million, or $1.18 per diluted share, resulting from the Chalmette asset exchange and substitution transaction withUHS, as discussed herein; • an unfavorable change of $1.3 million, or $.10 per diluted share, resulting from a decrease in our equity in unconsolidated LLCs, as discussedbelow (excluding gains recorded by LLCs during 2006 and 2005 and after adjusting for $93,000 LLC Impact, as indicated above); • a favorable change of $1.9 million, or $.16 per diluted share, resulting from the 2006 recognition of a deferred gain recorded in connection with thesale of our interest in an unconsolidated LLC during 2005; • an unfavorable change of $1.0 million, or $.09 per diluted share, resulting from a gain on the sale of real property recorded by an unconsolidatedLLC during 2005; • an unfavorable change of $4.7 million, or $.40 per diluted share, resulting from property damage recovered from UHS during 2005 related tohurricane damage sustained at Wellington Regional Medical Center; • a favorable change of $832,000, or $.07 per diluted share, resulting from a decrease in interest expense, as discussed below (after adjusting for the$192,000 LLC Impact, as indicated above); • an unfavorable change of $191,000, or $.02 per diluted share, resulting from an increase in other operating expenses (after adjusting for the$377,000 LLC Impact, as indicated above), and; • an unfavorable change of $200,000, or $.02 per diluted share, resulting from other combined unfavorable changes including a $109,000 increase indepreciation and amortization expense, as discussed below (after adjusting for the $172,000 LLC Impact, as indicated above). Included in our consolidated statement of income during 2005 was a property write-down charge of $6.3 million representing the book value of theChalmette property damaged by the hurricane. Included in our 2005 net income was an equal amount representing the property damage recoverable from UHS.Prior to the completion of the asset exchange and substitution, Chalmette had a combined asset value of $8.3 million on our consolidated balance sheetconsisting of $2.0 million of land held for exchange and $6.3 million of property damage receivable from UHS. Included in our net income during 2006 was again of $14.0 million representing the total property transferred to us from UHS as of December 31, 2006 ($22.2 million) in excess of the $8.3 million bookvalue of Chalmette. Upon the completion of the asset exchange and substitution during the third quarter of 2006, we received the above mentioned CapitalAdditions from Wellington and Bridgeway which had a combined fair value of $13.0 million. In addition, the construction costs related to the completedCapital Addition at Inland Valley amounted to $9.2 million as of December 31, 2006 ($11.0 million was the total minimum estimated cost of Inland Valley’sCapital Addition). FASB Interpretation No. 30 (“FIN 30”), Accounting for Involuntary Conversion of Nonmonetary Assets to Monetary Assets, an Interpretation ofAPB No. 29 (“APB29”), provides guidance on the accounting for involuntary conversions of nonmonetary assets (such as property) to monetary assets(such as insurance proceeds). Although the damage to Chalmette did not directly result in the conversion of a nonmonetary asset to a monetary asset, we do notbelieve that the receipt of a nonmonetary asset is in substance different than the receipt of a monetary asset in the context of an involuntary conversion. Theguidance in FIN 30 would result in recognition of the assets received upon the involuntary conversion at their fair values with gain or loss recognized for thedifference between the fair value of the assets received and the carrying value of the assets 36Table of Contentsconverted. We also considered the guidance in SFAS No. 153 (“SFAS No. 153”), Exchanges of Nonmonetary Assets, as Amendment of APB 29, which iseffective for nonmonetary asset exchanges occurring in the fiscal year beginning after June 15, 2005. SFAS No. 153 is based upon the principle thatexchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, unless the exchange lacks “commercial substance”, asdefined in paragraph 21 of APB 29, as amended by SFAS 153. After evaluating the provisions of SFAS No. 153, we concluded that the exchange of theseassets had “commercial substance” since, as indicated above, the base or minimum rent component of the total rental earned on the substituted assets hasincreased (by $562,000) over the base rental amount earned pursuant to the terms of the Chalmette lease. As a result, the risk component of the future leasestream has been significantly and favorably impacted. In addition, the future bonus rental earned on the substituted assets at Wellington, Bridgeway andInland Valley will be impacted (either favorably or unfavorably) by the distinct operating characteristics of those facilities such as the nature of the healthcarecare services provided, the geographic markets serviced and patient and payor mix, among other things. As a result of the facts and conclusions detailedabove, and pursuant to the contingent gain guidance in SFAS No, 5, Accounting for Contingencies, we recorded the $14.0 million gain during 2006 whichreflects the fair value of the assets transferred from UHS to us as of December 31, 2006, net of the $6.3 million recoverable from UHS recorded during 2005and the $2.0 million of Chalmette land relinquished. During 2007, we recorded an additional gain of $1.7 million related to this transaction. Included in our financial results was equity in income of unconsolidated LLCs of $4.2 million during 2006 and $4.6 million during 2005. After givingeffect to the $93,000 LLC Impact, as indicated above, the equity in income of unconsolidated LLCs decreased by approximately $500,000 during 2006, ascompared to 2005, as follows: (i) an increase of $1.9 million resulting from the 2006 recognition of a deferred gain recorded in connection with the sale of ourinterest in an unconsolidated LLC during 2005; (ii) a decrease of $1.0 million resulting from a gain on the sale of real property recorded by an unconsolidatedLLC during 2005; (iii) a combined decrease of approximately $500,000 due to our share of the increased interest expense incurred by two LLCs during 2006,as compared to 2005, as a result of increased borrowings from refinancing of third-party debt, that is non-recourse to us; (iv) a decrease of approximately$300,000 due to the losses incurred by a newly constructed MOB that was completed and opened in March of 2006; (v) a decrease of approximately $200,000due to the recording of our share of a charge incurred by a LLC to write-off unamortized financing costs in connection with the refinancing of third-party debt,and; (vi) approximately $400,000 of other combined decreases. After giving effect to the $192,000 LLC Impact, as indicated above, interest expense decreased $832,000 during 2006, as compared to 2005, dueprimarily to: (i) a $369,000 decrease due to the expiration of two interest-rate swaps that expired during 2005 and 2006; (ii) a $252,000 decrease due to a netcharge recorded during 2005 related to an interest-rate swap agreement that became ineffective based upon the forecasted borrowings under our revolving creditfacility; (iii) a decrease of $145,000 due to interest earned during 2006 on a note receivable related to the sale of our ownership interest in a LLC, and;(iv) $66,000 of other combined decreases. After giving effect to the $377,000 LLC Impact, as indicated above, other operating expenses (from continuing operations) increased $191,000 during2006, as compared to 2005, as follows: (i) $109,000 of combined increases in expense resulting primarily from increased operating expenses at our MOBs,and; (ii) $82,000 of expense recorded during 2006 in connection with the adoption of SFAS No. 123R. Included in our other operating expenses are expensesrelated to the consolidated MOBs, a portion of which are passed on directly to the tenants. During both 2006 and 2005, 75% of the operating expensesassociated with our MOBs were passed on directly to the tenants. Building expenses allocated to tenants for reimbursement are dependent upon various factorssuch as overall building occupancy levels and terms of individual leases. After giving effect to the $172,000 LLC impact, as indicated above, depreciation and amortization expense increased $109,000 during 2006, ascompared to 2005. The majority of the increase resulted from the increased depreciation expense recorded during 2006 on the Wellington and Bridgeway assetsreceived in connection with the asset exchange and substitution agreement with UHS (related to the damage sustained at Chalmette from Hurricane Katrina)and replacement property at Wellington (related to hurricane damage sustained during 2004). 37Table of ContentsBelow is a reconciliation of our reported net income to FFO for 2006 and 2005 (in thousands): 2006 2005 Net income $34,697 $25,423 Depreciation expense: Consolidated investments 5,314 5,379 Unconsolidated affiliates 4,613 4,012 Discontinued operations 124 124 Less gains: Previously deferred gain on sale of our interest in an unconsolidated LLC (1,860) — Gain on asset exchange and substitution agreement with UHS—Chalmette (13,958) — Property damage recovered from UHS-Wellington — (4,693)Gains recorded by unconsolidated affiliates — (1,043)Funds From Operations $28,930 $29,202 Our FFO decreased $272,000 to $28.9 million during 2006 as compared to $29.2 million during 2005. This decrease in FFO was due primarily to: • an unfavorable change of approximately $900,000 of FFO generated from our unconsolidated LLCs. This decrease, which excludes depreciationand amortization expense recorded at the LLCs, resulted primarily from a $1.3 million decrease in our equity in unconsolidated LLCs, asdiscussed above (excluding gains recorded by LLCs during 2006 and 2005 and after adjusting for $93,000 LLC impact, as indicated above); • a favorable change of $823,000 resulting from a decrease in interest expense, as discussed above (after adjusting for the $192,000 LLC impact, asindicated above), and; • other combined unfavorable changes of approximately $200,000. Effects of Inflation Although inflation has not had a material impact on our results of operations over the last three years, the healthcare industry is very labor intensive andsalaries and benefits are subject to inflationary pressures as are rising supply costs which tend to escalate as vendors pass on the rising costs through priceincreases. Operators of our hospital facilities are experiencing the effects of the tight labor market, including a shortage of nurses which has caused and maycontinue to cause an increase, in excess of the inflation rate, in salaries, wages and benefits expense. Therefore, there can be no assurance that a continuation ofthese trends will not have a material adverse effect on the future results of operations of the operators of our facilities which may affect their ability to makelease payments to us. Most of our leases contain provisions designed to mitigate the adverse impact of inflation. Our hospital leases require all building operating expenses,including maintenance, real estate taxes and other costs, to be paid by the lessee. In addition, certain of the hospital leases contain bonus rental provisions,which require the lessee to pay additional rent to us based on increases in the revenues of the facility over a base year amount. In addition, most of our MOBleases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, insurance and real estate taxes. Theseprovisions may reduce our exposure to increases in operating costs resulting from inflation. To the extent that some leases do not contain such provisions, ourfuture operating results may be adversely impacted by the effects of inflation. 38Table of ContentsLiquidity and Capital Resources Year ended December 31, 2007 as compared to December 31, 2006: Net cash provided by operating activities Net cash provided by operating activities was $22.8 million during 2007 as compared to $24.7 million during 2006. The $1.9 million decrease wasattributable to: • an unfavorable change of $1.3 million due to a decrease in net income plus or minus the adjustments to reconcile net income to net cash provided byoperating activities (depreciation and amortization, gain on sale of property, gain on sale of property by a LLC, gain on sale of our interest in a LLCand replacement property recovered from UHS-Chalmette). This decrease was primarily due to an unfavorable change in net cash provided byoperating activities related to our investments in unconsolidated LLCs as follows: (i) $736,000 of the decrease resulted from a decrease in thedepreciation and amortization expense add back during 2007, as compared to 2006, as a result of the LLC Impact, as indicated above, and; (ii)$535,000 of the decrease resulted from a decrease in the equity in income of unconsolidated LLCs during 2007, as compared to 2006, as discussedabove (excludes gains from both periods and after giving effect to the LLC Impact, as indicated above): • an unfavorable change of $1.2 million in accrued expenses and other liabilities, as discussed below; • a favorable change of $127,000 in rent receivable; • a favorable change of $237,000 in accrued interest, and; • other favorable changes of approximately $200,000. The $1.2 million unfavorable change in accrued expenses and other liabilities resulted primarily from the exercise and settlement of an aggregate of50,000 Dividend Equivalent Rights (“DERs”) during 2007. The liability associated with the DER settlement during 2007 was $951,000. The DER cashsettlement, after withholding taxes, was returned to us to satisfy the cost of stock option exercises and is reflected in “Cash flows from financing activities” onthe consolidated statements of cash flows. Net cash used in investing activities Net cash used in investing activities was $4.3 million during 2007 as compared to $2.4 million during 2006. 2007: During 2007, we used $4.3 million of net cash in investing activities as follows: • We spent $16.7 million to fund advances to unconsolidated LLCs as follows: • $8.5 million advance (which was fully repaid during 2007) made to an existing LLC that owns Thunderbird Paseo Medical Plaza I and IIlocated in Glendale, Arizona, in which we have a 75% non-controlling equity interest; • $3.1 million advance made to the LLC that owns the Spring Valley Medical Building II, an existing LLC in which we have a 95% non-controlling equity interest; • $5.0 million advance made to the LLC that owns Desert Springs Medical Plaza, an existing LLC in which we have a 99% non-controllingequity interest, and; • $120,000 advance made to the LLC that owns the Spring Valley Medical Building I, an existing LLC in which we have a 95% non-controlling equity interest. • We spent $8.2 million to fund equity investments in unconsolidated LLCs as follows: • $4.0 million invested in the LLC that owns the Canyon Springs Medical Plaza in which we have a 95% non-controlling equity interest; 39Table of Contents • $1.7 million invested in the LLC that owns the Spring Valley Hospital Medical Office Building II, in which we have a 95% non-controllingequity interest; • $765,000 invested in exchange for a 95% non-controlling equity interest in a LLC that owns the Cobre Valley Medical Plaza; • $748,000 invested in the LLC that owns 700 Shadow Lane and Goldring Medical Office Buildings in which we have a 98% non-controllingequity interest; • $495,000 invested in the master LLC, which governs four unconsolidated LLCs, in which we have a 90% non-controlling equity interest; • $380,000 invested in the LLC that owns the Centennial Hills Medical Office Building I, which was completed during the fourth quarter of2007, in which we have a 95% non-controlling equity interest; • $74,000 invested in the LLC that will construct and own the Phoenix Children’s East Valley Care Center, in which we have a 95% non-controlling equity interest, and; • $95,000 invested in the LLC that owns the Sierra San Antonio Medical Plaza in which we have a 95% non-controlling equity interest. • We spent $7.2 million to fund capital additions at certain of our consolidated real estate investments as follows: • $5.8 million funded at a consolidated LLC that will develop, construct, own and operate the Palmdale Medical Office Building; • $760,000 funded in connection with the Inland Valley additions in excess of $11.0 million, related to the Chalmette asset exchange andsubstitution transaction, as discussed herein, and; • $669,000 of other capital additions. • We received $10.0 million in repayments of advances previously provided to unconsolidated LLCs as follows: • $8.6 million received from the LLC that owns the Thunderbird Paseo Medical Plaza I and II, in which we own a 75% non-controlling equityinterest; • $485,000 received from the LLC that owns the Sierra San Antonio Medical Plaza in which we have a 95% non-controlling equity interest; • $696,000 received from the LLC that owned the Rio Rancho Medical Center in which we owned a 80% non-controlling equity interest. ThisLLC was sold during the first quarter of 2007; • $219,000 received from the LLC that owns the Spring Valley Hospital Medical Office Building II, in which we have a 95% non-controllingequity interest, and; • $50,000 received from the LLC that owns the Suburban Medical Plaza II in which we have a 33% non-controlling equity interest. • We received $7.2 million of cash proceeds in connection with refinancing of third-party debt by unconsolidated LLCs as follows: • $5.4 million received from the LLC that owns the Thunderbird Paseo Medical Plaza I and II, in which we have a 75% non-controlling equityinterest; • $998,000 received from the LLC that owns the Canyon Springs Medical Plaza, in which we have a 95% non-controlling equity interest; • $829,000 received from the LLC that owns the Phoenix Children’s East Valley Care Center, in which we have a 95% non-controlling equityinterest, and; • $77,000 received from the LLC that owns the Papago Medical Park, in which we have a 89% non-controlling equity interest. 