Universal Health Realty Income Trust
Annual Report 2008

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, 2008 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, a non-accelerated filer or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 reporting company) 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 30, 2008: $351,403,320. Number of shares of beneficialinterest outstanding of registrant as of January 31, 2009: 11,865,960 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 2008 (incorporated by reference under Part III). Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST2008 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS PART IItem 1 Business 1Item 1A Risk Factors 10Item 1B Unresolved Staff Comments 18Item 2 Properties 19Item 3 Legal Proceedings 24Item 4 Submission of Matters to a Vote of Security Holders 24PART IIItem 5 Market for the Registrant’s Common Equity and Related Stockholder Matters 24Item 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 45Item 8 Financial Statements and Supplementary Data 46Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46Item 9A Controls and Procedures 46Item 9B Other Information 49PART IIIItem 10 Directors, Executive Officers and Corporate Governance 49Item 11 Executive Compensation 49Item 12 Security Ownership of Certain Beneficial Owners and Management 49Item 13 Certain Relationships and Related Transactions, and Director Independence 49Item 14 Principal Accounting Fees and Services 49PART IVItem 15 Exhibits, Financial Statement Schedules 50SIGNATURES 52Index to Financial Statements and Schedule 53Exhibit Index 82Exhibit 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, 2008. 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 8 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 (“MOBs”). As of December 31, 2008 we have forty-nine real estate investments or commitments located in fifteen states in the United Statesconsisting of: (i) seven hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and two sub-acute; (ii) thirty-eight MOBs(including twenty-nine owned by various LLCs, three of which are currently under construction), 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 2008. 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, 2008, we have investments or commitments in forty-nine facilities, including three new MOBs currently under construction,located in fifteen states 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.Wellington Regional Medical Center(A) W. Palm Beach, FL Acute Care 100% Universal Health Services, Inc.The Bridgeway(A) N.Little Rock, AR Behavioral Health 100% Universal Health Services, Inc.Kindred Hospital Chicago Central(B) Chicago, IL Sub-Acute Care 100% Kindred Healthcare, Inc.Kindred Hospital Corpus Christi(B,N) Corpus Christi, TX 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,M) Riverdale, GA MOB 100% —Southern Crescent Center, II(B,M) Riverdale, GA MOB 100% — 1Table of ContentsFacility Name Location Type of Facility Ownership GuarantorDesert Samaritan Hospital MOBs(C) Mesa, AZ MOB 76% —Suburban Medical Plaza II(C) Louisville, KY MOB 33% —Desert 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% —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(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) Las Vegas, NV MOB 95% —Sierra San Antonio Medical Plaza(C) Fontana, CA MOB 95% —Phoenix Children’s East Valley Care Center(C) Phoenix, AZ MOB 95% —Centennial Hills Medical Office Building I(D) Las Vegas, NV MOB 95% —Canyon Springs Medical Plaza(C) Gilbert, AZ MOB 95% —Palmdale Medical Plaza(F,I) Palmdale, CA MOB 95% —Cobre Valley Medical Plaza(C) Globe, AZ MOB 95% —Deer Valley Medical Office Building III(C,K) Phoenix, AZ MOB 95% —Summerlin Hospital Medical Office Building III(F,J) Las Vegas, NV MOB 95% —Vista Medical Terrace & The Sparks Medical Building(D,L) Sparks, NV MOB 95% —Auburn Medical Office Building II(O) Auburn, WA 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 ownership 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 was renewed during 2008 and is scheduled to expire on May 31, 2014.(F)Real estate assets owned by a LLC in which we have a non-controlling ownership interest as indicated above. Tenants of this medical office building include subsidiaries of UHS. Pursuant to FIN 46R, as a result ofour related party relationship with UHS and a master lease agreement between UHS and this property, this LLC is considered to be a variable interest entity. Consequently, we consolidate the results of operations ofthis 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 MOB was completed and opened during the third quarter of 2008.(J)This MOB was completed and opened during the first quarter of 2009.(K)This MOB is under construction and is scheduled to be completed and opened during the first quarter of 2009.(L)This MOB was acquired by the LLC from a subsidiary of UHS during the third quarter of 2008.(M)A property impairment charge was recorded on this MOB during 2008, as discussed herein.(N)This sub-acute hospital was acquired by us during the first quarter of 2008.(O)This MOB, which is under construction and may include tenants which are subsidiaries of UHS, is scheduled to be completed and opened during the fourth quarter of 2009. 2008 Acquisition During the third quarter of 2008, we invested $2.3 million for a 95% non-controlling ownership interest in a LLC that purchased the Vista MedicalTerrace and The Sparks Medical Building located in Sparks, Nevada. Both of these medical office buildings are located on the campus of Northern NevadaMedical Center, an acute care hospital owned and operated by a wholly-owned subsidiary of UHS. 2Table of ContentsIn February, 2008, we purchased Kindred Hospital, Corpus Christi, an unaffiliated long-term sub-acute care hospital located in Corpus Christi, Texasfor 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. Thelease payments on this facility are unconditionally guaranteed by Kindred Healthcare, Inc. until its scheduled expiration in June, 2019. Other Information Included in our portfolio at December 31, 2008 are seven hospital facilities with an aggregate investment of $142.0 million. The leases with respect tothese hospital facilities comprised approximately 65%, of our revenues in each of 2008 and 2007, and 58% of our revenues in 2006. As of December 31,2008, these leases have fixed terms with an average of 3.9 years remaining and include renewal options ranging from two to four, five-year terms. We 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 at the end of each respective year, the combined weighted average Coverage Ratio was approximately 6.1(ranging from 2.5 to 8.7) during 2008, 4.6 (ranging from 3.3 to 7.0) during 2007 and 5.5 (ranging from 3.8 to 8.3) during 2006. The Coverage Ratio forindividual facilities varies. See “Relationship with Universal Health Services, Inc.” below for Coverage Ratio information related to the four hospital facilitiesleased to subsidiaries of UHS. Pursuant to the terms of our leases for our hospital facilities and the preschool and childcare centers, each lessee, including subsidiaries of UHS, isresponsible for building operations, maintenance, renovations and property insurance. We, or the LLCs in which we have invested, are responsible for thebuilding operations, maintenance and renovations of 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 the real property of certain subsidiaries from UHS and immediately leasing the propertiesback to the respective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 yearswith up to six additional 5-year renewal terms, with base rents set forth in the leases effective for all but the last two renewal terms. The base rents are paidmonthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis based upon a computation thatcompares current quarter revenue to a corresponding quarter in the base year. The leases with subsidiaries of UHS are unconditionally guaranteed by UHSand are cross-defaulted with one another. 3Table of ContentsThe combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 53% of our total revenue for the five yearsended December 31, 2008 (approximately 55% for the year ended December 31, 2008). 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 approximately24% of the combined consolidated and unconsolidated revenue for the five years ended December 31, 2008 (approximately 21% for the year endedDecember 31, 2008). In addition, nine MOBs (plus two additional MOBs currently under construction) owned by LLCs in which we hold various non-controlling equity interests, include or will include tenants which are subsidiaries of UHS. For the four hospital facilities currently owned by us and leased tosubsidiaries of UHS, the combined weighted average Coverage Ratio was approximately 6.2, 4.5 and 5.7 for the years ended December 31, 2008, 2007 and2006, respectively. The Coverage Ratio for individual facilities vary and range from 2.5 to 8.7 in 2008, 3.3 to 7.0 in 2007 and 3.8 to 8.3 in 2006. We cannotpredict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates, or any of our other leases, will be renewed at the end oftheir lease terms. If the leases are not renewed at their current rates, we would be required to find other operators for those facilities and/or enter into leases onterms 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, an acute care hospital located in Chalmette, Louisiana, was severely damaged and closed as a result ofHurricane 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. 4Table of ContentsThe total cost of the Capital Addition at Inland Valley amounted to $11.7 million, which exceeded the $11.0 million threshold included in the Agreement.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 the rent on thishospital has been adjusted accordingly. 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 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). 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: UHS, together with its South Texas Health System affiliates, which operate McAllen Medical Center, were served with asubpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and Human Services (“OIG”). At that time, theCivil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigation under the False Claims Act regardingcompliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and the solicitation of patient referrals fromphysicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS has advised us that since January of 2006,documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including an additional March 9, 2007 subpoena. OnFebruary 16, 2007, UHS’s South Texas Health System affiliates were served with a search warrant in connection with what UHS had been advised was arelated criminal Grand Jury investigation concerning the production of documents. At that time, the government obtained various documents and otherproperty related to the facilities. Follow-up Grand Jury subpoenas for documents and witnesses and other requests for information were subsequently servedon South Texas Health System facilities and certain UHS employees and former employees. UHS has advised us that they have received notification from the U.S. Department of Justice (“DOJ”) that, at this time, the DOJ will not be pursuingcriminal prosecutive action against UHS or its South Texas Health System affiliates. The DOJ is still investigating whether or not any individualsindependently obstructed justice as it relates to the civil subpoena dated November 21, 2005. Representatives of UHS have been advised that the CivilDivision of the U.S. Attorney’s office in Houston, Texas is continuing its investigation in connection with the civil subpoena dated November 21, 2005 issuedby the OIG. UHS’s legal representatives continue to meet with representatives of the Civil Division to discuss the status of this matter. UHS understands that,based on those discussions and its investigations to date, the government is focused on certain arrangements entered into by the South Texas Health Systemaffiliates which, the government believes, may have violated Medicare and Medicaid rules and regulations pertaining to payments to physicians and thesolicitation of patient referrals from physicians and other matters relating to payments to various individuals which may have constituted improper payments.UHS is cooperating with the investigations and responding to the matters raised with them. UHS has been negotiating a possible settlement of this matter withthe government. UHS expects to continue its discussions with the government to attempt to resolve this matter in a manner satisfactory to UHS and thegovernment. During 2008, UHS recorded a pre-tax charge of $25 million to establish a reserve in connection 5Table of Contentswith this matter. There is no assurance that UHS will be able to reach a settlement, and, should a settlement be reached, UHS is unable, at this time, todetermine the ultimate settlement amount. If UHS is ultimately unable to reach a settlement, UHS is unable, at this time, to determine the extent of the totalfinancial and/or other exposure to them in connection with this matter. 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, from time to time UHS is subjected to inquiries or actions with respect to its facilities andthere is no assurance that UHS will not face sanctions, fines or penalties in connection with such inquiries or actions, including with respect to theinvestigation of its South Texas Health System affiliates. Even if UHS were to ultimately prevail, the government’s inquiry and/or action in connection withthis matter could have a material adverse effect on UHS’s future operating results and on the future operating results of McAllen Medical Center. While thebase rentals are guaranteed by UHS through the end of the existing lease term, should this matter adversely impact the future revenues and/or operating resultsof McAllen Medical Center, the future bonus rental earned by us on this facility may be materially, adversely impacted. Bonus rental revenue earned by usfrom McAllen Medical Center amounted to $1.7 million for each of the years ended December 31, 2008 and 2007 and $1.9 million during 2006. We canprovide no assurance that this matter will not have a material adverse impact on underlying value of McAllen Medical Center or on the future base rentalearned on this facility should the existing lease not be renewed at its current lease rates upon the scheduled expiration of the existing lease term in December,2011. 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 2009. 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 $1.6 millionduring 2008 and $1.4 million for each of 2007 and 2006. No incentive fees were paid during 2008, 2007 or 2006. Officers and Employees: Our officers are all employees of UHS and although as of December 31, 2008 we had no salaried employees, our officers doreceive stock-based compensation from time-to-time. Share Ownership: As of December 31, 2008, UHS owned 6.6% of our outstanding shares of beneficial interest. 6Table of ContentsSEC 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 a significant portion of our consolidated revenues during each of the last three years, and since a subsidiary of UHS isour Advisor, 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. Competition 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 may have a lower cost of capital than we do. These developments couldresult in fewer investment opportunities for us and lower spreads 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, sales 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. During the past several years, McAllen Medical Center (which is operated by a subsidiary of UHS), in McAllen, Texas, our largest facility, has beenpressured by intense hospital and physician competition from other healthcare providers, including physician-owned facilities. Additionally, newlyconstructed inpatient capacity and expansion of certain services at the physician-owned hospital is expected to be completed and opened during the first quarterof 2009 which may further erode UHS’ future patient volumes and profitability. In response to these competitive pressures, UHS has undertaken significantcapital investment in the market including a new dedicated 120-bed children’s facility, which was completed and opened during the first quarter of 2006, aswell as a 134-bed replacement behavioral health facility, which was completed and opened during the second quarter of 2006. We do not have an ownershipinterest in the real estate assets of either of these newly constructed UHS facilities. The future patient volumes, net revenues and profitability at McAllenMedical Center are expected to continue to be unfavorably impacted as a result of this increased competitor capacity and expansion of services. A continuationof increased provider competition in this market, as well as the potential future capacity added by UHS and others, could result in additional erosion of the netrevenues and financial operating results of McAllen Medical Center which may negatively impact the bonus rentals earned by us on this facility and maypotentially have a negative impact on the future lease renewal terms (current lease expires in December, 2011) and the underlying value of the property. 7Table of ContentsIn addition, the number and quality of the physicians on a hospital’s staff are important factors in determining a hospital’s success and competitiveadvantage. Typically, physicians are responsible for making hospital admissions decisions and for directing the course of patient treatment. The operators ofour facilities also compete with other health care providers in recruiting and retaining qualified hospital management, nurses and other medical personnel.From time-to-time, the operators of our acute care and behavioral health care facilities may experience the effects of a shortage of skilled nursing staffnationwide, which has caused and may continue to cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Our operators mayexperience difficulties attracting and retaining qualified physicians, nurses and medical support personnel. We anticipate that our operators, including UHS,will continue to encounter increased competition in the future that could lead to a decline in patient volumes and harm their businesses, which in turn, couldharm 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. Regulation and Other Factors During 2008, 2007 and 2006, 51%, 53% and 48%, 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 the 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 additional governmental inquiries or actions, or that they would not be faced withsanctions, 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 benefitof regulatory 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. 8Table of ContentsA 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 hospitals. For federalfiscal years 2008, 2007 and 2006, the update factors were 3.3%, 3.4% and 3.7%, respectively. For 2009, the update factor is 3.6%. Hospitals are allowed toreceive the full basket update if they provide the Centers for Medicare and Medicaid Services (“CMS”) with specific data relating to the quality of servicesprovided. The operators of our acute care hospital facilities have complied fully with this requirement and intend to comply fully in future 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. 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 the 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. Our three acute care hospitals thatare operated by UHS receive a significant portion of their patient revenue from their respective state’s Medicaid programs (Texas, California and Florida).These states have reported significant budget deficits that, for all except Texas at this time, have resulted in the reduction of Medicaid funding for 2009. Inaddition to statutory and regulatory changes to the Medicare and each of the state Medicaid programs, our operators’ operations and reimbursement may beaffected by administrative rulings, new or novel interpretations and determinations of existing laws and regulations, post-payment audits, requirements forutilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost ofproviding services and the timing of payments to our facilities. Conversely, in February, 2009, the American Recovery and Reinvestment Act of 2009 wassigned into law and contained various Medicaid provisions that will: (i) provide for temporary increases to Medicaid funding through enhanced federalmatching assistance percentages for a 27 month period retroactive to October 1, 2008 through December 31, 2010; (ii) provide for a temporary increase of2.5% in the federal Medicaid disproportionate share hospital allotment for both federal fiscal years 2009 and 2010, and; (iii) require states to maintain efforton Medicaid eligibility consistent with requirements prior to passage of this law. Due to the indirect nature of the enhanced Medicaid federal funding containedwithin the 9Table of ContentsAmerican Recovery and Reinvestment Act of 2009, the operators of our hospitals are unable to determine the impact of these Medicaid changes on their futureresults of operations. 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. Executive Officers of the Registrant Name Age PositionAlan B. Miller 71 Chairman of the Board, Chief Executive Officer and PresidentCharles F. Boyle 49 Vice President and Chief Financial OfficerCheryl K. Ramagano 46 Vice President, Treasurer and SecretaryTimothy J. Fowler 53 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. He is the father of Marc D. Miller, who waselected to our Board of Trustees in December, 2008 and also serves as a Senior Vice President and a member of the Board of Directors of UHS. Mr. Charles F. Boyle was appointed Chief Financial Officer in February of 2003 and had 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. 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. General economic and employment conditions in the United States could materially affect the business and future results of operations ofthe operators of our facilities which could, in turn, materially reduce our revenues and net income. The deterioration in the general economic conditions has not yet had a material unfavorable impact on our results of operations. However, our futureresults of operations could be unfavorably impacted by continued 10Table of Contentsdeterioration in general economic conditions which could result in increases in the number of people unemployed and/or uninsured. A continuation orworsening of economic conditions may result in a continued increase in the unemployment rate which will likely increase the number of individuals withouthealth insurance. As a result, the operators of our facilities may experience a decrease in patient volumes which could result in decreased occupancy rates atour medical office buildings. Additionally, a reduction in the revenues earned by the operators of our hospital facilities may occur, which would unfavorablyimpact our future bonus rentals (on the UHS hospital facilities) and may potentially have a negative impact on the future lease renewal terms and theunderlying value of the hospital properties. Additionally, the general real estate market has been unfavorably impacted by the deterioration in economic andcredit market conditions which may adversely impact the underlying value of our properties. The deterioration of credit and capital markets may adversely affect our access to sources of funding and we cannot be certain of theavailability and terms 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 (including third-party debtheld by various LLCs in which we own non-controlling equity interests) at or prior to their maturities and to invest at yields which exceed our cost of capital.However, we can provide no assurance that financing will be available to us on satisfactory terms when needed, which could harm our business. Given theseuncertainties, our growth strategy is not assured and may fail. To fund all or a portion of our future financing needs, we rely on borrowings from various sources including fixed rate, long-term debt as well asborrowings pursuant to our revolving credit. If any of the lenders were unable to fulfill their future commitments, our liquidity could be impacted, whichcould have a material unfavorable impact our results of operations and financial condition. 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. In addition, global capital markets have experienced volatility that has tightened access to capital markets and other sources of funding. In the event weneed to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms orwithin an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations,financial condition and liquidity. 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, 2008, UHS accounted for 58% of our consolidated revenues. In addition, as of December 31, 2008, subsidiaries ofUHS leased four of the seven hospital facilities owned by us with terms expiring in 2011 or 2014. We cannot assure you that UHS will continue to satisfy itsobligations to us. The failure or inability of UHS to satisfy its obligations to us could materially reduce our revenues and net income, which could in turnreduce the amount of 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 11Table of Contentsefforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), to provideadministrative 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, 2008, we had nosalaried employees although our officers do receive stock-based compensation from time-to-time. We believe that the quality and depth of the management andadvisory services provided to us by our Advisor and UHS could not be replicated by contracting with unrelated third parties or by being self-advised withoutconsiderable cost increases. We believe that these relationships have been beneficial to us in the past, but we cannot guarantee that will not become detrimentalto 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, 2008, 61% 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. 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; • 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 increasein the 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. 