40Table of Contents • We received $7.3 million of cash proceeds in connection with the sale of real property; • We received $2.2 million of cash distributions in excess of income and other cash activities related to our unconsolidated LLCs, and;. • We received $1.1 million of cash distributions in connection with the sale of real property by a LLC. 2006: During 2006, we used $2.4 million of net cash in investing activities as follows: • We spent $7.6 million to fund advances to unconsolidated LLCs as follows: • $5.3 million advance made to a LLC that will develop, construct, own and operate the Spring Valley Hospital Medical Office Building II,located in Las Vegas, Nevada on the campus of a UHS facility, in which we have a 95% non-controlling equity interest. We have committedto a total of $12.3 million of debt financing to this LLC, of which $5.3 million has been funded as of December 31, 2006. This project wasopened during the second quarter of 2007; • $630,000 advance (which was fully repaid during 2007) made to the LLC that owns Rio Rancho Medical Center, an existing LLC in whichwe have a 80% non-controlling equity interest (subsequent to December 31, 2006, the real estate assets of this LLC were sold); • $540,000 advance (which was fully repaid during the third quarter of 2006) made to a master LLC which governs four unconsolidatedLLCs in which we have a 90% non-controlling equity interest; • $485,000 advance (which was fully repaid during 2007) made to the LLC that constructed and owns the Sierra San Antonio Medical Plaza,located in Fontana, California, in which we have a 95% non-controlling equity interest. The LLC also obtained a $7.5 million third-partyconstruction loan, which is non-recourse to us. This project was completed and opened during the first quarter of 2006; • $363,000 advance (which was converted to equity during 2007) made to the LLC that will develop, construct, own and operate the PhoenixChildren’s East Valley Care Center, located in Gilbert, Arizona, in which we have a 95% non-controlling equity interest. This project wasopened during the fourth quarter of 2007, and; • $259,000 of advances made to various LLCs in which we own a non-controlling equity interest. • During 2006, we spent $5.3 million spent to fund equity investments in unconsolidated LLCs as follows: • $1.6 million of equity funded to the LLC that constructed and owns the Sierra San Antonio Medical Plaza, located in Fontana, California, inwhich we have a 95% non-controlling equity interest. We have committed to invest a total of up to $3.5 million in equity in this LLC, ofwhich $2.7 million has been funded to date. The LLC also obtained a $7.5 million third-party construction loan, which is non-recourse tous. This project was completed and opened during the first quarter of 2006; • $1.5 million of equity funded to the LLC that will develop, construct, own and operate the Phoenix Children’s East Valley Care Center,located in Gilbert, Arizona, in which we have a 95% non-controlling equity interest. We have committed to invest a total of up to $3.5 millionin equity in this LLC, of which $2.0 million has been funded to date. This project is scheduled to be completed and opened during the thirdquarter of 2007; • $637,000 of additional equity funded to the LLC that constructed and owns the Saint Mary’s Professional Office Building located in Reno,Nevada, in which we have a 75% non-controlling equity interest. We have committed to invest a total of $8.0 million in equity in this LLC,of which $5.2 million has been funded as of December 31, 2007. The LLC also obtained a $29 million third-party mortgage that is non-recourse to us; 41Table of Contents • $532,000 of additional equity funded to the LLC that owns the Desert Samaritan Hospital MOBs located in Mesa, Arizona, in which wehave a 76% non-controlling equity interest; • $329,000 of additional equity funded to the LLC that owns the 700 Shadow Lane & Goldring MOBs located in Las Vegas, Nevada, inwhich we have a 98% non-controlling equity interest; • $214,000 of additional equity funded to the LLC that owns the Spring Valley Medical Office Building located in Las Vegas, Nevada, on thecampus of a UHS facility, in which we have a 95% non-controlling equity interest, and; • $562,000 of additional investments in various LLCs in which we own a non-controlling equity interest. • We received $1.9 million of cash received in connection with repayments of advances previously made to LLCs, was as follows: • $1.2 million received from the LLC that owns the Suburban Medical Plaza II, located in Louisville, Kentucky, in which we have a 33% non-controlling equity interest; • $540,000 received from the master LLC which governs four unconsolidated LLCs in which we have a 90% non-controlling equity interest,and; • $160,000 received from various LLCs in which we own non-controlling equity interests. • We spent $1.3 million to fund capital additions at certain of our consolidated real estate investments; • We received $5.7 million of cash proceeds in connection with refinancing of third-party debt by an unconsolidated LLC; • We received $3.1 million of cash proceeds related to the sale of our interest in a LLC, and; • We received $1.1 million of net cash distributions in excess of income and other cash activities related to our unconsolidated LLCs. Net cash used in financing activities Net cash used in financing activities was $18.1 million during 2007 and $23.2 million during 2006. During 2007, we had net debt borrowings of $3.2 million on our revolving line of credit, paid $27.2 million in dividends, paid $527,000 in financingfees related to our new revolving credit agreement, paid $201,000 on a mortgage note payable of a consolidated LLC, that is non-recourse to us, paid $132,000on a mortgage note payable that is non-recourse to us, paid $236,000 for shares repurchases, borrowed $5.8 million on a construction loan payable of aconsolidated LLC, that is non-recourse to us and generated $1.2 million of net cash from the issuance of shares of beneficial interest During 2006, we had net debt borrowings of $3.6 million on our revolving line of credit, paid $26.6 million of dividends, paid $577,000 on mortgagenotes payable that are non-recourse to us and generated $391,000 of net cash from the issuance of shares of beneficial interest. Year ended December 31, 2006 as compared to December 31, 2005: Net cash provided by operating activities Net cash provided by operating activities was $24.7 million during 2006 as compared to $25.3 million during 2005. The $601,000 net decrease wasattributable to: • an unfavorable change of $1.1 million due to a decrease in net income plus or minus the adjustments to reconcile net income to net cash providedby operating activities (depreciation and amortization, gain on sales of properties by LLCs, gain on sale of our interest in a LLC, property write-down from hurricane damage-Chalmette, property damage recoverable from UHS-Chalmette, property damage recovered from UHS (Chalmette andWellington) and net loss on ineffective cash flow hedge); 42Table of Contents • a favorable change of $574,000 in rent receivable; • a favorable change of $140,000 in tenant reserves, escrows, deposits and prepaid rents; • an unfavorable change of $136,000 in accrued interest, and; • $79,000 of other unfavorable changes. The $1.1 million unfavorable change in net income plus or minus the adjustments to reconcile net income to net cash provided by operating activitieswas due to: (i) a $1.3 million unfavorable change resulting from a decrease in equity in income of unconsolidated LLCs, as discussed above (excludes thegains from both periods); (ii) an $823,000 favorable change resulting from a decrease in interest expense, as discussed above; (iii) an unfavorable change of$257,000 due to an increase in other operating expenses, as discussed above, and; (iv) other combined unfavorable changes of $366,000. Net cash (used in)/provided by investing activities Net cash (used in)/provided by investing activities was ($2.4 million) during 2006, as discussed above, as compared to $8.4 million during 2005. 2005: We generated $8.4 million of net cash provided by investing activities as follows: • We spent $8.3 million to fund equity investments in unconsolidated LLCs and $2.9 million to fund advances made to unconsolidated LLCs($11.2 million in total) as follows: • $4.5 million of equity funded in connection with the purchase of a 75% non-controlling interest in a LLC that constructed and owns theSaint Mary’s Center for Health located in Reno, Nevada, which opened in March, 2005; • $2.5 million paid to an unrelated third-party member as net consideration in connection with the restructure of the ownership interests in fiveexisting unconsolidated LLCs (see Note 9 to the consolidated financial statements); • $1.0 million funded in exchange for a 95% non-controlling interest in a LLC that constructed and owns the Sierra San Antonio MedicalPlaza, located in Fontana, California. This project was completed and opened during 2006; • $235,000 of additional equity funded during the third quarter of 2005 to the LLC that owns the 700 Shadow Lane & Goldring MOBslocated in Las Vegas, Nevada, in which we have a 98% non-controlling equity interest; • $400,000 additional advance to a LLC that owns the Saint Mary’s Center for Health, in connection with the purchase of a 75% non-controlling interest in the LLC (which was fully repaid during 2005); • $680,000 advance made to Desert Samaritan Hospital MOBs, an existing LLC which we have a 76% non-controlling equity interest (whichwas fully repaid during 2005); • $425,000 advance made to Edwards Medical Plaza, an existing LLC in which we have a 90% non-controlling equity interest; • $1.3 million advance (which was partially repaid during 2006 and 2007) made to Suburban Medical Plaza II, an existing LLC in which wehave a 33% non-controlling equity interest, and; • $85,000 advance (which was fully repaid during 2007) made to Rio Rancho Medical Center, an existing LLC in which we have a 80% non-controlling equity interest (subsequent to December 31, 2006, the real estate assets of this LLC were sold). 43Table of Contents • We received $9.6 million of cash in connection with repayments of advances previously made to LLCs, as follows: • $6.5 million received as repaid advances previously provided to a LLC that owns the 700 Shadow Lane & Goldring MOBs located in LasVegas, Nevada, in which we have a 98% non-controlling equity interest; • $2.5 million received as repaid advances previously provided to a LLC that owns the Saint Mary’s Center for Health located in Reno,Nevada, in which we have a 75% non-controlling equity interest, and; • $680,000 received as repaid advances previously provided to a LLC that owns the Desert Samaritan Hospital MOBs located in Mesa,Arizona, in which we have a 76% non-controlling equity interest. • We spent $2.4 million to fund capital additions at certain of our consolidated real estate investments; • We received $8.5 million of cash proceeds in connection with refinancing of third-party debt by unconsolidated LLCs; • We received $2.9 million of cash proceeds related to sales of properties by unconsolidated LLCs; • We received $1.0 million of cash distributions in excess of income from our unconsolidated LLCs. Net cash used in financing activities Net cash used in financing activities was $23.2 million during 2006, as discussed above, and $35.6 million during 2005. During 2005, we had net debt repayments of $10.0 million on our revolving line of credit, paid $25.6 million in dividends, paid $662,000 onmortgage notes payable that are non-recourse to us and generated $668,000 of cash from the issuance of shares of beneficial interest. Credit facilities and mortgage debt In January 2007, we entered into a new unsecured $100 million revolving credit agreement (the “Agreement”) which expires on January 19, 2012. Wehave a one time option, which can be exercised at any time, subject to bank approval, to increase the amount by $50 million for a total commitment of $150million. The Agreement provides for interest at our option, at the Eurodollar rate plus .75% to 1.125%, or the prime rate plus zero to .125%. A fee of .15% to.225% is paid on the unused portion of the commitment. The margins over the Eurodollar, prime rate and commitment fee are based upon our debt to totalcapital ratio as defined by the Agreement. As of December 31, 2007, the applicable margin over the Eurodollar rate was .75%, the margin over the prime ratewas zero, and the commitment fee was .15%. At December 31, 2007, we had $16.8 million of outstanding borrowings and $25.2 million of letters of credit outstanding against the revolving creditagreement. We had $58.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2007.There are no compensating balance requirements. The Agreement contains a provision whereby the commitments will be reduced by 50% of the proceedsgenerated from any new equity offering. The average amounts outstanding under our revolving credit agreement were $11.3 million in 2007, $11.9 million in2006, and $12.0 million in 2005 with corresponding effective interest rates, including commitment fees and interest rate swap expense, of 7.1% in 2007,7.9% in 2006, and 9.0% in 2005. The carrying value of the amounts borrowed approximates fair market value. Covenants relating to the Agreement require the maintenance of a minimum tangible net worth and specified financial ratios, limit our ability to incuradditional debt, limit the aggregate amount of mortgage 44Table of Contentsreceivables and limit our ability to increase dividends in excess of 95% of cash available for distribution, unless additional distributions are required tocomply with the applicable section of the Internal Revenue Code and related regulations governing real estate investment trusts. We are in compliance with all ofthe covenants at year end 2007. We expect to meet our short-term liquidity requirements generally through our available working capital and net cash provided by operations. We believethat our net cash provided by operations will be sufficient to allow us to make any distributions necessary to enable us to continue to qualify as a REIT underSections 856 to 860 of the Internal Revenue Code of 1986. We have two mortgages and one construction loan, which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2007,with a combined outstanding balance of $19.8 million. Both mortgages carry an interest rate of 8.3% and both have maturity dates in 2010. The constructionloan carries an interest rate as of December 31, 2007 of LIBOR plus 2.60% or 7.2% and has a maturity date in 2008. The mortgages are secured by the realproperty of the buildings as well as property leases and rents. These two mortgages and the construction loan have a combined fair value of approximately$20.6 million as of December 31, 2007. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact on interest incurredor cash flow. The following represents the scheduled maturities of our contractual obligations as of December 31, 2007: Payments Due by Period (dollars in thousands)Contractual Obligation Total Less than 1 Year 2-3 years 4-5 years After 5 yearsLong-term debt fixed(a) $12,404 $361 $12,043 $— $— Long-term debt-variable(b) 24,213 7,413 — 16,800 — Estimated future interest payments on debt outstanding as ofDecember 31, 2007(c) 6,803 2,288 3,455 1,060 — Equity and debt financing commitments(d) 35,305 35,305 — — — Total contractual cash obligations $78,725 $45,367 $15,498 $17,860 $— (a)Consists of two mortgages, which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2007. Excluded from the tableabove is the $214.9 million of combined third-party debt outstanding as of December 31, 2007, that is non-recourse to us, at the unconsolidated LLCsin which we hold various non-controlling ownership interests (see Note 9 to the consolidated financial statements).(b)Consists of $16.8 million of borrowings outstanding as of December 31, 2007 under the terms of our $100 million revolving credit agreement enteredinto in January 2007, and $7.4 million of borrowings outstanding as of December 31, 2007 pursuant to a construction loan at a LLC, which is non-recourse to us.(c)Assumes that all debt outstanding as of December 31, 2007, including borrowings under the revolving credit agreement and two mortgage notes payableand a construction loan, which are non-recourse to us, remain outstanding until the final maturity of the debt agreements at the same interest rates whichwere in effect as of December 31, 2007. We have the right to repay borrowings under the revolving credit agreement and construction loan at any timeduring the terms of the agreements, without penalty. 45Table of Contents(d)As of December 31, 2007, we have equity investment and debt financing commitments remaining in connection with our investments in various LLCs,as follows (in thousands): AmountArlington Medical Properties $2,800Sierra Medical Properties 776Spring Valley Medical Properties II 1,884PCH Southern Properties 2,354Centennial Hills Medical Properties 6,167Canyon Healthcare Properties 2,967Palmdale Medical Properties 4,158Banburry Medical Properties 6,424Deerval Properties II 6,800Deerval Parking Company (a.) 975Total $35,305 (a.)Deerval Parking Company is owned 50% by Deerval Properties and 50% by Deerval Properties II. Off Balance Sheet Arrangements As of December 31, 2007, we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financingcommitments as detailed on the above “Contractual Obligations” table. Our outstanding letters of credit at December 31, 2007 totaled $25.2 million consistingof: (i) $2.0 million related to the Deerval Parking Company; (ii) $5.8 million related to the Deerval Properties II; (iii) $900,000 related to Arlington MedicalProperties; (iv) $1.1 million related to Sierra Medical Properties; (v) $6.0 million related to Centennial Hills Medical Properties, (vi) $5.5 million related to theBanburry Medical Properties; (vii) $3.9 million related to Palmdale Medical Properties. ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk Market Risks Associated with Financial Instruments Our interest expense is sensitive to changes in the general level of interest rates. To mitigate the impact of fluctuations in interest rates, we have, from timeto time, fixed the rate on a portion of our debt by entering into interest rate swap agreements. Interest rate swap agreements are contracts that require us to pay afixed rate 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 uponcommencement of the swap agreements. We do not hold or issue derivative instruments for trading purposes and we are not a party to any instruments withleverage features. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial instruments. As of December 31, 2007 and 2006, we had no outstanding interest rate swap agreements. We did not have any hedging activity during 2007. Additional interest expense recorded as a result of our hedging activity during 2006 and 2005, was$62,000 and $431,000, respectively. For the years ended December 31, 2006 and 2005, we received a weighted average rate of 4.8% and 3.2%, respectively,and paid a weighted average rate on our interest rate swap agreements of 6.9% and 6.1% in 2006 and 2005, respectively. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their 2007 levels, with all othervariables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately$71,000. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by approximately $73,000. Thecarrying value of amounts borrowed approximates fair value. 46Table of ContentsThe table below presents information about our financial instruments that are sensitive to changes in interest rates, including debt obligations as ofDecember 31, 2007. For debt obligations, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates. Maturity Date, Year Ending December 31 (Dollars in thousands) 2008 2009 2010 2011 2012 Thereafter Total Long-term debt: Fixed rate $361 $409 $11,634 $— $— $— $12,404 Weighted average interest rates 8.3% 8.3% 8.3% — — — 8.3%Variable rate long-term debt (a) $7,413 — — — $16,800 $— $24,213 Weighted average interest rates 7.2% — — — 5.6% — 5.9% (a)Consists of borrowings outstanding under the terms of our $100 million revolving credit agreement, as amended in January of 2007, and ourconstruction loan. As calculated based upon our variable rate debt outstanding as of December 31, 2007 that is subject to interest rate fluctuations, each 1% of change ininterest rates would impact our net income by approximately $242,000. ITEM 8.Financial Statements and Supplementary Data Our Consolidated Balance Sheets, Consolidated Statements of Income, Shareholders’ Equity and Cash Flows, together with the report of KPMG LLP,independent registered public accountants, are included elsewhere herein. Reference is made to the “Index to Financial Statements and Schedule.” ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A.Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures As of December 31, 2007, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), we performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) orRule 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “1934 Act”). Based on this evaluation, the CEO and CFO have concludedthat our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by managementon a timely basis in order to comply with our disclosure obligations under the Securities and Exchange Act of 1934 and the SEC rules thereunder. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting or in other factors during the fourth quarter of 2007 that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting. In order to evaluate theeffectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment,including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of 47Table of Contentsthe Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2007,based on criteria in Internal Control – Integrated Framework, issued by the COSO. The effectiveness of our internal control over financial reporting as ofDecember 31, 2007, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. 48Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Shareholders and Board of TrusteesUniversal Health Realty Income Trust: We have audited Universal Health Realty Income Trust’s internal control over financial reporting as of December 31, 2007, based on criteria establishedin Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Universal HealthRealty Income Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, Universal Health Realty Income Trust maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Universal Health Realty Income Trust and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income,shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated March 13, 2008, expressedan unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 13, 2008 49Table of ContentsITEM 9B.Other Information None. PART III ITEM 10.Directors, Executive Officers and Corporate Governance There is hereby incorporated by reference the information to appear under the captions “Proposal No. 1” (Election of Trustees), “Section 16(a)Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our Proxy Statement to be filed with the Securities and Exchange Commissionwithin 120 days after December 31, 2007. See also “Executive Officers of the Registrant” appearing in Item I hereof. ITEM 11.Executive Compensation There is hereby incorporated by reference information to appear under the caption “Executive Compensation” in our Proxy Statement to be filed with theSecurities and Exchange Commission within 120 days after December 31, 2007. ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters There is hereby incorporated by reference the information to appear under the captions “Security Ownership of Certain Beneficial Owners andManagement” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2007. See also “SecuritiesAuthorized for Issuance Under Equity Compensation Plans” appearing in Item 5 hereof. ITEM 13.Certain Relationships and Related Transactions and Director Independence There is hereby incorporated by reference the information to appear under the captions “Certain Relationships and Related Transactions” and “CorporateGovernance” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2007. ITEM 14.Principal Accounting Fees and Services There is hereby incorporated herein by reference the information to appear under the caption “Relationship with Independent Auditor” in our ProxyStatement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2007. 50Table of ContentsPART IV ITEM 15.Exhibits, Financial Statement Schedules (a)Documents filed as part of this report: (1)Financial Statements: See “Index to Financial Statements and Financial Statement Schedules.” (2)Financial Statement Schedules: See “Index to Financial Statements and Financial Statement Schedules.” (3)Exhibits: 3.1 Declaration of Trust, dated as of August 1986, previously filed as Exhibit 4.1 to the Trust’s Registration Statement on Form S-3 (File No. 333-60638) is incorporated herein by reference. 3.2 Amendment to Declaration of Trust, dated as of June 15, 1993, previously filed as Exhibit 4.2 to the Trust’s Registration Statement on Form S-3(File No. 333-60638) is incorporated herein by reference. 3.3 Amended and restated bylaws previously filed as Exhibit 4.3 to the Trust’s registration statement on Form S-3 (File No. 333-60638) is incorporatedherein 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 theTrust’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by reference. 10.2 Agreement dated December 3, 2007, to renew Advisory Agreement dated as of December 24, 1986 between Universal Health Realty Income Trustand UHS of Delaware, Inc. 10.3 Contract of Acquisition, dated as of August 1986, between the Trust and certain subsidiaries of Universal Health Services, Inc., previously filedas 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 (File 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 theTrust (File No. 33-7872), is incorporated herein by reference. 10.5 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases and Contract of Acquisition, dated December 1986, issued by UniversalHealth 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, isincorporated herein by reference. 10.6* 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 endedDecember 31, 1991, is incorporated herein by reference. 10.7 Lease, dated December 22, 1993, between the Trust and THC-Chicago, Inc., as lessee, previously filed as Exhibit 10.14 to the Trust’s AnnualReport on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.8* Universal Health Realty Income Trust 1997 Incentive Plan, previously filed as Exhibit 10.1 to the Trust’s Form 10-Q for the quarter endedSeptember 30, 1997, is incorporated herein by reference. 10.9 Credit Agreement, dated as of January 19, 2007, by and among the Trust, the financial institutions from time to time party thereto and WachoviaBank, National Association, as Administrative Agent, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K dated January 24, 2007, isincorporated herein by reference. 51Table of Contents10.10 Dividend Reinvestment and Share Purchase Plan included in the Trust’s Registration Statement Form S-3 (Registration No. 333-81763) filed onJune 28, 1999, is incorporated herein by reference. 10.11 Asset Exchange and Substitution Agreement, dated as of April 24, 2006, by and among the Trust and Universal Health Services, Inc. and certainof its subsidiaries, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K dated April 25, 2006, is incorporated herein by reference. 10.12 Amendment No. 1 to the Master Lease Document, between certain subsidiaries of Universal Health Services, Inc. and the Trust, previously filedas Exhibit 10.2 to the Trust’s Current Report on Form 8-K dated April 25, 2006, is incorporated herein by reference. 10.13* Universal Health Realty Income Trust 2007 Restricted Stock Plan, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K,dated April 27, 2007, is incorporated herein by reference. 10.14* Form of Restricted Stock Agreement, previously filed as Exhibit 10.2 to the Trust’s Current Report on Form 8-K dated April 27, 2007, isincorporated herein by reference. 11 Statement re computation of per share earnings is set forth on the Consolidated Statements of Income. 21 Subsidiaries of Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification from the Trust’s Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934. 31.2 Certification from the Trust’s Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934. 32.1 Certification from the Trust’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification from the Trust’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Management contract or compensatory plan or arrangement. Exhibits, other than those incorporated by reference, have been included in copies of this Annual Report filed with the Securities and Exchange Commission.Shareholders of the Trust will be provided with copies of those exhibits upon written request to the Company. 52Table of ContentsSIGNATURES 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 besigned on its behalf by the undersigned, thereunto duly authorized. UNIVERSAL HEALTH REALTY INCOME TRUSTBy: /s/ ALAN B. MILLER Alan B. Miller,Chairman of the Board,Chief Executive Officer and President Date: March 13, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated. Signatures Title Date/s/ ALAN B. MILLER Alan B. Miller Chairman of the Board, ChiefExecutive Officer and President(Principal Executive Officer) March 13, 2008/s/ JAMES E. DALTON, JR. James E. Dalton, Jr Trustee March 13, 2008/s/ MYLES H. TANENBAUM Myles H. Tanenbaum Trustee March 13, 2008/s/ MILES L. BERGER Miles L. Berger Trustee March 13, 2008/s/ ELLIOT J. SUSSMAN Elliot J. Sussman, M.D., M.B.A. Trustee March 13, 2008/s/ CHARLES F. BOYLE Charles F. Boyle Vice President and Chief Financial Officer(Principal Financial and Accounting Officer) March 13, 2008/s/ CHERYL K. RAMAGANO Cheryl K. Ramagano Vice President, Treasurer and Secretary March 13, 2008 53Table of ContentsINDEX TO FINANCIAL STATEMENTS AND SCHEDULE PageConsolidated Financial Statements: Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Schedule 55Consolidated Balance Sheets—December 31, 2007 and December 31, 2006 56Consolidated Statements of Income—Years Ended December 31, 2007, 2006 and 2005 57Consolidated Statements of Shareholders’ Equity—Years Ended December 31, 2007, 2006 and 2005 58Consolidated Statements of Cash Flows—Years Ended December 31, 2007, 2006 and 2005 59Notes to the Consolidated Financial Statements—December 31, 2007 60Schedule III—Real Estate and Accumulated Depreciation—December 31, 2007 83Notes to Schedule III—December 31, 2007 84 54Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Shareholders and Board of TrusteesUniversal Health Realty Income Trust: We have audited the accompanying consolidated balance sheets of Universal Health Realty Income Trust and subsidiaries (the Company) as ofDecember 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule III.These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to expressan opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal HealthRealty Income Trust and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal Health RealtyIncome Trust’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2008, expressed an unqualifiedopinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 13, 2008 55Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED BALANCE SHEETS(dollar amounts in thousands) December 31,2007 December 31,2006 ASSETS: Real Estate Investments: Buildings and improvements $178,655 $171,761 Accumulated depreciation (60,627) (56,935) 118,028 114,826 Land 18,258 19,317 Construction in progress 7,511 9,220 Net Real Estate Investments 143,797 143,363 Investments in and advances to limited liability companies (“LLCs”) 52,030 47,223 Other Assets: Cash and cash equivalents 1,131 798 Bonus rent receivable from UHS 960 1,025 Rent receivable—other 746 814 Deferred charges and other assets, net 1,085 916 Total Assets $199,749 $194,139 LIABILITIES AND SHAREHOLDERS’ EQUITY: Liabilities: Line of credit borrowings $16,800 $13,600 Mortgage note payable, non-recourse to us 3,717 3,849 Mortgage and construction loans payable of consolidated LLCs, non-recourse to us 16,100 8,888 Accrued interest 125 84 Accrued expenses and other liabilities 1,874 2,857 Tenant reserves, escrows, deposits and prepaid rents 741 595 Total Liabilities 39,357 29,873 Minority interest 87 69 Shareholders’ Equity: Preferred shares of beneficial interest, $.01 par value; 5,000,000 shares authorized; none issued and outstanding — — Common shares, $.01 par value; 95,000,000 shares authorized; issued and outstanding: 2007—11,841,938;2006—11,791,950 118 118 Capital in excess of par value 188,638 187,524 Cumulative net income 327,065 304,874 Cumulative dividends (355,516) (328,319)Total Shareholders’ Equity 160,305 164,197 Total Liabilities and Shareholders’ Equity $199,749 $194,139 See the accompanying notes to these consolidated financial statements. 56Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF INCOME(amounts in thousands, except per share amounts) Year ended December 31, 2007 2006 2005 Revenues (Note 1): Base rental—UHS facilities $12,244 $12,448 $12,567 Base rental—Non-related parties 9,352 11,313 11,696 Bonus rental—UHS facilities 3,958 4,317 4,509 Tenant reimbursements and other—Non-related parties 2,293 3,336 3,415 Tenant reimbursements and other—UHS facilities 113 300 403 27,960 31,714 32,590 Expenses: Depreciation and amortization 5,209 5,436 5,499 Advisory fees to UHS (Note 2) 1,425 1,424 1,420 Other operating expenses 4,482 6,149 6,335 Property write-down—hurricane damage—Chalmette — — 6,259 Property replacement recoverable from UHS—Chalmette — — (6,259) 11,116 13,009 13,254 Income before equity in income of unconsolidated limited liability companies (“LLCs”), replacementproperty recovered from UHS (Chalmette) and interest expense 16,844 18,705 19,336 Equity in income of unconsolidated LLCs (including recognition of gain on sale of real property of $264during 2007, a previously deferred gain of $1,860 on our sale of our interest in an unconsolidated LLCduring 2006 and a gain on sale of real property of $1,043 during 2005) 2,821 4,241 4,602 Replacement property recovered from UHS—Chalmette 1,748 13,958 — Property damage recovered from UHS—Wellington — — 4,693 Interest expense (1,749) (2,476) (3,500)Income from continuing operations 19,664 34,428 25,131 Income from discontinued operations, net (including gain on sale of real property of $2,270 during 2007) 2,527 269 292 Net income $22,191 $34,697 $25,423 Basic earnings per share: From continuing operations $1.66 $2.92 $2.14 From discontinued operations $0.21 $0.02 $0.02 Total basic earnings per share $1.87 $2.94 $2.16 Diluted earnings per share: From continuing operations $1.66 $2.90 $2.12 From discontinued operations $0.21 $0.02 $0.03 Total diluted earnings per share $1.87 $2.92 $2.15 Weighted average number of shares outstanding—Basic 11,818 11,784 11,764 Weighted average number of share equivalents 57 82 77 Weighted average number of shares and equivalents outstanding—Diluted 11,875 11,866 11,841 See the accompanying notes to these consolidated financial statements. 57Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2007, 2006 and 2005(amounts in thousands, except per share amounts) Common Shares Capital inexcess ofpar value Cumulativenet income Cumulativedividends Accumulatedothercomprehensive(loss)/income Total Numberof Shares Amount January 1, 2005 11,756 $118 $186,275 $244,754 ($276,100) ($994) $154,053 Issuance of shares of beneficial interest 22 — 668 — — — 668 Dividends ($2.175/share) — — — — (25,588) — (25,588)Comprehensive income: Net income — — — 25,423 — — 25,423 Adjustment for settlement amounts reclassified intoincome — — — — — 863 863 Unrealized derivative gains on cash flow hedges — — — — — 31 31 Total—comprehensive income — — — 25,423 — 894 26,317 December 31, 2005 11,778 118 186,943 270,177 (301,688) (100) 155,450 Issuance of shares of beneficial interest 14 — 499 — — — 499 Dividends ($2.26/share) — — — — (26,631) — (26,631)Stock-based compensation expense — — 82 — 82 Comprehensive income: Net income — — — 34,697 — — 34,697 Adjustment for settlement amounts reclassified intoincome — — — — — 62 62 Unrealized derivative losses on cash flow hedges — — — — — 38 38 Total—comprehensive income — — — 34,697 — 100 34,797 December 31, 2006 11,792 118 187,524 304,874 (328,319) — 164,197 Shares of Beneficial Interest: Issued 57 — 1,213 — — — 1,213 Repurchased (7) — (236) — — — (236)Dividends ($2.30/share) — — — — (27,197) — (27,197)Stock-based compensation expense — — 137 — — — 137 Comprehensive income: Net income — — — 22,191 — — 22,191 Total—comprehensive income — — — 22,191 — — 22,191 December 31, 2007 11,842 $118 $188,638 $327,065 ($355,516) $— $160,305 See the accompanying notes to these consolidated financial statements. 58Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands) Year ended December 31, 2007 2006 2005 Cash flows from operating activities: Net income $22,191 $34,697 $25,423 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,209 5,560 5,623 Gain on sale of property (2,270) — — Gains on sales of properties by limited liability companies (“LLCs”) (264) — (1,043)Gain on sale of our interest in a LLC — (1,860) — Replacement property recovered from UHS—Wellington — — (4,693)Property write-down from hurricane damage—Chalmette — — 6,259 Property damage recoverable from UHS—Chalmette — — (6,259)Replacement property recovered from UHS—Chalmette (1,748) (13,958) — Net loss on ineffective cash flow hedge — — 254 Changes in assets and liabilities: Rent receivable 133 6 (568)Accrued expenses and other liabilities (779) 386 354 Tenant reserves, escrows, deposits and prepaid rents 146 134 (6)Accrued interest 41 (196) (60)Other, net 116 (67) 19 Net cash provided by operating activities 22,775 24,702 25,303 Cash flows from investing activities: Investments in LLCs (8,231) (5,332) (8,281)Repayments of advances made to LLCs 10,003 1,949 9,631 Advances made to LLCs (16,693) (7,573) (2,902)Cash distributions in excess of income from LLCs 2,101 1,399 954 Proceeds received from sale of our interest in a LLC — 3,102 — Cash distributions from sales of properties by LLCs 1,108 — 2,851 Cash distributions of refinancing proceeds from LLCs 7,279 5,704 8,499 Cash received from sale of property 7,280 — — Other cash activities of LLCs 51 (359) — Additions to real estate investments (7,234) (1,294) (2,391)Proceeds received from sale of minority ownership interest in LLC — — 47 Net cash (used in)/provided by investing activities (4,336) (2,404) 8,408 Cash flows from financing activities: Net borrowings/(repayments) on line of credit 3,200 3,600 (10,000)Financing costs paid (527) — — Repayments of mortgage notes payable of consolidated LLCs (201) (454) (551)Borrowings of construction loans payable of consolidated LLC 5,774 — — Repayments of mortgage notes payable (132) (123) (111)Dividends paid (27,197) (26,631) (25,588)Repurchase of shares of beneficial interest (236) — — Issuance of shares of beneficial interest 1,213 499 668 Dividend reinvestment receivable — (108) — Net cash used in financing activities (18,106) (23,217) (35,582)Increase (decrease) in cash and cash equivalents 333 (919) (1,871)Cash and cash equivalents, beginning of period 798 1,717 3,588 Cash and cash equivalents, end of period $1,131 $798 $1,717 Supplemental disclosures of cash flow information: Interest paid $1,795 $2,661 $3,104 Supplemental disclosures of non-cash transactions: Replacement property recovered from UHS—Chalmette $1,748 $13,958 — Property damage costs capitalized —UHS—Wellington — — 4,693 Increase (decrease) in net property due to recording of LLCs on consolidated/unconsolidated basis 1,674 (25,571) — Increase (decrease) in debt due to recording of LLCs on consolidated/unconsolidated basis 1,725 (12,234) — See accompanying notes to these consolidated financial statements. 59Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2007 (1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Universal Health Realty Income Trust and subsidiaries (the “Trust”) is organized as a Maryland real estate investment trust. We invest in healthcareand human service related facilities including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgerycenters, childcare centers and medical office buildings. As of December 31, 2007, we have forty-six real estate investments or commitments located in fourteenstates consisting of: • six hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and one sub-acute; • thirty-six medical office buildings (including three being constructed), and; • four pre-school and childcare centers. Since we have significant investments in six hospital facilities, which comprised 65%, 58% and 56% of net revenues in 2007, 2006 and 2005,respectively, we are subject to certain industry risk factors which directly impact the operating results of our lessees. In recent years, an increasing number oflegislative initiatives have been introduced or proposed in Congress and in state legislatures that would effect major changes in the healthcare system, eithernationally or at the state level. In addition, the healthcare industry has been characterized in recent years by increased competition and consolidation. Four ofour six hospital facilities and all or a portion of seven medical office buildings are leased to subsidiaries of Universal Health Services, Inc. (“UHS”) atDecember 31, 2007. Management is unable to predict the effect, if any, that the industry factors discussed above will have on the operating results of our lessees or on theirability to meet their obligations under the terms of their leases with us. Management’s estimate of future cash flows from our leased properties could bematerially affected in the near term, if certain of the leases are not renewed at the end of their lease terms. Revenue Recognition Our revenues consist primarily of rentals received from tenants, which are comprised of minimum rent (base rentals), bonus rentals andreimbursements from tenants for their pro-rata share of expenses such as common area maintenance costs, real estate taxes and utilities. The minimum rent for all hospital facilities is fixed over the initial term or renewal term of the respective leases. Rental income recorded by ourconsolidated and unconsolidated medical office buildings (“MOBs”) relating to leases in excess of one year in length, is recognized using the straight-linemethod under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resultingfrom straight-line rent adjustments is dependent on many factors including the nature and amount of any rental concessions granted to new tenants, scheduledrent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of one year. As aresult, the straight-line adjustments to rental revenue may vary from period-to-period. Bonus rents are recognized when earned based upon increases in eachfacility’s net revenue in excess of stipulated amounts. Bonus rentals are determined and paid each quarter based upon a computation that compares therespective facility’s current quarter’s net revenue to the corresponding quarter in the base year. Tenant reimbursements for operating expenses are accrued asrevenue in the same period the related expenses are incurred. 60Table of ContentsCash and Cash Equivalents We consider all highly liquid investment instruments with original maturities of three months or less to be cash equivalents. Real Estate Properties We record acquired real estate at cost and use the straight-line method to calculate depreciation expense for buildings and improvements over theirestimated useful lives of 25 to 45 years. We follow the provisions of FASB Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.” The Statement establishes a single accounting model for long-lived assets to be disposed of by sale. It requires companies to reportseparately discontinued operations, and extends that reporting for all periods presented to a component of an entity that either has been disposed of or isclassified as held for sale. Additionally, SFAS No. 144 requires that assets and liabilities of components held for sale, if material, be disclosed separately inthe balance sheet. It is our policy to review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carryingvalue of such assets may not be recoverable. Measurement of the impairment loss is based on the fair value of the asset. Generally, the estimated fair value willbe determined using valuation techniques such as the present value of expected future cash flows. In assessing the carrying value of our real estate investmentsfor possible impairment, management reviews estimates of future cash flows expected from each of our facilities and evaluates the creditworthiness of ourlessees based on their current operating performance and on current industry conditions. Investments in Limited Liability Companies (“LLCs”) Our consolidated financial statements include the consolidated accounts of our controlled investments and those investments that meet the criteria of avariable interest entity where we are the primary beneficiary. In accordance with the American Institute of Certified Public Accountants’ Statement of Position78-9 “Accounting for Investments in Real Estate Ventures” as amended by FASB Staff Position SOP 78-9-1 “Interaction of AICPA Statement of Position78-9 and EITF Issue No. 04-5”, Emerging Issues Task Force Issue (EITF) 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majorityof the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights” and EITF 04-5 “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”, weaccount for our unconsolidated investments in LLCs which we do not control using the equity method of accounting. The third-party members in theseinvestments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and;(iii) financing commitments. These investments, which represent 33% to 99% non-controlling ownership interests, are recorded initially at our cost andsubsequently adjusted for our equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements,allocations of profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specifiedpreferred return rate thresholds have been satisfied. The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, as revised (“FIN 46R”), whichaddresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. As a result of our related party relationship withUHS, and certain master lease, lease assurance or lease guarantee arrangements between UHS and various properties owned by three LLCs in which we ownnon-controlling ownership interests ranging from 95% to 99%, these three LLCs were considered to be variable interest entities. In addition, we were theprimary beneficiary of these three LLC investments. Upon the adoption of FIN 46R on March 31, 2004, we began consolidating the results of operations ofthese three LLC investments in our consolidated financial statements. 61Table of ContentsAs a result of the expiration of the master lease arrangements between subsidiaries of UHS and two of these three LLCs, during the fourth quarter of2006, we began recording the financial results of two LLCs on an unconsolidated basis in our consolidated financial statements. Beginning with the fourthquarter of 2006, the revenues and expenses of these two LLCs are no longer included in our consolidated revenues and expenses; instead, our share of the netincome generated from each of these two LLCs is included in our consolidated statements of income as “Equity in income of unconsolidated LLCs”. Therewas no impact on our net income as a result of the change in accounting for these LLCs. Additionally, as a result of a master lease arrangement between asubsidiary of UHS and a LLC that owns a medical office building that is currently under construction, this LLC is included in our consolidated financialstatements on a consolidated basis. Therefore, as of December 31, 2007, our consolidated balance sheet includes the assets, liabilities and third-party debt(that is non-recourse to us) incurred by the LLC in connection with this newly constructed building which is scheduled to be completed and opened during thesecond quarter of 2008. The other LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to theconsolidation requirements of FIN 46R. Federal Income Taxes No provision has been made for federal income tax purposes since we qualify as a real estate investment trust under Sections 856 to 860 of the InternalRevenue Code of 1986, and intend to continue to remain so qualified. As such, we are exempt from federal income taxes and we are required to distribute atleast 90% of our real estate investment taxable income to our shareholders. We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary incomeplus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax hasbeen reflected in the financial statements as no tax was due. Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposesdue to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording ofprovision for impairment losses. The aggregate gross cost basis and net book value of the properties for federal income tax purposes are approximately $161 million and $103 million,respectively, at December 31, 2007 and $170 million and $111 million respectively, at December 31, 2006. Stock-Based Compensation The 1997 Incentive Plan (the “1997 Plan”) expired on June 22, 2007. Awards granted under the 1997 Plan on or before the termination date remainexercisable, in accordance with their respective terms, after the termination of the 1997 Plan. During the second quarter of 2007, our Board of Trusteesapproved and adopted the Universal Health Realty Income Trust 2007 Restricted Stock Plan (the “2007 Plan”). The 2007 Plan was also approved by ourshareholders during the second quarter of 2007. A total of 75,000 shares have been authorized for issuance under the 2007 Plan and there have been no sharesissued under the 2007 Plan at December 31, 2007. Additionally, during the second quarter of 2007, the Board of Trustees approved the termination of theUniversal Health Realty Income Trust’s Share Compensation Plan for outside Trustees. Effective January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment” and related interpretations and began expensing the grant-date fairvalue of stock options. SFAS No. 123R requires companies to recognize the grant-date fair value of stock options and other equity-based compensation. SFAS123R generally requires that a company account for these transactions using the fair-value based method and eliminates a company’s 62Table of Contentsability to account for share-based compensation transactions using the intrinsic value method of accounting provided in Accounting Principles Board,(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which was permitted under Statement No. 123, as originally issued. Prior toJanuary 1, 2006, we accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, and related interpretations.Accordingly, no compensation expense was reflected in net income for stock option grants, as all options granted under the plan had an original exercise priceequal to the market value of the underlying shares on the date of grant. The impact of adopting SFAS No. 123R for the years ended December 31, 2007 and2006, reduced net income by approximately $137,000 and $82,000, respectively, recognized related to outstanding stock options and Dividend EquivalentRights (“DERs”) that were granted or have vestings after December 31, 2005. As of December 31, 2007, there was approximately $368,000 of unrecognizedcompensation costs related to unvested options and DERs which is expected to be recognized over the weighted average remaining vesting period of 2.8 years.During 2007, there were 24,000 options and DERs issued under the 1997 Plan with a weighted-average grant-date fair value of $14.70 per option. We willrecognize compensation cost related to restricted share awards associated with the 2007 Plan over the respective vesting periods. However, as of December 31,2007, there were no unvested restricted share awards outstanding. We adopted SFAS No. 123R using the modified prospective transition method and; therefore, we have not restated prior periods. Under this transitionmethod, compensation costs associated with stock options recognized in 2007 and 2006 includes amortization related to the remaining unvested portion ofstock option and dividend equivalent rights awards granted prior to January 1, 2006, and include amortization expense related to new awards granted afterJanuary 1, 2006. We use the Black-Scholes model as our option pricing model for applying SFAS 123R. The expense associated with share-based compensation arrangements is a non-cash charge. In the consolidated statements of cash flows, share-basedcompensation expense is an adjustment to reconcile net income to cash provided by operating activities. 