12Table of ContentsIn 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. Increased 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 13Table of Contentsspecialty or large hospitals that provide medical, surgical and behavioral health services, facilities and equipment that are not available at our operators’hospitals. The increase in outpatient treatment and diagnostic facilities, outpatient surgical centers and freestanding ambulatory surgical centers also increasescompetition 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 addition, newly constructed inpatient capacity and expansion of certain services at the physician-owned hospital is expected to becompleted and opened during the first quarter of 2009 which may further erode McAllen Medical Center’s future patient revenues and profitability. In responseto these competitive pressures, UHS has, among other things, undertaken significant capital investment in the market including a new dedicated 120-bedchildren’s facility, which was completed and opened during the first quarter of 2006, as well as a 134-bed replacement behavioral health facility, which wascompleted and opened during the second quarter of 2006. We do not have an ownership interest in the real estate assets of either of these newly constructedUHS facilities. A continuation of the provider competition in this market, as well as the additional capacity recently completed by UHS and others, couldresult in additional erosion of the net revenues and financial operating results of McAllen Medical Center which may negatively impact the bonus rentalsearned 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 theunderlying 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 ultimate timing or effect of these changes cannot be predicted. Government regulation may have a dramatic effect on ouroperators’ costs of doing business and the amount of reimbursement received by both government and other third-party payors. The failure of any of ouroperators 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; 14Table of Contents • 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: UHS, together with its South Texas Health System affiliates, which operate McAllen Medical Center, were served with asubpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and Human Services (“OIG”). At that time, theCivil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigation under the False Claims Act regardingcompliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and the solicitation of patient referrals fromphysicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS has advised us that since January of 2006,documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including an additional March 9, 2007 subpoena. OnFebruary 16, 2007, UHS’s South Texas Health System affiliates were served with a search warrant in connection with what UHS had been advised was arelated criminal Grand Jury investigation concerning the production of documents. At that time, the government obtained various documents and otherproperty related to the facilities. Follow-up Grand Jury subpoenas for documents and witnesses and other requests for information were subsequently servedon South Texas Health System facilities and certain UHS employees and former employees. UHS has advised us that they have received notification from the U.S. Department of Justice (“DOJ”) that, at this time, the DOJ will not be pursuingcriminal prosecutive action against UHS or its South Texas Health System affiliates. The DOJ is still investigating whether or not any individualsindependently obstructed justice as it relates to the civil subpoena dated November 21, 2005. Representatives of UHS have been advised that the CivilDivision of the U.S. Attorney’s office in Houston, Texas is continuing its investigation in connection with the civil subpoena dated November 21, 2005 issuedby the OIG. UHS’s legal representatives continue to meet 15Table of Contentswith representatives of the Civil Division to discuss the status of this matter. UHS understands that, based on those discussions and its investigations to date,the government is focused on certain arrangements entered into by the South Texas Health System affiliates which, the government believes, may have violatedMedicare and Medicaid rules and regulations pertaining to payments to physicians and the solicitation of patient referrals from physicians and other mattersrelating to payments to various individuals which may have constituted improper payments. UHS is cooperating with the investigations and responding to thematters raised with them. UHS has been negotiating a possible settlement of this matter with the government. UHS expects to continue its discussions with thegovernment to attempt to resolve this matter in a manner satisfactory to UHS and the government. During 2008, UHS recorded a pre-tax charge of $25 millionto establish a reserve in connection with this matter. There is no assurance that UHS will be able to reach a settlement, and, should a settlement be reached,UHS is unable to determine, at this time, the ultimate settlement amount. If UHS is ultimately unable to reach a settlement, UHS is unable to determine, at thistime, the extent of the total financial and/or other exposure in connection with this matter. 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, from time to time UHS is subjected to inquiries or actions with respect to its facilities andthere is no assurance that UHS will not face sanctions, fines or penalties in connection with such inquiries or actions, including with respect to theinvestigation of its South Texas Health System affiliates. Even if UHS were to ultimately prevail, the government’s inquiry and/or action in connection withthis matter could have a material adverse effect on UHS’s future operating results and on the future operating results of McAllen Medical Center. While thebase rentals are guaranteed by UHS through the end of the existing lease term, should this matter adversely impact the future revenues and/or operating resultsof McAllen Medical Center, the future bonus rental earned by us on this facility may be materially, adversely impacted. Bonus rental revenue earned by usfrom McAllen Medical Center amounted to $1.7 million for each of the years ended December 31, 2008 and 2007 and $1.9 million during 2006. We canprovide no assurance that this matter will not have a material adverse impact on underlying value of McAllen Medical Center or on the future base rentalearned on this facility should the existing lease not be renewed at its current lease rates upon the scheduled expiration of the existing lease term in December,2011. 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 affects the revenues and operating results of our facilities. Further, a primary collection riskfor our operators relates to uninsured patients and the portion of the bill that is the patient’s responsibility, which primarily includes co-payments anddeductibles. 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 16Table of Contentsincrease the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees andthe creation of government health insurance plans that would cover all citizens and increase payments by beneficiaries. We cannot predict whether anyproposals 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. These 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 17Table of Contentssenior executives or of a significant portion of our operators’ local hospital management personnel could significantly undermine our management expertise andour operators’ ability to provide efficient, quality health care services at our facilities, which could 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 may have a lower cost of capital than we do. These developments could result in fewer investment opportunities for us and lower spreadsover our cost of our capital, which would hurt our growth. 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. 18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 @12/31/08 Average Occupancy(1) Minimumrent End ofinitialorrenewedterm Renewalterm(years) 2008 2007 2006 2005 2004 Southwest Healthcare System:Inland Valley Campus(2)Wildomar, California Acute Care 122 77% 67% 85% 87% 78% $2,648,000 2011 20McAllen Medical Center(3)McAllen, Texas Acute Care 368 50% 51% 52% 59% 68% 5,485,000 2011 20Wellington Regional MedicalCenterWest Palm Beach, Florida Acute Care 143 74% 78% 77% 73% 72% 3,030,000 2011 20The BridgewayNorth Little Rock, Arkansas BehavioralHealth 98 83% 94% 92% 96% 98% 930,000 2014 10Tri-State Rehabilitation HospitalEvansville, Indiana Rehabilitation 80 55% 57% 53% 74% 74% 885,000 2014 15Kindred Hospital Corpus ChristiCorpus Christi, Texas Sub-Acute Care 74 63% — — — — 654,000 2019 25Kindred Hospital Chicago CentralChicago, Illinois Sub-Acute Care 84 44% 38% 46% 47% 47% 1,373,000 2011 15 19Table of ContentsITEM 2.Properties (continued) Facility Name and Location Lease Term Type offacility Average Occupancy(1) Minimumrent End ofinitialorrenewedterm(4) Renewalterm(years) 2008 2007 2006 2005 2004 Kelsey-Seybold Clinic atKings CrossingKingwood, Texas MOB 100% 100% 100% 100% 100% $345,000 2010 NoneProfessional Bldgs. at KingsCrossingKingwood, Texas MOB 75% 86% 90% 90% 91% 272,000 2011-2018 VariousSouthern Crescent Center, I Riverdale, Georgia(6) MOB 26% 26% 36% 49% 64% 190,000 2010-2012 VariousSouthern Crescent Center, IIRiverdale, Georgia(6,7) MOB 94% 94% 94% 94% 98% 1,136,000 2009-2010 10Cypresswood ProfessionalCenter Spring, Texas MOB 68% 77% 92% 100% 100% 535,000 2009-2015 VariousDesert Springs MedicalPlaza(5)Las Vegas, Nevada MOB 78% 77% 96% 100% 100% 765,000 2009-2013 VariousOrthopaedic Specialists ofNevada BuildingLas Vegas, Nevada MOB 100% 100% 100% 100% 100% 180,000 2009 20Summerlin HospitalMOB(5)Las Vegas, Nevada MOB 98% 87% 98% 100% 100% 1,307,000 2009-2014 VariousSummerlin HospitalMOB II(5)Las Vegas, Nevada MOB 100% 81% 100% 100% 100% 1,598,000 2009-2014 VariousSheffield Medical BuildingAtlanta, Georgia MOB 77% 82% 86% 85% 88% 1,345,000 2009-2019 VariousMedical Center of WesternConnecticut Danbury,Connecticut MOB 100% 98% 85% 100% 100% 880,000 2009-2017 VariousChesterbrook AcademyAudubon, New Britain, Newtown and 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% 96% 90% 99% 99% 1,589,000 2009-2017 VariousSt. Mary’s ProfessionalOffice BuildingReno, Nevada MOB 97% 95% 92% 77% — 3,897,000 2012-2025 Various 20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, 2008. 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 degree ofoutpatient use of the hospital services. Average occupancy rate for the multi-tenant medical office buildings is based on the occupied square footage of eachbuilding, 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 campus isbased on net revenues and the financial results of the two facilities are no longer separable, the lease was amended during 2002 to exclude from the bonusrent calculation the estimated net revenues generated at the Rancho Springs campus (as calculated pursuant to a percentage based allocation determined atthe time of the merger). The average occupancy rates shown for this facility for all years were based on the combined number of beds occupied at theInland 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 the combined net revenues of the twofacilities, the McAllen Medical Center lease was amended during 2001 to exclude from the bonus rent calculation, the estimated net revenues generated atthe Heart Hospital (as calculated pursuant to a percentage based allocation determined at the time of the merger). In addition, during 2000, UHS purchasedthe South Texas Behavioral Health Center, a behavioral health care facility located in McAllen, Texas. In 2006, a newly constructed replacement facilityfor the South Texas Behavioral Health Center was completed and opened. The license for this facility, the real property of which is not owned by us, wasalso merged with the license for McAllen Medical Center. There was no amendment to the McAllen Medical Center lease related to the operations of theSouth Texas Behavioral Health Center. The revenues of South Texas Behavioral Health Center are excluded from the bonus rent calculation. No assurancecan be given as to the effect, if any, the consolidation of the facilities as mentioned above, had on the underlying value of McAllen Medical Center. Baserental commitments and the guarantee by UHS under the original lease continue for the remainder of the lease terms. The average occupancy rates shownfor this facility in all years presented were based on the combined number of beds at McAllen Medical Center, McAllen Heart Hospital and South TexasBehavioral 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 unaffiliated third-parties or subsidiaries of UHS.(6)A $4.6 million provision for asset impairment was recorded in connection with Southern Crescent Centers I & II during 2008, as discussed herein.(7)The master lease on Southern Crescent Center II, applicable to 86% of the building, is scheduled to expire in June, 2010. It is unlikely that this masterlease will be renewed at the end of the lease term. In the likely event that the lease is not renewed, we will be required to find other operators for this facilityand/or enter into leases on terms potentially less favorable to us than the current lease. During each of 2008, 2007 and 2006, our revenues, net income andnet cash provided by operating activities included approximately $1.1 million annually in connection with the terms of the existing master lease. 21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. 1,2009 Percentage of RSF with lease expirations 2009 2010 2011 2012 2013 2014andLater Hospital Investments McAllen Medical Center 532,403 0% 0% 0% 100% 0% 0% 0%Wellington Regional Medical Center 270,915 0% 0% 0% 100% 0% 0% 0%Kindred Hospital Chicago Central 115,554 0% 0% 0% 100% 0% 0% 0%Southwest Healthcare System—Inland Valley Campus 108,499 0% 0% 0% 100% 0% 0% 0%The Bridgeway 77,901 0% 0% 0% 0% 0% 0% 100%HealthSouth Deaconess Rehab. Hospital(d) 77,440 0% 0% 0% 0% 0% 0% 100%Kindred Hospital, Corpus Christi 69,700 0% 0% 0% 0% 0% 0% 100%Subtotal Hospitals 1,252,412 0% 0% 0% 82% 0% 0% 18%Other Investments Medical Office Buildings: Desert Samaritan Hospital MOBs 201,108 19% 21% 17% 18% 11% 7% 7%Saint Mary’s Professional Office Building 190,247 1% 0% 0% 0% 2% 0% 97%Edwards Medical Plaza 141,299 17% 25% 10% 1% 26% 14% 7%700 Shadow Lane and Goldring MOBs 114,904 15% 29% 13% 5% 10% 16% 12%Centinela Medical Buildings 103,353 1% 57% 5% 18% 0% 7% 12%Suburban Medical Plaza II 102,818 0% 0% 0% 30% 6% 2% 62%Desert Springs Medical Plaza 102,580 40% 28% 11% 8% 8% 5% 0%Centennial Hills Medical Office Building I 96,831 39% 4% 0% 0% 4% 22% 31%Thunderbird Paseo Medical Plaza I & II 96,569 0% 22% 28% 14% 12% 24% 0%Summerlin Hospital Medical Office Building II(c) 92,313 0% 0% 22% 28% 32% 14% 4%Canyon Springs Medical Plaza 91,957 10% 0% 0% 0% 14% 0% 76%Summerlin Hospital Medical Office Building I 89,636 3% 31% 24% 17% 8% 11% 6%Vista Medical Terrace & The Sparks Medical Building 86,378 27% 19% 6% 7% 26% 0% 15%Papago Medical Park 79,247 9% 38% 13% 2% 0% 24% 14%Deer Valley Medical Office II 77,264 0% 6% 7% 0% 61% 6% 20%Mid Coast Hospital MOB 74,629 0% 0% 0% 16% 0% 12% 72%Sheffield Medical Building 71,940 23% 17% 14% 10% 28% 6% 2%Rosenberg Children’s Medical Plaza 66,231 0% 0% 10% 7% 7% 51% 25%Sierra San Antonio Medical Plaza 59,160 36% 0% 0% 18% 0% 12% 34%Palmdale Medical Plaza(a) 58,150 33% 0% 0% 0% 0% 59% 8%Spring Valley Medical Office Building 57,828 3% 47% 15% 11% 6% 11% 7%Spring Valley Medical Office Building II 57,556 50% 0% 0% 0% 11% 0% 39%Southern Crescent Center II(b) 53,680 6% 8% 86% 0% 0% 0% 0%Desert Valley Medical Center 53,625 12% 16% 20% 30% 12% 10% 0%Southern Crescent Center I 41,400 74% 0% 4% 0% 22% 0% 0%Cypresswood Professional Center 40,082 17% 7% 0% 0% 17% 0% 59%Medical Center of Western Connecticut 37,522 0% 15% 63% 0% 0% 4% 18%Phoenix Children’s East Valley Care Center 30,960 0% 0% 0% 0% 0% 0% 100%Apache Junction Medical Plaza 26,901 9% 4% 9% 9% 13% 34% 22%Santa Fe Professional Plaza 25,300 39% 25% 14% 5% 7% 5% 5%Professional Bldg at King’s Crossing 24,414 34% 0% 0% 20% 6% 0% 40%Cobre Valley Medical Plaza 21,882 0% 25% 0% 0% 58% 17% 0%Kelsey-Seybold Clinic at King’s Crossing 20,470 0% 0% 100% 0% 0% 0% 0%Orthopaedic Specialists of Nevada Building 11,000 0% 100% 0% 0% 0% 0% 0%Family Doctor’s MOB 9,155 0% 0% 0% 100% 0% 0% 0%Preschool and Childcare Centers: Chesterbrook Academy—Audubon 8,300 0% 0% 100% 0% 0% 0% 0%Chesterbrook Academy—Uwchlan 8,163 0% 0% 100% 0% 0% 0% 0%Chesterbrook Academy—Newtown 8,100 0% 0% 100% 0% 0% 0% 0%Chesterbrook Academy—New Britain 7,998 0% 0% 100% 0% 0% 0% 0%Sub-total Other Investments 2,540,950 14% 15% 13% 9% 12% 11% 26%Total 3,793,362 9% 10% 9% 33% 9% 7% 23% 22Table of Contents (a)The Palmdale Medical Plaza has a 75% master lease commitment from UHS that expires at the earlier of the commitment threshold being met or thescheduled expiration in June, 2013.(b)The Southern Crescent Center II has a master lease agreement that is applicable to 86% of the building that is scheduled to expire in June, 2010.(c)The Summerlin Hospital Medical Office Building II has a master lease provision that expires on September 30, 2010 which covers all vacancies.(d)The lease with Deaconess was renewed during 2008 and is scheduled to expire on May 31, 2014. 23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, 2008 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, 2008 and 2007 are summarized below: 2008 2007 HighPrice LowPrice HighPrice LowPriceFirst Quarter $36.78 $31.43 $42.05 $34.77Second Quarter $36.10 $30.00 $38.29 $32.78Third Quarter $39.14 $30.64 $36.70 $29.23Fourth Quarter $38.27 $23.27 $38.76 $32.21 Holders As of January 31, 2009, there were approximately 506 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: 2008 2007First Quarter $.580 $.570Second Quarter .585 .575Third Quarter .585 .575Fourth Quarter .590 .580 $2.34 $2.30 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 2003. Company Name/Index BasePeriodDec 2003 INDEXED RETURNSYears Ending Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008Universal Health Realty Income Trust $100 $113.78 $118.66 $157.22 $152.57 $151.84S&P 500 Index $100 $110.88 $116.33 $134.70 $142.10 $89.53Peer Group $100 $120.35 $116.50 $167.23 $167.12 $156.22 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, 2008. 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) 2008 2007 2006 2005 2004 Operating Results: Total revenue(1) $29,184 $27,960 $31,714 $32,590 $31,013 Income from continuing operations 11,653 19,664 34,428 25,131 21,425 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 Net income $11,653 $22,191 $34,697 $25,423 $23,671 Balance Sheet Data: Real estate investments, net of accumulated depreciation(1) $154,649 $143,797 $143,363 $152,865 $157,601 Investments in LLCs(1) 56,462 52,030 47,223 29,572 40,523 Total assets(1) 221,056 199,749 194,139 196,889 204,583 Total indebtedness(1)(2) 71,692 36,617 26,337 35,548 46,210 Other Data: Funds from operations(3) $24,996 $29,066 $28,930 $29,202 $31,149 Cash provided by (used in): Operating activities 21,842 22,775 24,702 25,303 26,967 Investing activities (26,923) (4,336) (2,404) 8,408 11,905 Financing activities 4,568 (18,106) (23,217) (35,582) (36,387)Per Share Data: Basic earnings per share: From continuing operations $0.98 $1.66 $2.92 $2.14 $1.83 From discontinued operations 0.00 0.21 0.02 0.02 0.19 Total basic earnings per share $0.98 $1.87 $2.94 $2.16 $2.02 Diluted earnings per share: From continuing operations $0.98 $1.66 $2.90 $2.13 $1.81 From discontinued operations 0.00 0.21 0.02 0.02 0.19 Total diluted earnings per share $0.98 $1.87 $2.92 $2.15 $2.00 Dividends per share $2.340 $2.300 $2.260 $2.175 $2.000 Other Information (in thousands) Weighted average number of shares outstanding—basic 11,851 11,818 11,784 11,764 11,744 Weighted average number of shares and share equivalents outstanding—diluted 11,882 11,875 11,866 11,841 11,813 (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. Also, as a result of a master lease arrangement between a subsidiary ofUHS and a LLC that owns a medical office building that opened during the third quarter of 2008, this LLC is included in our consolidated financialstatements on a consolidated basis. Additionally, as a result of a master lease arrangement between a subsidiary of UHS and a LLC that owns a medicaloffice building that was under construction, as of December 31, 2008, this LLC is also included in our consolidated financial statements on aconsolidated basis. Therefore, as of December 31, 2008, 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 was completed and opened during the first quarter of2009. There was no impact on our net income as a result of recording these LLCs on an unconsolidated or a consolidated basis.(2)Excludes third-party debt that is non-recourse to us, incurred by unconsolidated LLCs in which we hold various non-controlling equity interests asfollows: $230.5 million as of December 31, 2008; $214.9 million as of December 31, 2007; $180.9 million as of December 31, 2006; $152.3 millionas of December 31, 2005, and; $124.8 million as of December 31, 2004. (See Note 8 to the consolidated financial statements).(3)Our funds from operations (“FFO”) decreased $4.1 million to $25.0 million during 2008 as compared to $29.1 million during 2007. The decrease wasdue to the $4.6 million provision for asset impairment recorded during 2008, as mentioned herein. 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) 2008 2007 2006 2005 2004 Net income $11,653 $22,191 $34,697 $25,423 $23,671 Depreciation expense: Consolidated investments 5,832 5,167 5,314 5,379 4,918 Unconsolidated affiliates 7,511 5,990 4,613 4,012 4,282 Discontinued operations — — 124 124 120 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)Gain on sale of real property, included in income from discontinued operations — (2,270) — — (833)FFO $24,996 $29,066 $28,930 $29,202 $31,149 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, 2008, we have forty-nine real estate investments or commitments in fifteen states consisting of: • seven hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and two sub-acute; • thirty-eight medical office buildings (including three under construction), and; • four preschool and childcare centers. 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 McAllenMedical Center, as described herein; • the potential unfavorable impact on our business of continued deterioration in national, regional and local economic and business conditions,including a continuation or worsening of unfavorable credit market conditions; • a worsening of the economic and employment conditions in the United States could materially affect the business of our operators, includingUHS; • the deterioration of credit and capital markets may adversely affect our access to sources of funding and we cannot be certain of the availabilityand terms of capital to fund the growth of our business when needed; 28Table of Contents • our majority ownership interests in various LLCs in which we hold non-controlling equity interests; • 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 provideragreements on 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 thedemand for, health care, and; the ability to attract and retain qualified medical personnel, including physicians; • 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 limitedto, 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 of America requires us to makeestimates and 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: Revenue 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. 29Table of ContentsThe 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. Real Estate Investments: We account for our property acquisitions under the provisions of Statement of Financial Accounting Standards No. 141,“Business Combinations” (“SFAS No. 141”). Under SFAS No. 141, the purchase price of a property is allocated to the property’s land, buildings andintangible assets based upon our estimates of their fair values. Depreciation is computed using the straight-line method over the useful lives of the buildingsand capital improvements. The value of intangible assets is amortized as real estate amortization over the remaining lease term. Asset Impairment: Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if management’sestimate of the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, areless than the carrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, aswell as the effects of demand, competition, local market conditions and other factors. The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheetdate that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated action to be taken withrespect to the property could impact the determination of whether an impairment exists and whether the effects could materially impact our net income. To theextent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of theproperty over the fair value of the property. Assessment of the recoverability by us of certain lease related costs must be made when we have reason to believe that a tenant might not be able toperform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs. An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is notconsidered recoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flows. To the extentimpairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income. Intangible Assets: We account for our property acquisitions under the provisions of Statement of Financial Accounting Standards No. 141,“Business Combinations” (“SFAS No. 141”). Under SFAS No. 141, the purchase price of a property is allocated to the property’s land, buildings andintangible assets based upon our estimates of their fair values. Depreciation is computed using the straight-line method over the useful lives of the buildingsand capital improvements. The value of intangible assets is amortized as real estate amortization over the remaining lease term. 30Table of Contents 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 accounting for these LLCs. Also, as a result of a masterlease arrangement between a subsidiary of UHS and a LLC that owns a medical office building that opened during the third quarter of 2008, this LLC isincluded in our consolidated financial statements on a consolidated basis. Additionally, as a result of a master lease arrangement between a subsidiary of UHSand a LLC that owns a medical office building that was under construction, as of December 31, 2008, this LLC is also included in our consolidated financialstatements on a consolidated basis. Therefore, as of December 31, 2008, 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 was completed and opened during the first quarterof 2009. 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. 31Table of ContentsWe 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, 2008 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 for2009. 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 combined revenues generated from the leases on the UHS hospital facilities comprised approximately 55%, 57% and 51% of our revenues for theyears ended December 31, 2008, 2007 and 2006, 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 21% of the combinedconsolidated and unconsolidated revenues for the year ended December 31, 2008 and 24% for each of the years ended December 31, 2007 and 2006. The leasesto the hospital facilities of UHS are guaranteed by UHS and cross-defaulted with one another. Recent Accounting Pronouncements: For a summary of recent accounting pronouncements, please see Note 1 to the Consolidated FinancialStatements as included in this Annual Report on Form 10-K for the year ended December 31, 2008. Results of Operations Year ended December 31, 2008 as compared to the year ended December 31, 2007: For the year ended December 31, 2008, net income was $11.7 million, or $0.98 per diluted share, as compared to $22.2 million, or $1.87 per dilutedshare for the year ended December 31, 2007. The decrease in net income of $10.5 million, or $.89 per diluted share, during 2008 as compared to 2007, wasprimarily attributable to: • an unfavorable change of $4.6 million, or $.39 per diluted share, resulting from the provision for asset impairment recorded during 2008 on acertain medical office building complex, as discussed below; 32Table of Contents • an unfavorable change of $2.3 million, or $0.19 per diluted share, resulting from the gain realized during 2007 on the sale of a medical officebuilding (included in income from discontinued operations); • an unfavorable change of $1.7 million, or $0.15 per diluted share, resulting from the gain recognized during 2007 in connection with theChalmette asset exchange and substitution transaction, as discussed herein; • an unfavorable change of $264,000, or $0.02 per diluted share, resulting from the gain recorded during 2007 in connection with the sale of realproperty by a LLC in which we had an 80% non-controlling equity interest; • an unfavorable change of $2.2 million, or $0.18 per diluted share, resulting from increased depreciation and amortization expense at ourproperties recorded on a consolidated basis ($700,000) and an unconsolidated basis ($1.5 million) primarily resulting from: (i) increaseddepreciation expense incurred during 2008 on various newly constructed medical office buildings that were completed and opened during 2008 and2007 including Palmdale Medical Plaza (2008), Canyon Springs Medical Plaza (2007), Centennial Hills Medical Office Building I (2007),Phoenix Children’s East Valley Care Center (2007) and Spring Valley Medical Office Building II (2007), and; (ii) depreciation and amortizationexpense recorded on Kindred Hospital, Corpus Christi which was acquired during 2008, and; • other combined net favorable changes of $600,000, or $0.04 per diluted share. Total revenue increased $1.2 million to $29.2 million during 2008, as compared to $28.0 million during 2007. The increase was primarily attributableto the revenues generated at Kindred Hospital-Corpus Christi which was acquired in February of 2008 and Palmdale Medical Plaza, a newly constructedmedical office building that was completed and opened during the third quarter of 2008. Depreciation and amortization expense increased $700,000 to $5.9 million during 2008, as compared to $5.2 million during 2007. The increase wasprimarily attributable to the depreciation and amortization expense recorded during 2008 on Kindred Hospital-Corpus Christi and Palmdale Medical Plaza aswell as increased depreciation expense incurred on the replacement assets received from UHS (applicable to Southwest Healthcare System, Inland Valley) inconnection with the Chalmette asset exchange and substitution transaction. Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $4.0 million and $3.2 million for2008 and 2007, respectively. A portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants. Tenantreimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as tenant reimbursementrevenue in our condensed consolidated statements of income. During 2008, $2.5 million, or 62% of the expenses related to consolidated medical officebuildings were passed on directly to the tenants. During 2007, $2.4 million, or 74% of the expenses related to consolidated medical office buildings werepassed on directly to the tenants. The decrease in the percentage of operating expenses passed on directly to tenants during 2008, as compared to 2007, wasprimarily due to higher than anticipated repairs and maintenance expenses incurred at a certain MOB which were not allocated to the tenants of that property. During 2008, we recorded an asset impairment charge of $4.6 million in connection with two medical office buildings (Southern Crescent Centers I andII) located on a medical campus in Clayton County (Riverdale), Georgia. This asset impairment charge was recorded after evaluation of property and location-specific factors including: (i) the future expiration of a master lease which is scheduled to occur in June, 2010; (ii) the current and projected occupancy of thebuildings, and; (iii) the anticipated unfavorable impact on the region and the properties resulting from the loss of the school district’s accreditation during2008. Given the local market conditions, we believe it is probable that the master lease (which has been in effect since 2000 on one of these properties) will notbe renewed upon its expiration in June, 2010. In the likely event that the master lease is not 33Table of Contentsrenewed, we will be required to find other operators for this property and/or enter into leases on terms potentially less favorable to us than the current masterlease. During each of 2008, 2007 and 2006, our revenues, net income and net cash provided by operating activities included approximately $1.1 millionannually in connection with the terms of this master lease. The combined fair value of these properties was determined based upon the present value of theirexpected future cash flows. Interest expense, net of interest income, increased $642,000 during 2008, as compared to 2007, due primarily to: (i) an increase in our averageborrowings outstanding under our revolving credit agreement, partially offset by a decrease in our average borrowing rate, and; (ii) the interest incurred on theterm loan related to the newly constructed Palmdale Medical Plaza which was completed and opened during 2008. The increased borrowings under ourrevolving credit agreement were used primarily to fund the acquisition of Kindred Hospital-Corpus Christi during the first quarter of 2008 and investments invarious LLCs as discussed herein. During 2008 and 2007, we recorded equity in income of unconsolidated LLCs of $2.1 million and $2.8 million, respectively. The $769,000 decreaseduring 2008, as compared to 2007, was primarily due to: (i) a $600,000 decrease at a certain LLC due to the expiration of a master lease during the firstquarter of 2008 and decreased occupancy; (ii) a gain of $264,000 realized during 2007 on the sale of real property by a LLC, and; (iii) approximately$100,000 of other combined net favorable changes. During 2009, we expect to recapture a portion of the income lost during 2008 resulting from the master leaseexpiration and decreased occupancy at the LLC mentioned above since a new lease on a significant portion of the vacant space is scheduled to commenceduring the second quarter of 2009. Our funds from operations (“FFO”) decreased $4.1 million to $25.0 million during 2008 as compared to $29.1 million during 2007. The decrease wasdue to the $4.6 million provision for asset impairment recorded during 2008, as mentioned above. Below is a reconciliation of our reported net income to FFOfor 2008 and 2007 (in thousands): 2008 2007 Net income $11,653 $22,191 Depreciation expense: Consolidated investments 5,832 5,167 Unconsolidated affiliates 7,511 5,990 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)Funds From Operations $24,996 $29,066 34Table of ContentsYear 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. 35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 realproperty by 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 theChalmette asset 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. During 2007, $2.4 million, or 74% of the expenses related to consolidated medical office buildingswere passed on directly to the tenants. During 2006, $2.4 million (after adjusting for $1.3 million LLC impact in 2006), or 73% of the expenses related toconsolidated medical office buildings were passed on directly to the tenants. Building expenses allocated to tenants for reimbursement are dependent uponvarious 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. 36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 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. Depending on general economic and labor market conditions, the operators of our hospital facilities may experience unfavorable labor marketconditions, including a shortage of nurses which may cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Therefore, therecan be no assurance that these factors will not have a material adverse effect on the future results of operations of the operators of our facilities which mayaffect their ability to make lease 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. Liquidity and Capital Resources Year ended December 31, 2008 as compared to December 31, 2007: Net cash provided by operating activities Net cash provided by operating activities was $21.8 million during 2008 as compared to $22.8 million during 2007. The $1.0 million decrease wasattributable to: • an unfavorable change of $1.0 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, provision for asset impairment, gain on sale of property, gain on sale of property by a LLCand replacement property recovered from UHS-Chalmette). This decrease was primarily due to: (i) an increase of $642,000 in interest expense,resulting primarily from increased borrowings, including the mortgage debt on the newly constructed Palmdale Medical Plaza which wascompleted and opened during 2008, and; (ii) a decrease of $505,000 in our equity in income of LLCs (excluding the $264,000 gain on sale of realproperty by a LLC during 2007), as discussed above in Results of Operations. 37Table of Contents • an unfavorable change of $1.4 million in rent receivable primarily resulting from the timing of base rental payments from UHS which werereceived in early January, 2009; • a favorable change of $1.2 million in accrued expenses and other liabilities due primarily to the unfavorable impact resulting from the exercise andsettlement of accrued dividend rights during 2007, and; • other combined favorable changes of approximately $200,000. Net cash used in investing activities Net cash used in investing activities was $26.9 million during 2008 as compared to $4.3 million during 2007. 2008: During 2008, we used $26.9 million of net cash in investing activities as follows: • We spent $13.8 million on additions to real estate investments as follows: • $9.8 million funded at a consolidated LLC that constructed the Summerlin Hospital Medical Office Building III, which was completedand opened during the first quarter of 2009; • $3.9 million funded to complete construction on the Palmdale Medical Plaza which opened during the third quarter of 2008, and; • $100,000 in other capital additions. • We spent $7.2 million to fund equity investments in unconsolidated LLCs as follows: • $2.3 million invested for a 95% non-controlling ownership interest in the LLC that purchased the Vista Medical Terrace and the SparksMedical Building, located in Sparks, Nevada; • $1.3 million invested in the LLC that owns the Deer Valley Medical Office Building III, in which we have a 95% non-controlling equityinterest; • $1.2 million invested in the LLC that owns the Centennial Hills Medical Office Building I, in which we have a 95% non-controllingequity interest; • $720,000 invested in the master LLC which governs four unconsolidated LLCs in which we have a 90% non- controlling equity interest; • $658,000 invested in the LLC that owns the Deer Valley Medical Office Building II in which we have a 90% non-controlling equityinterest, and; • $938,000 invested to various LLCs in which we own a non-controlling equity interest. • We spent $4.7 million on the acquisition of Kindred Hospital-Corpus Christi, during the first quarter of 2008. • We spent $4.0 million as an advance to our third-party partners, as discussed below. • We spent $3.1 million to fund advances to unconsolidated LLCs as follows: • $1.6 million advance made to an existing LLC that owns Sierra San Antonio Medical Plaza located in Fontana, California, in which wehave a 95% non-controlling equity interest; • $1.0 million advance made to an existing LLC that owns the Desert Samaritan Hospital MOBs located in Mesa, Arizona, in which wehave a 76% non-controlling equity interest, and; 38Table of Contents • $540,000 advance made to an existing LLC that owns the Mid Coast Hospital MOB located in Brunswick, Maine, in which we have a74% non-controlling equity interest. • We received $2.5 million of cash proceeds in connection with refinancing of third-party debt by unconsolidated LLCs as follows: • $1.3 million received from the LLC that owns the Papago Medical Park, in which we have a 89% non-controlling equity interest, and; • $1.2 million received from the LLC that owns the Canyon Spring Medical Plaza, in which we have a 95% non-controlling equity interest. • We received $3.1 million of cash distributions in excess of income related to our unconsolidated LLCs. • We received $232,000 in repayments of advances previously provided to unconsolidated LLCs. During 2008, we advanced $4.0 million to our third-party partners in a certain LLC in connection with a $4.0 million loan agreement. Interest on thisnon-amortizing loan is paid to us on a quarterly basis. The interest rate on this loan will be: (i) 4.25% plus LIBOR, or; (ii) if information to determine LIBORis not available, three hundred seventy-five basis points over the then existing borrowing cost. The loan has a stated maturity date of 2012, although it may beprepaid without penalty and is secured by various forms of collateral, including personal guarantees from each of the partners to the loan, as well as theirownership interest in the LLC. Interest on this loan agreement has been paid to us through December 31, 2008. 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-controlling equity interest, and; • $120,000 advance (which was fully repaid during 2008) made to the LLC that owns the Spring Valley Medical Building I, an existingLLC 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; • $1.7 million invested in the LLC that owns the Spring Valley Hospital Medical Office Building II, in which we have a 95% non-controlling equity 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-controlling equity interest; • $495,000 invested in the master LLC, which governs four unconsolidated LLCs, in which we have a 90% non-controlling equityinterest; 39Table of Contents • $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 developed, constructed, owns and operates the Palmdale Medical Plaza which wascompleted and opened during the third quarter of 2008; • $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-controllingequity interest; • $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.This LLC 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-controlling equity 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-controllingequity interest; • $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-controllingequity interest, and; • $77,000 received from the LLC that owns the Papago Medical Park, in which we have a 89% non-controlling equity interest. • 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. • We received $1.1 million of cash distributions in connection with the sale of real property by a LLC. 40Table of ContentsNet cash provided by (used in) financing activities Net cash provided by (used in) financing activities was $4.6 million during 2008 and ($18.1 million) during 2007. During 2008, we had $4.6 million of net cash provided by financing activities as follows: (i) borrowed $22.2 million, net of repayments, on ourrevolving line of credit; (ii) paid $27.7 million in dividends; (iii) borrowed $9.9 million pursuant to term and construction loans payable of consolidatedLLCs that are non-recourse to us; (iv) borrowed $68,000, net of repayments, from a third-party partner; (v) repaid $218,000 of mortgage notes payable of aconsolidated LLC that is non-recourse to us; (vi) repaid $189,000 of mortgage notes payable that is non-recourse to us, and; (vii) generated $529,000 fromthe issuance of shares of beneficial interest from our dividend reinvestment plan. During 2007, we used $18.1 million of net cash in financing activities as follows: (i) borrowed $3.2 million, net of repayments, on our revolving line ofcredit; (ii) paid $27.2 million in dividends; (iii) paid $527,000 in financing fees related to our new revolving credit agreement; (iv) paid $201,000 on amortgage note payable of a consolidated LLC, that is non-recourse to us; (v) paid $132,000 on a mortgage note payable that is non-recourse to us; (vi) paid$236,000 for the repurchase of shares of beneficial interest; (vii) borrowed $5.8 million on a construction loan payable of a consolidated LLC, that is non-recourse to us, and; (viii) generated $1.2 million of net cash from the issuance of shares of beneficial interest. 