63Table of ContentsFor stock options and DERs granted prior to the adoption of SFAS No. 123R, the effect on net income and earnings per share if we had applied the fairvalue recognition provisions of SFAS No. 123R to our stock option and DER plans for 2005 is shown in the table below. Year EndedDecember 31, 2005 (in thousands, exceptper share data) Income from continuing operations $25,131 Income from discontinued operations, net 292 Net income $25,423 Income from continuing operations $25,131 Add: total stock-based compensation expenses included in net income 227 Deduct: total stock-based employee compensation expenses determined under fair value based methods for all awards: (236)Pro forma net income from continuing operations $25,122 Income from discontinued operations, net 292 Total pro forma net income $25,414 Basic earnings per share, as reported: From continuing operations $2.14 From discontinued operations 0.02 Total basic earnings per share, as reported $2.16 Basic earnings per share, pro forma: From continuing operations $2.14 From discontinued operations 0.02 Total basic earnings per share, pro forma $2.16 Diluted earnings per share, as reported: From continuing operations $2.12 From discontinued operations 0.03 Total diluted earnings per share, as reported $2.15 Diluted earnings per share, pro forma: From continuing operations $2.12 From discontinued operations 0.03 Diluted earnings per share $2.15 Fair Value of Financial Instruments From time to time, we may enter into interest rate swap agreements and the fair value of such interest rate swap agreements would be based on quotedmarket prices. The carrying amounts reported in the balance sheet for cash, receivables, and short-term borrowings approximate their fair values due to theshort-term nature of these instruments. Accordingly, these items are excluded from the fair value disclosures included elsewhere in these notes to consolidatedfinancial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 64Table of ContentsAccounting for Derivative Instruments and Hedging Activities SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities” and SFAS No. 138, “Accounting for Certain DerivativeInstruments and Certain Hedging Activity”, an Amendment of SFAS 133, require that all derivative instruments be recorded on the balance sheet at theirrespective fair values. [At December 31, 2007, we had no outstanding swap agreements.] On the date a derivative contract is entered into, we designate the derivative as either a hedge of a forecasted transaction or the variability of cash flows tobe paid related to a recognized liability. For all hedging relationships we formally document the hedging relationship and our risk-management objective andstrategy for undertaking the hedge, the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument’s effectiveness inoffsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that aredesignated as cash-flow hedges to specific liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess,both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes inthe cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, wediscontinue hedge accounting prospectively. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in othercomprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designatedhedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash-flow hedge is reported in earnings. We discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows ofthe hedged item, the derivative expires or is sold or terminated, the derivative is de-designated as a hedging instrument because it is unlikely that a forecastedtransaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of thederivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we continue to carry the derivative on thebalance sheet at its fair value with subsequent changes in fair value included in earnings, and gains and losses that were accumulated in other comprehensiveincome are recognized immediately in earnings. We manage our ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in acost-effective manner, from time to time, we enter into interest rate swap agreements, in which we agree to exchange various combinations of fixed and/orvariable interest rates based on agreed upon notional amounts. Recent Accounting Pronouncements Business Combinations: In December 2007, the FASB issued SFAS 141 (revised 2007) “Business Combinations” (“SFAS 141R”). SFAS 141Restablishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired,the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwillacquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15, 2008. We do not anticipate that the adoption of SFAS 141R will have amaterial impact on our results of operations or financial position. 65Table of ContentsNoncontrolling Interests in Consolidated Financial Statements: In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests inConsolidated Financial Statements—an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements forexisting minority interests. All other requirements of SFAS 160 shall be applied prospectively. We do not anticipate that the adoption of SFAS No. 160 willhave a material impact on our results of operations or financial position. Fair Value Option for Financial Assets and Financial Liabilities: In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits acompany to choose to measure many financial instruments and certain other items at fair value at specified election dates. Most of the provisions in SFASNo. 159 are elective; however, it applies to all companies with available-for-sale and trading securities. A company will report unrealized gains and losses onitems for which the fair value option has been elected in earnings (or another performance indicator if the company does not report earnings) at each subsequentreporting date. The fair value option: (a) may be applied instrument by instrument; (b) is irrevocable (unless a new election date occurs), and; (c) is appliedonly to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year beginning afterNovember 15, 2007. We do not anticipate that the adoption of SFAS No. 159 will have a material impact on our results of operations or financial position. Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions for SFAS 157 are to be applied prospectively asof the beginning of the fiscal year in which it is initially applied, except in limited circumstances including certain positions in financial instruments that tradein active markets as well as certain financial and hybrid financial instruments initially measured under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”) using the transaction price method. In these circumstances, the transition adjustment is measured asthe difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initially applied. In February,2008, the FASB decided to issue final staff positions that will: (i) partially defer the effective date of SFAS No. 157 for one year for certain non-financialassets and non-financial liabilities, and; (ii) remove certain leasing transactions from the scope of SFAS No. 157. We do not anticipate that the adoption ofSFAS No. 157 will have a material impact on our results of operations or financial position. (2)RELATIONSHIP WITH UHS AND RELATED PARTY TRANSACTIONS Leases: We commenced operations in 1986 by purchasing certain subsidiaries from UHS and immediately leasing the properties back to therespective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years with up to sixadditional 5-year renewal terms, with base rents set forth in the leases effective for all but the last two renewal terms. In 1998, the lease for McAllen MedicalCenter was amended to provide that the last two renewal terms would also be fixed at the initial agreed upon base rental. This lease amendment was inconnection with certain concessions granted by UHS with respect to the renewal of other leases. The base rents are paid monthly and each lease also providesfor additional or bonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to acorresponding quarter in the base year. The leases with subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another. 66Table of ContentsThe combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 54% of our total revenue for the five yearsended December 31, 2007 (approximately 57%, 51%, and 49% for the years ended December 31, 2007, 2006 and 2005, respectively). Including 100% of therevenues generated at the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 99%, the leases on the UHShospital facilities accounted for approximately 25% of the combined consolidated and unconsolidated revenue for the five years ended December 31, 2007(approximately 24%, 24% and 25% for the years ended December 31, 2007, 2006 and 2005, respectively). In addition, seven MOBs (plus two additionalMOBs currently under construction) owned by LLCs in which we hold various non-controlling equity interests, include tenants which are subsidiaries ofUHS. Pursuant to the Master Lease Document by and among us and certain subsidiaries of UHS, dated December 24, 1986 (the “Master Lease”), whichgoverns the leases of all hospital properties with subsidiaries of UHS, UHS has the option to renew the leases at the lease terms described below by providingnotice to us at least 90 days prior to the termination of the then current term. In addition, UHS has rights of first refusal to: (i) purchase the respective leasedfacilities 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 respectiveleased 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. UHS also has the right topurchase the respective leased facilities at the end of the lease terms or any renewal terms at the appraised fair market value. In addition, during 2006, as partof the overall exchange and substitution proposal relating to Chalmette Medical Center (“Chalmette”), as discussed below, as well as the early five year leaserenewals on Southwest Healthcare System-Inland Valley Campus (“Inland Valley”), Wellington Regional Medical Center (“Wellington”), McAllen MedicalCenter (“McAllen”) and The Bridgeway (“Bridgeway”), we agreed to amend the Master Lease to include a change of control provision. The change of controlprovision grants UHS the right, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the four leased hospitalproperties at their appraised fair market value. During the third quarter of 2005, Chalmette, a 138-bed acute care hospital located in Chalmette, Louisiana, was severely damaged and closed as a resultof Hurricane Katrina. At that time, the majority of the real estate assets of Chalmette were leased from us by a subsidiary of UHS and, in accordance with theterms of the lease, and as part of an overall evaluation of the leases between subsidiaries of UHS and us, UHS offered substitution properties rather thanexercise its right to rebuild the facility or offer cash for Chalmette. Independent appraisals were obtained by us and UHS which indicated that the pre-hurricanefair market value of the leased facility was $24.0 million. During the third quarter of 2006, we completed the asset exchange and substitution pursuant to the Asset Exchange and Substitution Agreement(“Agreement”) with UHS whereby we agreed to terminate the lease between us and Chalmette and to transfer the real property assets and all rights attendantthereto (including insurance proceeds) of Chalmette to UHS in exchange and substitution for newly constructed real property assets owned by UHS (“CapitalAdditions”) at Wellington, Bridgeway and Inland Valley, in satisfaction of the obligations under the Chalmette lease. The Capital Additions consist ofproperties which were recently constructed on, or adjacent to, facilities already owned by us as well as a recently constructed Capital Addition at Inland Valleywhich was completed and opened during the third quarter of 2007. Pursuant to section 1033(a)(1) of the Internal Revenue Code of 1986, as amended (the“IRC”), we recognized no gain for federal income tax purposes based upon the transaction as agreed upon in the Agreement. The total cost of the 44-bed Capital Addition at Inland Valley amounted to $11.7 million, which exceeded the $11.0 million threshold included in theAgreement. Pursuant to the terms of the Agreement, the $760,000 of cost in excess of the $11.0 million threshold has been paid to UHS in cash and UHS willpay incremental rent on the $760,000 excess cost at a rate of 6.75%. 67Table of ContentsThe table below details the renewal options and terms for each of the four UHS hospital facilities: Hospital Name Type of Facility AnnualMinimumRent End ofLease Term RenewalTerm(years) McAllen Medical Center Acute Care $5,485,000 December, 2011 20(a)Wellington Regional Medical Center Acute Care $3,030,000 December, 2011 20(b)Southwest Healthcare System, Inland Valley Campus Acute Care $2,648,000(d) December, 2011 20(b)The Bridgeway Behavioral Health $930,000 December, 2014 10(c) (a)UHS has four 5-year renewal options at existing lease rates (through 2031).(b)UHS has two 5-year renewal options at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through2031).(c)UHS has two 5-year renewal options at fair market value lease rates (2015 through 2024).(d)Includes incremental rent on the $760,000 of Capital Addition cost in excess of $11.0 million. The properties included in the Asset Exchange and Substitution Agreement consist of the following, based upon fair value amounts (in thousands): Wellington—Bed Tower $8,926Bridgeway—28 bed addition 4,072Inland Valley—44 bed expansion 11,728Total fair value of exchanged and substituted assets, including $760,000 excess repaid to UHS $24,726 During 2005, 2004 and 2003, the total rent earned by us under the Chalmette lease was approximately $1.6 million to $1.7 million annually (including$960,000 of base rental and approximately $700,000 of bonus rental). The total rent payable to us on the Capital Additions included in the substitutionpackage (including the estimated base rent on the Inland Valley Capital Addition in excess of $11.0 million) is expected to approximate the total rent earned byus under the Chalmette lease. Also during the second quarter of 2006, as part of the overall asset exchange and substitution arrangement with UHS, UHS agreed to early renewals ofthe leases between us and each of Inland Valley, Wellington and McAllen which were scheduled to mature on December 31, 2006, and Bridgeway, which wasscheduled to mature on December 31, 2009. These leases were renewed on the same economic terms as the current leases. Included in our consolidated statement of income during 2005 was a property write-down charge of $6.3 million representing the book value of theChalmette property damaged by the hurricane. Included in our 2005 net income was an equal amount representing the property damage recoverable from UHS.Prior to the completion of the asset exchange and substitution, Chalmette had a combined asset value of $8.3 million on our consolidated balance sheetconsisting of $2.0 million of land held for exchange and $6.3 million of property damage receivable from UHS. Included in our net income during 2007 and2006 are gains of $1.7 million and $14.0 million, respectively, representing the total property transferred to us from UHS as of December 31, 2007 in excessof the $8.3 million book value of Chalmette. During 2007, we committed to invest up to $6.4 million in debt or equity, in exchange for a 95% non-controlling equity interest in a limited liabilitycompany that will develop, construct, own and operate the Summerlin Medical Office Building III, located in Las Vegas, Nevada, on the campus of a UHShospital. This building, tenants of which include subsidiaries of UHS, is scheduled to be completed and opened during the fourth quarter of 2008. 68Table of ContentsDuring 2006, we committed to invest up to $6.6 million ($250,000 in equity, $250,000 of which has been funded as of December 31, 2007 and $6.3million in debt financing or equity, of which $183,000 has been funded as of December 31, 2007) in exchange for a 95% non-controlling equity interest in alimited liability company that developed, constructed, owns and operates the Centennial Hills Medical Office Building I, located in Las Vegas, Nevada, on thecampus of a UHS hospital. The LLC has a $15.7 million construction loan commitment from a third-party, which is non-recourse to us. This building,tenants of which include subsidiaries of UHS, was completed and opened during the fourth quarter of 2007. Additionally, during 2006, we committed to invest up to $4.3 million in equity, of which $143,000 has been funded as of December 31, 2007, inexchange for a 95% non-controlling equity interest in a limited liability company that will develop, construct, own and operate the Palmdale Medical Plaza,located in Palmdale, California, on the campus of a UHS hospital currently under construction. This MOB will be 75% master leased by UHS of Palmdale,Inc., a subsidiary of UHS, on a triple net basis. The master lease for each suite will be cancelled at such time that the suite is leased for a minimum term offive years, to another tenant acceptable to the LLC and UHS of Palmdale. Based upon the executed leases and letter of intent commitments in place as ofDecember 31, 2007, the master lease threshold of 75% was not expected to be met by the completion and opening of the building. The LLC has a $9.9 millionconstruction loan commitment from a third-party, which is non-recourse to us. At December 31, 2007, $7.4 million of third-party debt has been borrowedagainst this $9.9 million construction loan commitment. This building, tenants of which include subsidiaries of UHS, is scheduled to be completed andopened during the second quarter of 2008. This LLC, which is deemed to be a variable interest entity, is consolidated in our financial statements as ofDecember 31, 2007. During 2005, we committed to invest up to $12.3 million in debt and/or equity, of which $10.2 million has been funded ($219,000 was repaid during2007) as of December 31, 2007, in exchange for a 95% non-controlling interest in a limited liability company that developed, constructed, owns and operatesthe Spring Valley Medical Office Building II, a second MOB on the campus of a UHS hospital located in Las Vegas, Nevada. This MOB was completed andopened during the second quarter of 2007. During the third quarter of 2004, Wellington, our 121-bed acute care facility located in West Palm Beach, Florida, sustained storm damage caused by ahurricane. This facility is leased by a wholly-owned subsidiary of UHS and pursuant to the terms of the lease, UHS is responsible for maintainingreplacement cost property insurance for the facility, a substantial portion of which is insured by a commercial carrier. The facility did not experiencesignificant business interruption. During the year ended December 31, 2005, UHS incurred $4.7 million in replacement costs (in addition to $1.9 millionincurred during 2004) and since these additional costs were recovered from UHS, $4.7 million has been included in net income during the year endedDecember 31, 2005. The repairs to the facility were completed as of December 31, 2005. UHS spent a total of approximately $6.6 million to replace thedamaged property at this facility. UHS Legal Proceedings: We have been advised by UHS that UHS, together with its South Texas Health System affiliates, which operate McAllenMedical Center, were served with a subpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and HumanServices (“OIG”). At that time, the Civil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigationunder the False Claims Act regarding compliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and thesolicitation of patient referrals from physicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS hasadvised us that since January of 2006, documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including anadditional March 9, 2007 subpoena. On February 16, 2007, UHS’s South Texas Health System affiliates were served with a search warrant in connectionwith what UHS has been advised is a related criminal Grand Jury investigation concerning the production of documents. At that time, the government obtainedvarious documents and other property related to the facilities. Follow-up Grand Jury subpoenas for documents and witnesses and other requests forinformation were subsequently served on South Texas Health System facilities and certain UHS employees and former employees. 69Table of ContentsUHS’s legal representatives continue to meet with representatives of the civil and criminal divisions of the United States Attorney’s Office for theSouthern District of Texas to discuss the status of these matters. UHS’s representatives have been advised that the government is continuing its investigations.UHS understands that, based on those discussions and its investigations to date, the government is focused on certain arrangements entered into by the SouthTexas Health System affiliates which, the government believes, may have violated Medicare and Medicaid rules and regulations pertaining to payments tophysicians and the solicitation of patient referrals from physicians and other matters relating to payments to various individuals which may have constitutedimproper or illegal payments. UHS understands that the government is also focusing its investigation to determine whether the South Texas Health Systemaffiliates and certain individuals illegally failed to fully comply with the original OIG subpoena. UHS is investigating these matters, cooperating with theinvestigations and responding to the matters raised with them. UHS continues to produce documents on a rolling basis to the government based on its requestspursuant to its investigations. UHS expects to continue their discussions with the government to attempt to resolve these matters in a manner satisfactory toUHS and the government. There is no assurance that UHS will be able to do so, and, at this time, UHS is unable to evaluate the extent of any potentialfinancial or other exposure in connection with these matters which are related to the subject of the government’s investigations. UHS has advised us that it monitors all aspects of its business and that it has developed a comprehensive ethics and compliance program that isdesigned to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmentalinvestigation or litigation may result in interpretations that are inconsistent with industry practices, including UHS’s. Although UHS believes its policies,procedures and practices comply with governmental regulations, no assurance can be given that UHS will not be subjected to further inquiries or actions, orthat UHS will not be faced with sanctions, fines or penalties in connection with the investigation of their South Texas Health System affiliates. Even if UHSwere to ultimately prevail, the government’s inquiry and/or action in connection with this matter could have a material adverse effect on UHS’s futureoperating results and on the future operating results of McAllen Medical Center. While the base rentals are guaranteed by UHS through the end of the existinglease term, should this matter adversely impact the future revenues and/or operating results of McAllen Medical Center, the future bonus rental earned by uson this facility may be materially, adversely impacted. Bonus rental revenue earned by us from McAllen Medical Center amounted to $1.7 million during2007 and $1.9 million during 2006. We can provide no assurance that this matter will not have a material adverse impact on underlying value of McAllenMedical Center or on the future base rental earned on this facility should the existing lease not be renewed pursuant to its current lease rates after its December,2011 scheduled expiration of the existing lease term. Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an AdvisoryAgreement (the “Advisory Agreement”) dated December 24, 1986. Under the Advisory Agreement, the Advisor is obligated to present an investment programto us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity tous), to provide administrative services to us and to conduct our day-to-day affairs. In performing its services under the Advisory Agreement, the Advisor mayutilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. TheAdvisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Trustees who are unaffiliated withUHS (the “Independent Trustees”), that the Advisor’s performance has been satisfactory. The Advisory Agreement may be terminated for any reason uponsixty days written notice by us or the Advisor. The Advisory Agreement has been renewed for 2008. All transactions between us and UHS must be approvedby the Independent Trustees. The Advisory Agreement provides that the Advisor is entitled to receive an annual advisory fee equal to 0.60% of our average invested real estate assets,as derived from our consolidated balance sheet. The advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financialstatements. In addition, the Advisor is entitled to an annual incentive fee equal to 20% of the amount by which cash available for distribution to shareholdersfor each year, as defined in the Advisory Agreement, exceeds 15% of our equity 70Table of Contentsas shown on our consolidated balance sheet, determined in accordance with generally accepted accounting principles without reduction for return of capitaldividends. The Advisory Agreement defines cash available for distribution to shareholders as net cash flow from operations less deductions for, among otherthings, amounts required to discharge our debt and liabilities and reserves for replacement and capital improvements to our properties and investments.Advisory fees incurred and paid (or payable) to UHS amounted to $1.4 million for each of 2007, 2006 and 2005. No incentive fees were paid during 2007,2006 or 2005. Officers and Employees: Our officers are all employees of UHS and although as of December 31, 2007 we had no salaried employees, our officers doreceive stock-based compensation from time-to-time. Share Ownership: As of December 31, 2007, UHS owned 6.7% of our outstanding shares of beneficial interest. (3)ACQUISITIONS AND DISPOSITIONS 2008: Acquisitions: In February, 2008, we purchased Kindred Hospital; Corpus Christi, an unaffiliated 74-bed long-term acute care hospital located in Corpus Christi,Texas for a total purchase price of $8.1 million. We paid $4.7 million in cash and assumed $3.4 million of third-party mortgage debt that is non-recourse tous. The lease payments on this facility are unconditionally guaranteed by Kindred Healthcare, Inc. until its scheduled expiration in June, 2019. Dispositions: None. 2007: Acquisitions: None. Dispositions: We received $8.4 million in connection with the following divestitures: • During the first quarter of 2007, we received $7.3 million for the sale of the Fresno-Herndon Medical Plaza, a medical office building located inFresno, California. The financial results of this property are reflected as discontinued operations on our condensed consolidated statements ofincome for 2007, 2006 and 2005. This transaction resulted in a gain of $2.3 million which is included in “Income from discontinued operations,net” during 2007, and; • During the second quarter of 2007, we received $1.1 million for the sale of real property by RioMed Investments, a LLC in which we had an 80%non-controlling equity interest, which sold the Rio Rancho Medical Center, located in Gilbert, Arizona. This transaction resulted in a $264,000 gainwhich is included in “Equity in income of unconsolidated LLCs” during 2007. 2006: Acquisitions: None. 71Table of ContentsDispositions: None. 2005: Acquisitions: None. Dispositions: During the fourth quarter of 2005, we sold our non-controlling equity interest in West Highland Holdings, a LLC which owned the St. Jude HeritageHealth Complex, located in California, in exchange for a $3.1 million note receivable which was collateralized by the entire ownership interest of the LLC.This transaction resulted in a deferred gain of $1.9 million which was recognized as income during 2006 when the cash proceeds to repay the note receivablewere received by us. During the first quarter of 2005, Bayway Properties, a LLC in which we owned a 73% non-controlling ownership interest, sold the real estate assets ofthe East Mesa Medical Center, which is located in Mesa, Arizona. Our share of the net sale proceeds resulting from this transaction was $2.9 million. Thetransaction resulted in a gain of approximately $1.0 million which is included in our results of operations for 2005. (4)LEASES All of our leases are classified as operating leases with initial terms ranging from 3 to 20 years with up to four additional, five-year renewal options.Under the terms of the leases, we earn fixed monthly base rents and pursuant to the leases with subsidiaries of UHS, we may earn periodic bonus rents (seeNote 1). The bonus rents from the subsidiaries of UHS, which are based upon each facility’s net revenue in excess of base amounts, are computed and paidon a quarterly basis based upon a computation that compares current quarter revenue to the corresponding quarter in the base year. Minimum future base rents from non-cancelable leases, excluding increases resulting from changes in the consumer price index and bonus rents, are asfollows (amounts in thousands): 2008 $21,5692009 20,5882010 18,1412011 15,6192012 2,406Thereafter 2,921Total minimum base rents $81,244 Under the terms of the hospital leases, the lessees are required to pay all operating costs of the properties including property insurance and real estatetaxes. Tenants of the medical office buildings generally are required to pay their pro-rata share of the property’s operating costs. (5)DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We use variable-rate debt to finance a portion of our operations and investments. These variable-rate debt obligations expose us to variability in interestpayments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of our interest payments. To meet thisobjective, from time to 72Table of Contentstime, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change thevariable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, we receive variable interest ratepayments and make fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. At December 31, 2007, we had no outstanding swapagreements. Changes in the fair value of an interest rate swap designated as a hedging instrument that effectively offsets the variability of cash flows associated withvariable-rate debt obligations are reported in accumulated other comprehensive income. These amounts subsequently are reclassified into interest expense in thesame period in which the underlying hedged item affects earnings. During 2007, we had no hedging activity. For the years ended December 31, 2006 and2005, we recorded additional interest expense of $62,000 and $431,000, respectively, as a result of our hedging activity. During 2005, based on revised borrowing forecasts, one of our interest rate swap agreements was deemed to be ineffective. In connection with thisineffective interest rate swap agreement, we recorded a net loss of $252,000 which was included in interest expense during 2005 and consisted of the following:(i) a loss of $515,000 representing the amount recorded in accumulated other comprehensive income (“AOCI”) as of January 1, 2005, and; (ii) a gain of$263,000 to recognize the change in fair value of this derivative during 2005. This swap was terminated during 2005 and a termination fee of $319,000 waspaid. (6)DEBT In January 2007, we entered into a new unsecured $100 million revolving credit agreement (the “Agreement”) which expires on January 19, 2012. Wehave a one time option, which can be exercised at any time, subject to bank approval, to increase the amount by $50 million for a total commitment of $150million. The Agreement provides for interest at our option, at the Eurodollar rate plus .75% to 1.125%, or the prime rate plus zero to .125%. A fee of .15% to.225% is paid on the unused portion of the commitment. The margins over the Eurodollar, prime rate and commitment fee are based upon our debt to totalcapital ratio as defined by the Agreement. As of December 31, 2007, the applicable margin over the Eurodollar rate was .75%, the margin over the prime ratewas zero, and the commitment fee was .15%. At December 31, 2007, we had $16.8 million of outstanding borrowings and $25.2 million of letters of credit outstanding under our revolving creditagreement. We had $58.