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 providedby operating activities (depreciation and amortization, gain on sale of property, gain on sale of property by a LLC, gain on sale of our interest in aLLC and replacement property recovered from UHS-Chalmette). This decrease was primarily due to an unfavorable change in net cash providedby operating 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, asdiscussed above (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. 41Table of ContentsNet cash used in investing activities Net cash used in investing activities was $4.3 million during 2007, as discussed above, as compared to $2.4 million during 2006. 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 the LLC that developed, constructed, owns and operates the Spring Valley Hospital Medical OfficeBuilding II, located in Las Vegas, Nevada on the campus of a UHS facility, in which we have a 95% non-controlling equity interest. Thisproject was opened 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 inwhich we 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 MedicalPlaza, located in Fontana, California, in which we have a 95% non-controlling equity interest. This project was completed and openedduring the first quarter of 2006; • $363,000 advance (which was converted to equity during 2007) made to the LLC that developed, constructed, owns and operates thePhoenix Children’s East Valley Care Center, located in Gilbert, Arizona, in which we have a 95% non-controlling equity interest. Thisproject was opened 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, in which we have a 95% non-controlling equity interest. This project was completed and opened during the first quarter of2006; • $1.5 million of equity funded to the LLC that will developed, constructed, owns and operates the Phoenix Children’s East Valley CareCenter, located in Gilbert, Arizona, in which we have a 95% non-controlling equity interest. This project was completed and openedduring the fourth quarter of 2007; • $637,000 of additional equity funded to the LLC that constructed and owns the Saint Mary’s Professional Office Building located inReno, Nevada, in which we have a 75% non-controlling equity interest; • $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, onthe campus 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. 42Table of Contents • We received $1.9 million of cash received in connection with repayments of advances previously made to LLCs 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 equityinterest, 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. • 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, as discussed above, as compared to $23.2 million during 2006. During 2006, we used $23.2 million of net cash in financing activities as follows: (i) borrowed of $3.6 million, net of repayments, on our revolving lineof credit; (ii) paid $26.6 million of dividends; (iii) repaid $577,000 of mortgage notes payable that are non-recourse to us, and; (iv) generated $391,000 of netcash 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 0.75% to 1.125%, or the prime rate plus zero to .125%. A fee of 0.15%to 0.225% is paid on the unused portion of the commitment. The margins over the Eurodollar, prime rate and the commitment fee are based upon our debt tototal capital ratio as defined by the Agreement. As of December 31, 2008, the applicable margin over the Eurodollar rate was 0.75%, the margin over the primerate was zero, and the commitment fee was 0.15%. At December 31, 2008, we had $39.0 million of outstanding borrowings and $23.0 million of letters of credit outstanding against the Agreement. We had$38.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2008. There are nocompensating balance requirements. The Agreement contains a provision whereby the commitments will be reduced by 50% of the proceeds generated fromany new equity offering. The average amounts outstanding under our revolving credit agreement were $27.0 million in 2008, $11.3 million in 2007 and $11.9million in 2006 with corresponding effective interest rates, including commitment fees and interest rate swap expense, of 3.9% in 2008, 7.1% in 2007 and7.9% in 2006. 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 year end 2008. We also believe that we would remain in compliance if the fullamount of our commitment was borrowed. 43Table of ContentsWe 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 three mortgages, one term loan and one construction loan, all of which are non-recourse to us, included on our consolidated balance sheet as ofDecember 31, 2008, with a combined outstanding balance of $32.7 million. The following table summarizes our outstanding mortgages and construction loanat December 31, 2008 (amounts in thousands): Facility Name OutstandingBalance(in thousands) InterestRate MaturityDateMedical Center of Western Connecticut fixed rate mortgage loan $3,574 8.3% 2010Summerlin Hospital MOB II fixed rate mortgage loan 8,469 8.3% 2010Kindred Hospital-Corpus Christi fixed rate mortgage loan 3,318 6.5% 2019Palmdale Medical Plaza term loan(a) 7,744 5.0% 2009Summerlin Hospital MOB III construction loan(b) 9,587 2.4% 2009Total $32,692 (a)This term loan is scheduled to mature on July 31, 2009 at variable interest rates based upon LIBOR plus 2.6% or the prime rate. This loan can beextended, at our option, for one-year to July 31, 2010 at interest rates as provided for in the current loan agreement.(b)This construction loan is scheduled to mature on December 31, 2009 at variable interest rates based upon LIBOR plus 1.8%. This loan can be extended,at our option, for one-year to December 31, 2010 at interest rates as provided for in the current loan agreement. The mortgages are secured by the real property of the buildings as well as property leases and rents. These mortgages, term loan and construction loanhave a combined fair value of approximately $32.9 million as of December 31, 2008. Changes in market rates on our fixed rate debt impacts the fair value ofdebt, but it has no impact on interest incurred or cash flow. The following represents the scheduled maturities of our contractual obligations as of December 31, 2008: 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) $23,105 $8,195 $11,780 $147 $2,983Long-term debt-variable(b) 48,587 9,587 — 39,000 — Estimated future interest payments on debt outstanding as ofDecember 31, 2008(c) 7,865 2,888 3,585 398 994Equity and debt financing commitments(d) 28,099 28,099 — — — Total contractual cash obligations $107,656 $48,769 $15,365 $39,545 $3,977 (a)Consists of three mortgages and one term loan, which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2008.Excluded from the table above is the $230.5 million of combined third-party debt outstanding as of December 31, 2008, that is non-recourse to us, at theunconsolidated LLCs in which we hold various non-controlling ownership interests (see Note 8 to the consolidated financial statements).(b)Consists of $39.0 million of borrowings outstanding as of December 31, 2008 under the terms of our $100 million revolving credit agreement and $9.6million of borrowings outstanding as of December 31, 2008 pursuant to a construction loan at a consolidated LLC, which is non-recourse to us. 44Table of Contents(c)Assumes that all debt outstanding as of December 31, 2008, including borrowings under the revolving credit agreement, three mortgage notes payable, aterm loan and a construction loan, which are non-recourse to us, remain outstanding until the stated maturity date of the debt agreements at the sameinterest rates which were in effect as of December 31, 2008. We have the right to repay borrowings under the revolving credit agreement and constructionloan at any time during the terms of the agreements, without penalty.(d)As of December 31, 2008, we have equity investment and debt financing commitments remaining in connection with our investments in various LLCs,as follows (in thousands): AmountArlington Medical Properties $1,157Sierra Medical Properties 528Palmdale Medical Properties 4,895Spring Valley Medical Properties II 1,131Centennial Hills Medical Properties 3,672Deerval Properties II 3,671Deerval Parking Company(a) 634Banburry Medical Properties 5,233Sparks Medical Properties 2,478Auburn Medical Properties 4,700Total $28,099 (a)Deerval Parking Company is owned 50% by Deerval Properties and 50% by Deerval Properties II, two LLCs in which we own non-controlling,majority ownership interests. Off Balance Sheet Arrangements As of December 31, 2008, 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, 2008 totaled $23.0 million consistingof: (i) $5.5 million related to the Banburry Medical Properties; (ii) $5.2 million related to Deerval Properties II; (iii) $4.7 million related to Centennial HillsMedical Properties; (iv) $3.0 million related to Palmdale Medical Properties; (v) $2.4 million related to Sparks Medical Properties; (vi) $1.0 million related toSierra Medical Properties; (vii) $631,000 related to Arlington Medical Properties, and; (viii) $609,000 related to Deerval Parking Company. 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, 2008, 2007 and 2006, we had no outstanding interest rate swap agreements. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their 2008 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$507,000. 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 $532,000.The carrying value of amounts borrowed approximates fair value. 45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, 2008. 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) 2009 2010 2011 2012 2013 Thereafter Total Long-term debt: Fixed rate(a) $8,195 $11,713 $67 $71 $76 $2,983 $23,105 Weighted average interest rates 6.2% 5.7% 6.4% 6.4% 6.4% 6.1% 6.2%Variable rate long-term debt(b) $9,587 $— $— $39,000 $— $— $48,587 Weighted average interest rates 3.3% — — 3.6% — — 3.5% (a)Consists of non-recourse mortgage notes payable.(b)Consists of a $9.6 million non-recourse construction loan and $39 million of borrowings outstanding under the terms of our $100 million revolvingcredit agreement, as amended in January of 2007. As calculated based upon our variable rate debt outstanding as of December 31, 2008 that is subject to interest rate fluctuations, each 1% change ininterest rates would impact our net income by approximately $83,000. 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 accounting firm, 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, 2008, 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 2008 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 46Table of Contentsthe criteria in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Oursystem of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparationand fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherentlimitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internalcontrol over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree 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, 2008,based on criteria in Internal Control—Integrated Framework, issued by the COSO. The effectiveness of our internal control over financial reporting as ofDecember 31, 2008, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. 47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, 2008, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). UniversalHealth Realty Income Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over FinancialReporting. Our responsibility 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, 2008, 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, 2008 and 2007, 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, 2008, and our report dated March 12, 2009 expressedan unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 12, 2009 48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, 2008. See also “Executive Officers of the Registrant” appearing in Item 1 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, 2008. 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 caption “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, 2008. 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, 2008. 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, 2008. 49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 4, 2008, 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 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. 10.7* 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. 10.8 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. 50Table of Contents10.9 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. 10.10 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. 10.11 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. 10.12* 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. 10.13* 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. 