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2007.There are no compensating balance requirements. The Agreement contains a provision whereby the commitments will be reduced by 50% of the proceedsgenerated from any new equity offering. The average amounts outstanding under our revolving credit agreement were $11.3 million in 2007, $11.9 million in2006, and $12.0 million in 2005 with corresponding effective interest rates, including commitment fees and interest rate swap expense, of 7.1% in 2007,7.9% in 2006, and 9.0% in 2005. The carrying value of the amounts borrowed approximates fair market value. Covenants relating to the Agreement require the maintenance of a minimum tangible net worth and specified financial ratios, limit our ability to incuradditional debt, limit the aggregate amount of mortgage receivables and limit our ability to increase dividends in excess of 95% of cash available fordistribution, unless additional distributions are required to comply with the applicable section of the Internal Revenue Code and related regulations governingreal estate investment trusts. We are in compliance with all of the covenants at December 31, 2007. We have two mortgages and one construction loan, which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2007,with a combined outstanding balance of $19.8 million. Both mortgages carry an interest rate of 8.3% and both have maturity dates in 2010. The constructionloan carries an interest rate as of December 31, 2007 of LIBOR plus 2.60% or 7.2% and has a maturity date in 2008. The 73Table of Contentsmortgages are secured by the buildings as well as property leases and rents. These two mortgages plus the construction loan have a combined fair value ofapproximately $20.6 million as of December 31, 2007. The following table summarizes our outstanding mortgages and construction loan at December 31, 2007 (amounts in thousands): Facility Name / Secured by OutstandingBalance(in thousands) InterestRate MaturityDateMedical Center of Western Connecticut $3,717 8.3% 2010Palmdale Medical Plaza 7,413 7.2% 2008Summerlin Hospital MOB II 8,687 8.3% 2010Total $19,817 As of December 31, 2007, our aggregate consolidated scheduled debt repayments (including mortgages and construction loan) are as follows (amounts inthousands): 2008 $7,7742009 3932010 11,6502011 — 2012(a) 16,800Later — Total $36,617 (a)Consists of borrowings outstanding under the terms of our new $100 million revolving credit agreement entered into in January, 2007. (7)DIVIDENDS Dividends of $2.30 per share were declared and paid in 2007, of which $1.646 per share was ordinary income, $0.2446 per share was a capital gaindistribution and $0.4094 per share was a return of capital distribution. Dividends of $2.260 per share were declared and paid in 2006, of which $1.831 pershare was ordinary income, $0.160 per share was a capital gain distribution and $0.269 per share was a return of capital distribution. Dividends of $2.175per share were declared and paid in 2005, of which $1.754 per share was ordinary income, $0.093 per share was a capital gain distribution and $0.328 pershare was a return of capital distribution. (8)INCENTIVE PLANS As discussed in Note 1, effective January 1, 2006, we adopted SFAS No. 123R and related interpretations and began expensing the grant-date fair valueof stock options. Prior to January 1, 2006, we accounted for these plans under the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense was reflected in net income for stock optiongrants, as all options granted under the plan had an original exercise price equal to the market value of the underlying shares on the date of grant. As a result ofadopting SFAS No. 123R, during 2007 and 2006 we recognized compensation cost in our financial statements on the unvested portion of existing options thatwere granted prior to the effective date and the cost of stock options granted after the effective date based on the fair value of the stock options at grant date. 74Table of ContentsDuring 1997, our Board of Trustees approved the Universal Health Realty Income Trust 1997 Incentive Plan (“The Plan”), a stock option anddividend equivalents rights plan for employees of the Trust, including officers and trustees; this plan expired on June 22, 2007. Awards granted under thisPlan on or before the termination date remain exercisable, in accordance with their respective terms, after the termination of The Plan. A combined total of400,000 shares and dividend equivalent rights had been reserved for issuance under The Plan. From inception through the expiration of the plan during thesecond quarter of 2007, there have been 161,000 stock options with dividend equivalent rights granted to eligible individuals, including officers and trustees.All stock options were granted with an exercise price equal to the fair market value on the date of the grant. The options granted vest ratably at 25% per yearbeginning one year after the date of grant, and expire in ten years. Dividend equivalent rights effectively reduce the exercise price of the 1997 Incentive Planoptions by an amount equal to the cash or stock dividends distributed subsequent to the date of grant. We recorded expenses relating to the dividend equivalentrights of $112,000 in 2007, $195,000 in 2006 and $227,000 in 2005. During 2007, there were 24,000 options and DERs issued under the 1997 IncentivePlan with a weighted-average grant-date fair value of $14.70 per option. As of December 31, 2007, there were 51,000 options exercisable under The Plan withan average exercise price of $22.17 per share (average exercise price, adjusted to give effect to the dividend equivalent rights is $8.89 per share). During the second quarter of 2007, our Board of Trustees approved and adopted the Universal Health Realty Income Trust 2007 Restricted Stock Plan(the “2007 Plan”). The 2007 Plan was approved by our shareholders during the second quarter of 2007. A total of 75,000 shares have been authorized forissuance under the 2007 Plan and there have been no shares issued under the 2007 Plan at December 31, 2007. Additionally, during the second quarter of2007, the Board of Trustees approved the termination of the Universal Health Realty Income Trust’s Share Compensation Plan for outside Trustees. Therewere no shares issued or outstanding under the terms of this plan. Compensation cost related to stock options is recognized using the straight-line method over the stated vesting period of the award. The fair value of eachoption grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, 2007 2006 2005 Volatility 18% 17% 18% - 19%Interest rate 4% 4% 4%Expected life (years) 9.5 9.2 9.2 Forfeiture rate 2% 2% 3%Dividend yield(a.) 0% 0% 6.5% (a.)Fair value calculated at 0% expected dividend yield to provide for effect of DERs. 75Table of ContentsStock options to purchase shares of beneficial interest have been granted to eligible individuals, including our officers and trustees, under various plans.Information with respect to these options, before adjustment to the option price to give effect to the dividend equivalent rights, is summarized as follows: Outstanding Options Numberof Shares ExerciseWeighted-Average Price Grant Price Range(High-Low)Balance, January 1, 2005 100,500 $19.67 $34.07/$14.75Granted 14,000 $34.55 $34.90/$30.06Exercised (4,500) $20.13 $34.07/$14.75Cancelled (1,000) $32.47 $34.07/$27.65Balance, January 1, 2006 109,000 $21.45 $34.90/$14.75Balance, January 1, 2007 109,000 $21.45 $34.90/$14.75Granted 24,000 $36.53 $36.53/$36.53Exercised (50,000) $18.625 $18.625/$18.625Balance, December 31, 2007 83,000 $27.51 $36.53/$14.75 The total in-the-money value of all stock options exercised during the years ended December 31, 2007 and 2005 was $836,000 and $59,000,respectively. There were no options granted, exercised or cancelled during 2006. The following table provides information about unvested options as of December 31, 2007: Shares WeightedAverageGrant DateFair ValueUnvested options as of January 1, 2007 14,250 $12.80Granted 24,000 $14.70Vested (6,250) $12.00Cancelled — $— Unvested options as of December 31, 2007 32,000 $14.38 The following table provides information about options outstanding and exercisable options at December 31, 2007: OptionsOutstanding OptionsExercisable Expectedto VestNumber 83,000 51,000 31,520Weighted average exercise price $27.51 $22.17 $36.02Aggregate intrinsic value $684,000 $677,000 $22,000Weighted average remaining contractual life 5.7 3.8 6.9 76Table of ContentsThe weighted average remaining contractual life and weighted average exercise price for options outstanding and the weighted average exercise prices pershare for exercisable and expected to vest options at December 31, 2007 were as follows: Options Outstanding ExercisableOptions Expected to VestOptions (a.)Exercise Price Shares WeightedAverageExercisePrice PerShare WeightedAverageRemainingContractualLife (inYears) Shares WeightedAverageExercisePrice PerShare Shares WeightedAverageExercisePrice PerShare$14.75 -$14.75 24,000 $14.75 2.2 24,000 $14.75 N/A N/A$18.625 -$19.625 2,500 19.63 .9 2,500 19.63 N/A N/A$21.4375 -$26.25 7,500 24.62 3.5 7,500 24.62 N/A N/A$27.65 -$29.44 7,000 28.42 5.2 7,000 28.42 N/A N/A$30.06 -$34.90 18,000 34.45 7.5 10,000 34.41 7,880 34.49$36.53 -$36.53 24,000 36.53 9.2 — — 23,640 36.53Total 83,000 $27.51 5.7 51,000 $22.17 31,520 $36.02 (a.)Assumes a weighted average forfeiture rate of 1.5% (9)SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES Since January 1, 1995 through December 31, 2007, we have invested $69.2 million of cash (including advances to various LLCs) in LLCs in whichwe own various non-controlling equity interests ranging from 33% to 99% (consolidated and unconsolidated), before reductions for cash distributions receivedfrom the LLCs. As of December 31, 2007, short-term unsecured advances aggregated $14.3 million due from four LLCs. Including the cumulativeadjustments for our share of equity in the net income of the LLCs and cash contributions to and distributions from these investments, our net investment inLLCs was $52.1 million, (excluding consolidated investments), as reflected on our consolidated balance sheet as of December 31, 2007. 77Table of ContentsAs of December 31, 2007, we had investments or commitments to invest in twenty-seven LLCs, twenty-five of which are accounted for by the equitymethod and two that are consolidated into the results of operations. The following tables represent summarized financial and other information related to thetwenty-five LLCs which were accounted for under the equity method as of December 31, 2007: Name of LLC Ownership Property Owned by LLCDSMB Properties 76% Desert Samaritan Hospital MOBsDVMC Properties(a.) 90% Desert Valley Medical CenterSuburban Properties 33% Suburban Medical Plaza IILitchvan Investments 89% Papago Medical ParkPaseo Medical Properties II 75% Thunderbird Paseo Medical Plaza I & IIWilletta Medical Properties(a.) 90% Edwards Medical PlazaSanta Fe Scottsdale(a.) 90% Santa Fe Professional Plaza575 Hardy Investors(a.) 90% Centinela Medical Building ComplexBrunswick Associates 74% Mid Coast Hospital MOBDeerval Properties 90% Deer Valley Medical Office IIPCH Medical Properties 85% Rosenberg Children’s Medical PlazaGold Shadow Properties(b.) 98% 700 Shadow Lane & Goldring MOBsArlington Medical Properties(c.) 75% Saint Mary’s Professional Office BuildingApaMed Properties 85% Apache Junction Medical PlazaSpring Valley Medical Properties(b.) 95% Spring Valley Medical Office BuildingSierra Medical Properties(d.) 95% Sierra San Antonio Medical PlazaSpring Valley Medical Properties II(b.)(e.) 95% Spring Valley Hospital Medical Office Building IIPCH Southern Properties(f.) 95% Phoenix Children’s East Valley Care CenterCentennial Medical Properties(b.)(g.) 95% Centennial Hills Medical Office Building ICanyon Healthcare Properties(h.) 95% Canyon Springs Medical Plaza653 Town Center Drive(b.)(i.) 95% Summerlin Hospital Medical Office BuildingDesMed(b.)(i.) 99% Desert Springs Medical PlazaDeerval Properties II(j.) 95% Deer Valley Medical Office Building IIICobre Properties(k.) 95% Cobre Valley Medical PlazaBanburry Medical Properties(b.)(l.) 95% Summerlin Hospital Medical Office Building III (a.)The membership interests of this entity are held by a master LLC in which we hold a 90% non-controlling ownership interest.(b.)Tenants of these medical office buildings include subsidiaries of UHS.(c.)We have committed to invest a total of $8.0 million in equity, of which $5.2 million has been funded as of December 31, 2007, in exchange for a 75%non-controlling interest in a LLC that owns the Saint Mary’s Professional Office Building located in Reno, Nevada. As of December 31, 2007, the LLChas an outstanding mortgage loan balance of $27.9 million from a third party, which is non-recourse to us. This medical office building opened inMarch of 2005.(d.)We have committed to invest a total of up to $3.5 million in equity in exchange for a 95% non-controlling interest in a LLC that owns the Sierra SanAntonio Medical Plaza located in Fontana, California. As of December 31, 2007, we have invested $2.7 million in equity and $485,000 in debtfinancing (which was repaid during the first quarter of 2007) in connection with this project. The LLC has a $7.5 million construction loan from athird party, which is non-recourse to us. This medical office building opened during the first quarter of 2006.(e.)We have committed to invest a total of up to $12.3 million in debt and/or equity financing (of which $10.2 million has been funded as of December 31,2007 of which $219,000 was repaid during 2007), in exchange for a 95% non-controlling interest in a LLC that owns and operates the Spring ValleyHospital Medical Office Building II, located in Las Vegas, Nevada on the campus of a UHS facility. This building was completed and opened duringthe second quarter of 2007. 78Table of Contents(f.)We have committed to invest a total of up to $3.5 million in equity, of which $2.0 million has been funded as of December 31, 2007, in exchange for a95% non-controlling interest in a LLC that owns the Phoenix Children’s East Valley Care Center, a single tenant medical office building, located inGilbert, Arizona. The LLC has a $7.3 million outstanding mortgage loan balance from a third-party, which is non-recourse to us. This building wascompleted and opened during the fourth quarter of 2007.(g.)We have committed to invest up to $6.6 million ($250,000 in equity all of which has been funded as of December 31, 2007, and $6.3 million in equityor debt financing, $183,000 of which has been funded as equity as of December 31, 2007) in exchange for a 95% non-controlling interest in a LLC thatowns the Centennial Hills Medical Office Building I, located in Las Vegas, Nevada on the campus of a UHS hospital. The LLC has a $15.7 millionconstruction loan commitment from a third-party, which is non-recourse to us, of which $12.8 million has been drawn as of December 31, 2007. Thisbuilding was completed and opened during the fourth quarter of 2007.(h.)We have committed to invest up to $6.0 million ($5.5 million in equity of which $4.0 million has been funded as of December 31, 2007, and $500,000in either equity and/or debt financing, none of which has been funded as of December 31, 2007) in exchange for a 95% non-controlling interest in aLLC that owns the Canyon Springs Medical Plaza in Gilbert, Arizona. The LLC has an outstanding mortgage loan balance of $17.5 million from athird-party, which is non-recourse to us. This building was completed and opened during the fourth quarter of 2007.(i.)We began recording these LLCs on an unconsolidated basis during the fourth quarter of 2006.(j.)We have committed to invest up to $6.8 million ($250,000 in equity, none of which has been funded as of December 31, 2007, and $6.6 million ineither equity and/or debt financing, none of which has been funded as of December 31, 2007) in exchange for a 95% non-controlling interest in a LLCthat will develop, construct, own and operate the Deer Valley Medical Office Building III in Phoenix, Arizona. The LLC has a $13.6 millionconstruction loan commitment with a third-party, which is non-recourse to us, under which $738,000 has been drawn as of December 31, 2007. Thisproject is scheduled to be completed and opened during the third quarter of 2008.(k.)We have invested $765,000 in exchange for a 95% non-controlling interest in a LLC that owns the Cobre Valley Medical Plaza, located in Gilbert,Arizona. The LLC has a $2.6 million mortgage loan balance from a third party, which is non-recourse to us.(l.)We have committed to invest up to $6.2 million in debt and/or equity, none of which has been funded as of December 31, 2007, and $250,000 ofequity, none of which has been funded as of December 31, 2007, in exchange for a 95% non-controlling interest in a LLC that will develop, construct,own and operate the Summerlin Medical Office Building III, located in Las Vegas, Nevada. This project is scheduled to be completed and opened duringthe third quarter of 2008. 79Table of ContentsBelow are the combined statements of income for the LLCs accounted for under the equity method: For the Year Ended December 31, 2007 2006 2005 (amounts in thousands)Revenues $40,040 $34,524 $31,689Operating expenses 17,987 14,853 13,993Depreciation and amortization 7,189 5,603 4,846Interest, net 12,100 10,631 9,671Net income before gain 2,764 3,437 3,179Gains on sales 339 — 1,693Net income $3,103 $3,437 $4,872Our share of net income before gains on divestitures $2,557 $2,381 $3,559Our share of gains on divestitures(a.) 264 1,860 1,043Our share of net income $2,821 $4,241 $4,602 (a.)During the second quarter of 2007, we received $1.1 million for the sale of real property by RioMed Investments, a LLC in which we had an 80% non-controlling equity interest, which sold the Rio Rancho Medical Center, located in Gilbert, Arizona. This transaction resulted in a $264,000 gain during2007. During the fourth quarter of 2005, we sold our non-controlling equity interest in West Highland Holdings, a LLC which owned the St. Jude HeritageHealth Complex, located in California, in exchange for a $3.1 million note receivable which was collateralized by the entire ownership interest of theLLC. This transaction resulted in a deferred gain of $1.9 million which we recognized as income during 2006 when the cash proceeds to repay the notereceivable were received by us. During the first quarter of 2005, Bayway properties, a LLC in which we owned a 73% non-controlling ownership interest, sold the real estate assets ofthe East Mesa Medical Center, located in Mesa, Arizona. Our share of the net sale proceeds resulting from this transaction was $2.9 million. Thetransaction resulted in a gain of approximately $1.0 million, which is included in our results of operations for 2005. Included in the 2006 information presented above was the combined income statement information for two above-mentioned LLCs that we beganaccounting for on an unconsolidated basis during the fourth quarter of 2006, pursuant to the provisions of FIN 46R. The combined revenue amounts includedin the table above for the fourth quarter of 2006 for these two properties were $834,000, the combined operating expenses were $377,000, the combineddepreciation and amortization expenses were $172,000 and the combined net interest expense was $192,000. For the year ended December 31, 2006, theamount of combined revenue reflected on our consolidated income statement for these two LLCs while accounted for on a consolidated basis, and therefore notincluded in the table above, totaled $3.8 million, the amount of combined operating expenses were $1.6 million, the combined depreciation and amortizationexpenses were $736,000 and the combined net interest expense was $715,000. There was no impact on our net income as a result of recording these two LLCson an unconsolidated basis. 