51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 12, 2009 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 12, 2009/s/ JAMES E. DALTON, JR. James E. Dalton, Jr. Trustee March 12, 2009/s/ MYLES H. TANENBAUM Myles H. Tanenbaum Trustee March 12, 2009/s/ MILES L. BERGER Miles L. Berger Trustee March 12, 2009/s/ ELLIOT J. SUSSMAN Elliot J. Sussman, M.D., M.B.A. Trustee March 12, 2009/s/ MARC D. MILLER Marc D. Miller Trustee March 12, 2009/s/ CHARLES F. BOYLE Charles F. Boyle Vice President and Chief Financial Officer(Principal Financial and Accounting Officer) March 12, 2009 52Table of ContentsINDEX TO FINANCIAL STATEMENTS AND SCHEDULE PageConsolidated Financial Statements: Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Schedule 54Consolidated Balance Sheets—December 31, 2008 and December 31, 2007 55Consolidated Statements of Income—Years Ended December 31, 2008, 2007 and 2006 56Consolidated Statements of Shareholders’ Equity—Years Ended December 31, 2008, 2007 and 2006 57Consolidated Statements of Cash Flows—Years Ended December 31, 2008, 2007 and 2006 58Notes to the Consolidated Financial Statements—December 31, 2008 59Schedule III—Real Estate and Accumulated Depreciation—December 31, 2008 79Notes to Schedule III—December 31, 2008 81 53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, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2008, 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, 2008, 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 12, 2009 expressed an unqualifiedopinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 12, 2009 54Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED BALANCE SHEETS(dollar amounts in thousands) December 31,2008 December 31,2007 ASSETS: Real Estate Investments: Buildings and improvements $191,761 $178,655 Accumulated depreciation (66,255) (60,627) 125,506 118,028 Land 19,348 18,258 Construction in progress 9,795 7,511 Net Real Estate Investments 154,649 143,797 Investments in and advances to limited liability companies (“LLCs”) 56,462 52,030 Other Assets: Cash and cash equivalents 618 1,131 Base and bonus rent receivable from UHS 1,982 960 Rent receivable—other 945 746 Deferred charges, notes receivable and intangible and other assets, net 6,400 1,085 Total Assets $221,056 $199,749 LIABILITIES AND SHAREHOLDERS’ EQUITY: Liabilities: Line of credit borrowings $39,000 $16,800 Mortgage notes payable, non-recourse to us 6,892 3,717 Mortgage, construction and other loans payable of consolidated LLCs, non-recourse to us 25,800 16,100 Accrued interest 190 125 Accrued expenses and other liabilities 3,196 1,874 Tenant reserves, escrows, deposits and prepaid rents 883 741 Total Liabilities 75,961 39,357 Minority interests 167 87 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: 2008—11,865,919;2007—11,841,938 119 118 Capital in excess of par value 189,347 188,638 Cumulative net income 338,718 327,065 Cumulative dividends (383,256) (355,516)Total Shareholders’ Equity 144,928 160,305 Total Liabilities and Shareholders’ Equity $221,056 $199,749 See the accompanying notes to these consolidated financial statements. 55Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF INCOME(amounts in thousands, except per share amounts) Year ended December 31, 2008 2007 2006 Revenues (Note 1): Base rental—UHS facilities $12,828 $12,244 $12,448 Base rental—Non-related parties 9,936 9,352 11,313 Bonus rental—UHS facilities 3,943 3,958 4,317 Tenant reimbursements and other—Non-related parties 2,352 2,293 3,336 Tenant reimbursements and other—UHS facilities 125 113 300 29,184 27,960 31,714 Expenses: Depreciation and amortization 5,904 5,209 5,436 Advisory fees to UHS (Note 2) 1,567 1,425 1,424 Other operating expenses 5,146 4,482 6,149 Provision for asset impairment 4,575 — — 17,192 11,116 13,009 Income before equity in income of unconsolidated limited liability companies (“LLCs”), propertyreplacement recovered from UHS (Chalmette) and interest expense 11,992 16,844 18,705 Equity in income of unconsolidated LLCs (including recognition of gain on sale of real property of $264during 2007 and a previously deferred gain of $1,860 on our sale of our interest in an unconsolidatedLLC during 2006) 2,052 2,821 4,241 Replacement property recovered from UHS—Chalmette — 1,748 13,958 Interest expense, net (2,391) (1,749) (2,476)Income from continuing operations 11,653 19,664 34,428 Income from discontinued operations, net (including gain on sale of real property of $2,270 during 2007) — 2,527 269 Net income $11,653 $22,191 $34,697 Basic earnings per share: From continuing operations $0.98 $1.66 $2.92 From discontinued operations — 0.21 0.02 Total basic earnings per share $0.98 $1.87 $2.94 Diluted earnings per share: From continuing operations $0.98 $1.66 $2.90 From discontinued operations — 0.21 0.02 Total diluted earnings per share $0.98 $1.87 $2.92 Weighted average number of shares outstanding—Basic 11,851 11,818 11,784 Weighted average number of share equivalents 31 57 82 Weighted average number of shares and equivalents outstanding—Diluted 11,882 11,875 11,866 See the accompanying notes to these consolidated financial statements. 56Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2008, 2007 and 2006(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, 2006 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 into income — — — — — 62 62 Unrealized derivative gains on cash flow hedges — — — — — 38 38 Total—comprehensive income — — — 34,697 — 100 34,797 January 1, 2007 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 January 1, 2008 11,842 118 188,638 327,065 (355,516) — 160,305 Shares of Beneficial Interest: Issued 24 1 528 — — — 529 Restricted share-based compensation expense 44 44 Dividends ($2.34/share) — — — — (27,740) — (27,740)Stock-based compensation expense — — 137 — — — 137 Comprehensive income: Net income — — — 11,653 — — 11,653 Total—comprehensive income — — — 11,653 — — 11,653 December 31, 2008 11,866 $119 $189,347 $338,718 ($383,256) $— $144,928 See the accompanying notes to these consolidated financial statements. 57Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands) Year ended December 31, 2008 2007 2006 Cash flows from operating activities: Net income $11,653 $22,191 $34,697 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,904 5,209 5,560 Provision for asset impairment 4,575 — — Gain on sale of property — (2,270) — Gain on sale of property by limited liability company (“LLC”) — (264) — Gain on sale of our interest in a LLC — — (1,860)Replacement property recovered from UHS—Chalmette — (1,748) (13,958)Changes in assets and liabilities: Rent receivable (1,221) 133 6 Accrued expenses and other liabilities 393 (779) 386 Tenant reserves, escrows, deposits and prepaid rents 142 146 134 Accrued interest 65 41 (196)Other, net 331 116 (67)Net cash provided by operating activities 21,842 22,775 24,702 Cash flows from investing activities: Investments in LLCs (7,187) (8,231) (5,332)Repayments of advances made to LLCs 232 10,003 1,949 Advances made to LLCs (3,140) (16,693) (7,573)Cash distributions in excess of income from LLCs 3,127 2,101 1,399 Proceeds received from sale of our interest in a LLC — — 3,102 Cash distributions from sales of properties by LLCs — 1,108 — Cash distributions of refinancing proceeds from LLCs 2,542 7,279 5,704 Cash received from sale of property — 7,280 — Other cash activities of LLCs — 51 (359)Advances made to third-party partners (3,960) — — Acquisition of real property (4,714) — — Additions to real estate investments (13,823) (7,234) (1,294)Net cash used in investing activities (26,923) (4,336) (2,404)Cash flows from financing activities: Net borrowings on line of credit 22,200 3,200 3,600 Net borrowings from third-party partner 68 — — Financing costs paid — (527) — Repayments of mortgage notes payable of consolidated LLCs (218) (201) (454)Net borrowings from loans payable of consolidated LLCs 9,918 5,774 — Repayments of mortgage notes payable (189) (132) (123)Dividends paid (27,740) (27,197) (26,631)Repurchase of shares of beneficial interest — (236) — Issuance of shares of beneficial interest 529 1,213 499 Dividend reinvestment receivable — — (108)Net cash provided by (used in) financing activities 4,568 (18,106) (23,217)(Decrease) increase in cash and cash equivalents (513) 333 (919)Cash and cash equivalents, beginning of year 1,131 798 1,717 Cash and cash equivalents, end of year $618 $1,131 $798 Supplemental disclosures of cash flow information: Interest paid $2,531 $1,795 $2,661 Supplemental disclosures of non-cash transactions: Debt assumed on acquisition of real estate $3,364 $— $— Replacement property recovered from UHS—Chalmette $— $1,748 $13,958 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. 58Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2008 (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, 2008, we have forty-nine real estate investments or commitments located in fifteenstates consisting of: • seven hospital facilities including three acute care, one behavioral healthcare, one rehabilitation and two sub-acute; • thirty-eight medical office buildings (including three being constructed), and; • four pre-school and childcare centers. Since we have significant investments in seven hospital facilities, which comprised 65% of net revenues in 2008 and 2007 and 58% of net revenues in2006, 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 seven hospital facilities and all or a portion of nine medical office buildings (plus two under construction as of December 31, 2008) are leased tosubsidiaries of Universal Health Services, Inc. (“UHS”) at December 31, 2008. A continuation or worsening of economic conditions may result in a continued increase in the unemployment rate which will likely increase the numberof individuals without health insurance. As a result, our facilities may experience a decrease in patient volumes which could result in decreased occupancyrates at our medical office buildings. Additionally, a reduction in the revenues earned by the operators of our hospital facilities may occur, which wouldunfavorably impact our future bonus rentals (on the UHS hospital facilities) and may potentially have a negative impact on the future lease renewal terms andthe underlying value of the hospital properties. These general economic and employment conditions in the United States could materially affect the businessand future results of operations of the operators of our facilities which could, in turn, materially reduce our revenues and net income. 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 59Table of Contentscontractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rentadjustments is dependent on many factors including the nature and amount of any rental concessions granted to new tenants, scheduled rent increases underexisting leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-lineadjustments to rental revenue may vary from period-to-period. Bonus rents are recognized when earned based upon increases in each facility’s net revenue inexcess of stipulated amounts. Bonus rentals are determined and paid each quarter based upon a computation that compares the respective facility’s currentquarter’s net revenue to the corresponding quarter in the base year. Tenant reimbursements for operating expenses are accrued as revenue in the same period therelated expenses are incurred. Cash and Cash Equivalents We consider all highly liquid investment instruments with original maturities of three months or less to be cash equivalents. Asset Impairment Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carryingamount of the property might not be recoverable. A property to be held and used is considered impaired only if management’s estimate of the aggregate futurecash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value ofthe property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand,competition, local market conditions and other factors. The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheetdate that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated action to be taken withrespect to the property could impact the determination of whether an impairment exists and whether the effects could materially impact our net income. To theextent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of theproperty over the fair value of the property. Assessment of the recoverability by us of certain lease related costs must be made when we have reason to believe that a tenant might not be able toperform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs. An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is notconsidered recoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flow. To the extentimpairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income. During 2008, we recorded an asset impairment charge of $4.6 million in connection with two medical office buildings (Southern Crescent Centers I andII) located on a medical campus in Clayton County (Riverdale), Georgia. This asset impairment charge was recorded after evaluation of property and location-specific factors including: (i) the future expiration of a master lease is scheduled to occur in June, 2010; (ii) the current and projected occupancy of thebuildings, and; (iii) the anticipated unfavorable impact on the region and the properties resulting from the loss of the school district’s accreditation during2008. Given the local market conditions, we believe it is probable that the master lease (which has been in effect since 2000 on one of these properties) will notbe renewed upon its expiration in June, 2010. In the likely event that the master lease is not renewed, we will be required to find other operators for this propertyand/or enter into leases on terms potentially less favorable to us than the current master lease. During each of 2008, 2007 and 2006, our revenues, net income 60Table of Contentsand net cash provided by operating activities included approximately $1.1 million annually in connection with the terms of this master lease. The combinedfair value of these properties was determined based upon the present value of their expected future cash flows. Intangible Assets We account for our property acquisitions under the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations”(“SFAS No. 141”). Under SFAS No. 141, the purchase price of a property is allocated to the property’s land, buildings and intangible assets based upon ourestimates of their fair values. Depreciation is computed using the straight-line method over the useful lives of the buildings and capital improvements. Thevalue of intangible assets is amortized as real estate amortization over the remaining lease term. 