80Table of ContentsBelow are the combined balance sheets for the LLCs accounted for under the equity method: December 31, 2007 2006(a.) (amounts in thousands)Net property, including CIP $247,514 $210,241Other assets 22,859 16,840Total assets $270,373 $227,081Liabilities $10,707 $3,930Mortgage notes payable, non-recourse to us 214,912 180,928Notes payable to us 14,035 7,238Equity 30,719 34,985Total liabilities and equity $270,373 $227,081Our share of equity and notes receivable from LLCs $52,030 $47,223 (a.)Includes the assets, liabilities and equity related to the two LLCs discussed above which we began accounting for under the equity method during thefourth quarter of 2006. As of December 31, 2007, aggregate maturities of mortgage notes payable by unconsolidated LLCs, which are accounted for under the equity methodand are non-recourse to us, are as follows (amounts in thousands): 2008 $11,1622009 31,2122010 23,6012011 11,6532012 20,880Later 116,404Total $214,912 Pursuant to the operating agreements of the LLCs, the third-party member and the Trust, at any time, have the right to make an offer (“OfferingMember”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member (“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of theNon-Offering Member (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 days to either: (i) purchase theentire ownership interest of the Offering-Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalentproportionate Transfer Price. The closing of the transfer must occur within 60 days of the acceptance by the Non-Offering Member. The LLCs in which we have invested maintain property insurance on all properties. Although we believe that generally our properties are adequatelyinsured, two of the LLCs in which we own various non-controlling equity interests, own properties in California that are located in earthquake zones. Theseproperties, in which we have invested a total of $5.4 million, are no longer covered by earthquake insurance since earthquake insurance is no longer availableat rates which are economical in relation to the risks covered. 81Table of Contents(10)SEGMENT REPORTING Our primary business is investing in and leasing healthcare and human service facilities through direct ownership or through joint ventures, whichaggregate into a single reportable segment under SFAS 131. We actively manage our portfolio of healthcare and human service facilities and may from time totime make decisions to sell lower performing properties not meeting our long-term investment objectives. The proceeds of sales are typically reinvested in newdevelopments or acquisitions, which we believe will meet our planned rate of return. It is our intent that all healthcare and human service facilities will beowned or developed for investment purposes. Our revenue and net income are generated from the operation of our investment portfolio. Our portfolio is located throughout the United States; however, we do not distinguish or group our operations on a geographical basis for purposes ofallocating resources or measuring performance. We review operating and financial data for each property on an individual basis, therefore we define anoperating segment as our individual properties. Individual properties have been aggregated into one reportable segment based upon their similarities with regardto both the nature and economics of the facilities, tenants and operational processes, as well as long-term average financial performance. (11)QUARTERLY RESULTS (unaudited) 2007 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts)Revenues $7,043 $7,079 $6,905 $6,933 $27,960Net income $5,811 $7,971 $4,430 $3,979 $22,191Total basic earnings per share $0.49 $0.68 $0.37 $0.34 $1.87Total diluted earnings per share $0.49 $0.67 $0.37 $0.33 $1.87 Included in net income during the first, second and third quarters of 2007 are gains on the asset exchange and substitution agreement with UHS of$789,000, $939,000 and $20,000, respectively. Included in net income during the first and fourth quarters of 2007 are gains of $252,000 and $12,000,respectively, on the sale of real property by a LLC. Also included in net income during the second quarter of 2007 is a gain on sale of real property of$2.3 million. 2006 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts)Revenues $8,161 $8,136 $8,205 $7,212 $31,714Net income $4,948 $6,892 $15,725 $7,132 $34,697Total basic earnings per share $0.42 $0.58 $1.33 $0.60 $2.94Total diluted earnings per share $0.42 $0.58 $1.32 $0.60 $2.92 Included in net income during the third and fourth quarters of 2006 are gains on the asset exchange and substitution agreement with UHS of$11.3 million and $2.7 million, respectively. Additionally, during the second quarter of 2006, a deferred gain of $1.9 million was recognized in connectionwith the sale of our interest in an unconsolidated LLC. Revenues during the fourth quarter of 2006 exclude the $834,000 of combined revenues generated bytwo LLCs that we began recording on an unconsolidated basis during the fourth quarter of 2006. 82Table of ContentsSchedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation—December 31, 2007(amounts in thousands) Initial Cost toUniversal HealthRealty IncomeTrust Net costcapitalized/divestedsubsequent toacquisition Gross amount atwhich carriedat close of period AccumulatedDepreciationas of Dec. 31,2007 Date ofconstruction,acquisitionor mostrecentsignificantexpansion orrenovation DateAcquired AverageDepreciableLifeDescription Land Building&Improv. Amount Land Building &Improvements CIP Total Inland Valley Regional Medical CenterWildomar, California 2,050 10,701 14,595 2,050 25,296 27,346 6,200 2007 1986 43 YearsMcAllen Medical CenterMcAllen, Texas 4,720 31,442 10,188 6,281 40,069 46,350 17,769 1994 1986 42 YearsWellington Regional Medical CenterWest Palm Beach, Florida 1,190 14,652 17,370 1,663 31,549 33,212 8,728(a.) 2006 1986 42 YearsThe BridgewayNorth Little Rock, Arkansas 150 5,395 4,571 150 9,966 10,116 3,724 2006 1986 35 YearsHealthSouth Deaconess Rehabilitation HospitalEvansville, Indiana 500 6,945 1,062 500 8,007 8,507 3,647 1993 1989 40 YearsKindred Hospital Chicago CentralChicago, Illinois 158 6,404 1,837 158 8,241 8,399 6,658 1993 1986 25 YearsFresno-Herndon Medical PlazaFresno, California 1,073 5,266 (6,339) 0 0 0 0 1992 1994 45 YearsFamily Doctor’s Medical Office BuildingShreveport, Louisiana 54 1,526 494 54 2,020 2,074 569 1991 1995 45 YearsKelsey-Seybold Clinic at King’s Crossing 439 1,618 257 439 1,875 2,314 505 1995 1995 45 YearsProfessional Center at King’s CrossingKingwood, Texas 439 1,837 100 439 1,937 2,376 525 1995 1995 45 YearsChesterbrook AcademyAudubon, Pennsylvania 307 996 — 307 996 1,303 258 1996 1996 45 YearsChesterbrook AcademyNew Britain, Pennsylvania 250 744 — 250 744 994 193 1991 1996 45 YearsChesterbrook AcademyUwchlan, Pennsylvania 180 815 — 180 815 995 211 1992 1996 45 YearsChesterbrook AcademyNewtown, Pennsylvania 195 749 — 195 749 944 194 1992 1996 45 YearsThe Southern Crescent Center 1,130 5,092 181 1,130 5,273 6,403 1,368 1994 1996 45 YearsThe Southern Crescent Center IIRiverdale, Georgia — — 5,095 806 4,289 5,095 938 2000 1998 35 YearsThe Cypresswood Professional CenterSpring ,Texas 573 3,842 121 573 3,963 4,536 1,177 1997 1997 35 YearsOrthopaedic Specialists of Nevada BuildingLas Vegas, Nevada — 1,579 — — 1,579 1,579 521 1999 1999 25 YearsSheffield Medical BuildingAtlanta, Georgia 1,760 9,766 1,729 1,760 11,495 13,255 3,669 1999 1999 25 YearsMedical Center of Western Connecticut—Bldg. 73 (a.)Danbury, Connecticut 1,151 5,176 345 1,151 5,521 6,672 1,432 2000 2000 30 YearsSummerlin Hospital MOB II (b.)Las Vegas, Nevada 158 13,073 1,198 158 14,271 14,429 2,341 2000 2000 40 YearsPalmdale Medical Properties (c.)Palmdale, California 14 — — 14 0 7,511 7,525 — 2007 2007 n/aTOTALS $16,491 $127,618 $52,804 $18,258 $178,655 $7,511 $204,424 $60,627 (a.)At December 31, 2007 this property had an outstanding mortgage balance of $3.7 million. The mortgage carries a 8.3% interest rate and matures on February 1, 2010.The mortgage is non-recourse to us and is secured by the Medical Center of Western Connecticut.(b.)At December 31, 2007 this property had an outstanding mortgage balance of $8.6 million. The mortgage carries a 8.3% interest rate and matures on December 10, 2010.The mortgage is non-recourse to us and is secured by the Summerlin Hospital MOB II.(c.)At December 31, 2007 this property had an outstanding construction loan balance of $7.4 million. 83Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO SCHEDULE IIIDECEMBER 31, 2007(amounts in thousands) (1)RECONCILIATION OF REAL ESTATE PROPERTIES The following table reconciles the Real Estate Properties from January 1, 2005 to December 31, 2007: 2007 2006 2005 Balance at January 1, $200,298 $210,594 $214,254 Initial consolidation of variable interest entities 2,017 — — Impact of deconsolidating two LLCs — (31,804) — Property write-down due to hurricane damage — — (10,621)Sale of real property (6,435) — — Construction in progress 5,508 9,220 — Other (127) — (123)Additions (a.) 3,163 12,288 7,084 Balance at December 31, $204,424 $200,298 $210,594 (a.)Amounts for each of the three years presented include replacement property recovered from UHS. (2)RECONCILIATION OF ACCUMULATED DEPRECIATION The following table reconciles the Accumulated Depreciation from January 1, 2005 to December 31, 2007: 2007 2006 2005 Balance at January 1, $56,935 $57,729 $56,609 Impact of deconsolidating two LLCs — (6,232) — Property write-down due to hurricane damage — — (4,362)Sale of real property (1,438) — — Other (37) — (21)Current year depreciation expense 5,167 5,438 5,503 Balance at December 31, $60,627 $56,935 $57,729 84Table of ContentsExhibit Index Exhibit No. Exhibit3.1 Declaration of Trust, dated as of August 1986, previously filed as Exhibit 4.1 to the Trust’s Registration Statement on Form S-3 (FileNo. 333-60638) is incorporated herein by reference.3.2 Amendment to Declaration of Trust, dated as of June 15, 1993, previously filed as Exhibit 4.2 to the Trust’s Registration Statementon Form S-3 (File No. 333-60638) is incorporated herein by reference.3.3 Amended and restated bylaws previously filed as Exhibit 4.3 to the Trust’s registration statement on Form S-3 (File No. 333-60638) isincorporated 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 10.2to the Trust’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by reference.10.2 Agreement dated December 3, 2007, to renew Advisory Agreement dated as of December 24, 1986 between Universal Health RealtyIncome Trust and UHS of Delaware, Inc.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 HealthServices, Inc. and the Trust (File 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 ofUniversal Health Services, Inc. and the Trust (File No. 33-7872), is incorporated herein by reference.10.5 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases and Contract of Acquisition, dated December 1986, issued byUniversal Health Services, Inc. in favor of the Trust, previously filed as Exhibit 10.5 to the Trust’s Current Report on Form 8-Kdated December 24, 1986, is incorporated herein by reference.10.6* Share Compensation Plan for Outside Trustees, previously filed as Exhibit 10.12 to the Trust’s Annual Report on Form 10-K for theyear ended December 31, 1991, is incorporated herein by reference.10.7 Lease, dated December 22, 1993, between the Trust and THC-Chicago, Inc., as lessee, previously filed as Exhibit 10.14 to theTrust’s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference.10.8* Universal Health Realty Income Trust 1997 Incentive Plan, previously filed as Exhibit 10.1 to the Trust’s Form 10-Q for the quarterended September 30, 1997, is incorporated herein by reference.10.9 Credit Agreement, dated as of January 19, 2007, by and among the Trust, the financial institutions from time to time party theretoand Wachovia Bank, National Association, as Administrative Agent, previously filed as Exhibit 10.1 to the Trust’s Current Report onForm 8-K dated January 24, 2007, is incorporated herein by reference.10.10 Dividend Reinvestment and Share Purchase Plan included in the Trust’s Registration Statement Form S-3 (Registration No. 333-81763) filed on June 28, 1999, is incorporated herein by reference.10.11 Asset Exchange and Substitution Agreement, dated as of April 24, 2006, by and among the Trust and Universal Health Services, Inc.and certain of its subsidiaries, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K dated April 25, 2006, isincorporated herein by reference. 85Table of ContentsExhibit No. Exhibit10.12 Amendment No. 1 to the Master Lease Document, between certain subsidiaries of Universal Health Services, Inc. and the Trust,previously filed as Exhibit 10.2 to the Trust’s Current Report on Form 8-K dated April 25, 2006, is incorporated herein by reference.10.13* Universal Health Realty Income Trust 2007 Restricted Stock Plan, previously filed as Exhibit 10.1 to the Trust’s Current Report onForm 8-K, dated April 27, 2007, is incorporated herein by reference.10.14* Form of Restricted Stock Agreement, previously filed as Exhibit 10.2 to the Trust’s Current Report on Form 8-K dated April 27,2007, is incorporated herein by reference.11 Statement re computation of per share earnings is set forth on the Consolidated Statements of Income.21 Subsidiaries of Registrant.23.1 Consent of Independent Registered Public Accounting Firm.31.1 Certification from the Trust’s Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934.31.2 Certification from the Trust’s Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934.32.1 Certification from the Trust’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.32.2 Certification from the Trust’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. *Management contract or compensatory plan or arrangement. 86Exhibit 10.2December 3, 2007Steve FiltonSenior Vice President & CFOUHS of Delaware, Inc.367 South Gulph RoadKing of Prussia, PA 19406Dear Steve;The Board of Trustees of Universal Health Realty Income Trust, at their December 3, 2007 meeting, authorized the renewal of the current AdvisoryAgreement between the Trust and UHS of Delaware, Inc. (“Agreement”) upon the same terms and conditions.This letter constitutes the Trust’s offer to renew the Agreement, until December 31, 2008, upon the same terms and conditions. Please acknowledge UHSof Delaware’s acceptance of this offer by signing in the space provided below and returning one copy of this letter to me. Thank you.Sincerely, /s/ Cheryl K. RamaganoCheryl K. RamaganoVice President & TreasurerAgreed and Accepted:UHS OF DELAWARE, INC.By: /s/ Steve Filton Steve Filton Senior Vice President and CFOcc: Charles BoyleExhibit 21Subsidiaries of RegistrantJurisdiction 73 Medical Building, LLC Connecticut Cypresswood Investments, L.P Georgia Riverdale Realty, LLC Georgia Sheffield Properties, LLC Georgia Cimarron Medical Properties, LLC Texas Saratoga Hospital Properties, LP Texas EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of TrusteesUniversal Health Realty Income Trust:We consent to the incorporation by reference in the registration statements (Nos. 033-56843, 333-57815 and 333-143944) on Form S-8 and in the registrationstatements (Nos. 333-81763 and 333-60638) on Form S-3 of Universal Health Realty Income Trust of our reports dated March 13, 2008, with respect to theconsolidated balance sheets of Universal Health Realty Income Trust as of December 31, 2007 and 2006, and the related consolidated statements of income,shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007, and the related financial statement schedule, andthe effectiveness of internal control over financial reporting as of December 31, 2007, which reports appear in the December 31, 2007 annual report on Form10-K of Universal Health Realty Income Trust./s/ KPMG LLPPhiladelphia, PennsylvaniaMarch 13, 2008Exhibit 31.1CERTIFICATION - Chief Executive OfficerI, Alan B. Miller, certify that:1. I have reviewed this annual report on Form 10-K of Universal Health Realty Income Trust;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and we have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principals;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 13, 2008 /s/ Alan B. MillerPresident and ChiefExecutive OfficerExhibit 31.2CERTIFICATION-Chief Financial OfficerI, Charles F. Boyle, certify that:1. I have reviewed this annual report on Form 10-K of Universal Health Realty Income Trust;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and we have:a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principals;c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; andd) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 13, 2008 /s/ Charles F. BoyleVice President andChief Financial OfficerEXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2007 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Alan B. Miller, President and Chief Executive Officer of the Trust, herebycertify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Trust at the end of,and for the period covered by the Report. /s/ Alan B. MillerPresident and Chief Executive OfficerMarch 13, 2008A signed original of this written statement required by Section 906 has been provided to the Trust and will be retained and furnished to the Securities andExchange Commission or its staff upon request.EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2007, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles F. Boyle, Vice President and Chief Financial Officer of the Trust,hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Trust at the end of,and for the period covered by the Report. /s/ Charles F. BoyleVice President and Chief Financial OfficerMarch 13, 2008A signed original of this written statement required by Section 906 has been provided to the Trust and will be retained and furnished to the Securities andExchange Commission or its staff upon request.

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