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. 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”. Therewas no impact on our net income as a result of the change in accounting for these LLCs. As a result of a master lease arrangement between a subsidiary of UHS and a LLC that owns a medical office building that was completed and openedduring the third quarter of 2008, this LLC is considered to be a variable interest entity and is therefore included in our consolidated financial statements on aconsolidated basis 61Table of Contentssince we are the primary beneficiary. Additionally, as a result of a master lease arrangement between a subsidiary of UHS and a LLC that owns a medicaloffice building that was under construction, as of December 31, 2008, this LLC is also included in our consolidated financial statements on a consolidatedbasis. Therefore, as of December 31, 2008, 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 was completed and opened during the first quarter of 2009. 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 $180 million and $118 million,respectively, at December 31, 2008 and $161 million and $103 million, respectively, at December 31, 2007. Stock-Based Compensation 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 generally requires companies to recognize the grant-date fair value of stock options and other equity-basedcompensation. SFAS 123R generally requires that a company account for these transactions using the fair-value based method and eliminates a company’sability 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. 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. Fair Value of Financial Instruments SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) emphasizes that fair value is a market-based measurement, not an entity-specificmeasurement and should be determined based upon the assumptions that market participants would use in pricing the asset or liability. SFAS No. 157discusses valuation techniques such as the market approach, the income approach and the cost approach. In instances when it is necessary to establish thefair value of our real estate investments and investments in LLCs we use unobservable inputs which are 62Table of Contentstypically based on our own assumptions, as there is little, if any, related market activity (please see Note 1 to the Consolidated Financial Statements for furtherdiscussion of SFAS No. 157). The carrying amounts reported in the balance sheet for cash, receivables, and short-term borrowings approximate their fairvalues due to the short-term nature of these instruments. Accordingly, these items are excluded from the fair value disclosures included elsewhere in these notesto consolidated financial 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. Recent Accounting Pronouncements Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities: In December,2008, FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests inVariable Interest Entities. The FSP amends the disclosure requirements of FASB No. 140, Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities. Additionally, the FSP amends the disclosure requirements of FASB No. 46 (revised December, 2003), Consolidation ofVariable Interest Entities. FSP 142-3 is effective for fiscal years ending after December 15, 2008. We do not currently expect the adoption of FSP FAS 140-4and FIN 46(R)-8 to have a material impact on our consolidated financial statements. Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities: In June 2008, FASB issuedFSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSPconcludes that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities under FASB No. 128,Earnings Per Share and should be included in the computation of earnings per share under the two-class method. The two-class method is an earningsallocation formula that we currently use to determine earnings per share for each class of common stock according to dividends declared and participationrights in undistributed earnings. We do not expect the adoption of this FSP effective January 1, 2009 will have a material impact on our results of operations orfinancial position. Determination of the Useful Life of Intangible Assets: In April 2008, the FASB issued FASB Staff Position 142-3 (“FSP 142-3”), Determinationof the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal yearsbeginning after December 15, 2008. We do not currently expect the adoption of FSP 142-3 to have a material impact on our consolidated financial statements. 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 future results of operations or financial position. 63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 January 1, 2008. We chose not to elect the fair value option forour financial assets and financial liabilities existing at January 1, 2008, and did not elect the fair value option on financial assets and financial liabilitiestransacted subsequent to that time. Therefore, the adoption of SFAS No. 159 had no impact on our results of operations or financial position. Fair Value Measurement: On January 1, 2008 we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The provisions for SFAS 157 are to beapplied prospectively as of the beginning of the fiscal year in which it is initially applied, except in limited circumstances including certain positions infinancial instruments that trade in active markets as well as certain financial and hybrid financial instruments initially measured under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) using the transaction price method. In these circumstances, the transitionadjustment is measured as the difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initiallyapplied. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurementshould be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering marketparticipant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participantassumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of thehierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). SFAS No. 157 discusses valuation techniques, such as the market approach, the income approach and the cost approach. The statement utilizes a fairvalue hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices forsimilar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; 64Table of Contents • Level 3: Unobservable inputs for the asset or liability, which are typically based on a reporting entity’s own assumptions, as there is little, ifany, related market activity. Disclosures about Derivative Instruments and Hedging Activities: In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). Thisstatement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedgingactivities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments withinthe scope of SFAS No. 133 as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedginginstruments. Entities with instruments subject to SFAS No. 161 must provide expanded qualitative and quantitative disclosures. SFAS No. 161 is effectiveprospectively for financial statements issued beginning after November 15, 2008, with early application permitted. Our adoption of this statement will notaffect our results of operations. (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. The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 53% of our total revenue for the five yearsended December 31, 2008 (approximately 55%, 57% and 51% for the years ended December 31, 2008, 2007 and 2006, 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 24% of the combined consolidated and unconsolidated revenue for the five years ended December 31, 2008(approximately 21%, 24%, and 24% for the years ended December 31, 2008, 2007 and 2006, respectively). In addition, nine MOBs (plus two additionalMOBs currently under construction) owned by LLCs in which we hold various non-controlling equity interests, include or will include tenants which aresubsidiaries of UHS. 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 asset exchange and substitution proposal relating to Chalmette Medical Center (“Chalmette”), as discussed below, as well as the early five yearlease renewals on Southwest Healthcare System-Inland Valley Campus (“Inland Valley”), Wellington Regional Medical Center (“Wellington”), McAllenMedical Center (“McAllen”) and The Bridgeway (“Bridgeway”), we agreed to amend the Master Lease to include a change of control provision. The change ofcontrol provision 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 leasedhospital properties at their appraised fair market value. 65Table of ContentsWe are committed to invest up to a total of $7.4 million in equity and debt financing, of which $2.5 million has been funded as of December 31, 2008,in exchange for a 95% non-controlling equity interest in a LLC that constructed, owns, and operates the Palmdale Medical Plaza, located in Palmdale,California, on the campus of a UHS hospital. This MOB has a triple net, 75% master lease commitment by UHS of Palmdale, Inc., a subsidiary of UHS,pursuant to the terms of which the master lease for each suite will be cancelled at such time that the suite is leased for a minimum term of five years to anothertenant acceptable to the LLC and UHS. This MOB, tenants of which will include subsidiaries of UHS, was completed and opened during the third quarter of2008 at which time the master lease commenced. Based upon the executed leases and letter of intent commitments in place as of December 31, 2008, the masterlease threshold of 75% has not been met. The LLC has a third-party term loan commitment of $8.5 million, which is non-recourse to us, of which $7.7million has been borrowed as of December 31, 2008. This LLC, which is deemed to be a variable interest entity, is consolidated in our financial statements asof December 31, 2008 since we are the primary beneficiary. We are committed to invest up to $5.4 million in debt or equity, of which $143,000 has been funded as of December 31, 2008, in exchange for a 95%non-controlling equity interest in a LLC that developed, constructed, owns and operates the Summerlin Medical Office Building III, located in Las Vegas,Nevada, on the campus of a UHS hospital. Summerlin Hospital Medical Center (“Summerlin Hospital”), a subsidiary of UHS, has committed to leaseapproximately 25% of this building pursuant to the terms of a 10-year flex lease. In addition, Summerlin Hospital has committed to a 50% master lease on theremaining 75% of the building pursuant to the terms of which the master lease for each suite will be cancelled at such time that the suite is leased for aminimum term of five years to another tenant acceptable to the LLC and Summerlin Hospital. Based upon the executed leases and letter of intent commitmentsin place as of December 31, 2008, the master lease threshold has not been met. The LLC has a third-party construction loan commitment of $14.4 million,which is non-recourse to us, of which $9.6 million has been borrowed as of December 31, 2008. This building was completed and opened during the firstquarter of 2009. This LLC, which is deemed to be a variable interest entity, is consolidated in our financial statements as of December 31, 2008 since we arethe primary beneficiary. We have committed to invest up to $4.8 million in equity and debt financing, of which $2.3 million has been funded as of December 31, 2008, inexchange for a 95% non-controlling interest in a LLC that owns and operates the Vista Medical Terrace and The Sparks Medical Building, located in Sparks,Nevada on the campus of a UHS hospital. These MOBs were acquired by the LLC during the third quarter of 2008. We are committed to invest up to $4.7 million in debt or equity, none of which has been funded as of December 31, 2008, in exchange for a 95% non-controlling equity interest in a LLC that will construct, own and operate the Auburn Medical Office Building II, located in Auburn, Washington on thecampus of a UHS hospital. This building, tenants of which will include subsidiaries of UHS, is scheduled to be completed and opened during the fourthquarter of 2009. 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 66Table of ContentsInland Valley which was completed and opened during the third quarter of 2007. Included in our net income during 2007 and 2006 are gains of $1.7 millionand $14.0 million, respectively, representing the total property transferred to us from UHS as of December 31, 2007 in excess of the $8.3 million book valueof Chalmette. Pursuant to section 1033(a)(1) of the Internal Revenue Code of 1986, as amended (the “IRC”), we recognized no gain for federal income taxpurposes based upon the transaction as agreed upon in the Agreement. The total cost of the Capital Addition at Inland Valley amounted to $11.7 million, which exceeded the $11.0 million threshold included in the Agreement.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 the rent on thishospital has been adjusted accordingly. 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 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). 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 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. UHS Legal Proceedings: UHS, together with its South Texas Health System affiliates, which operate McAllen Medical Center, were served with asubpoena dated November 21, 2005, issued by the Office of Inspector General of the Department of Health and Human Services (“OIG”). At that time, theCivil Division of the U.S. Attorney’s office in Houston, Texas indicated that the subpoena was part of an investigation under the False Claims Act regardingcompliance with Medicare and Medicaid rules and regulations pertaining to the employment of physicians and the solicitation of patient referrals fromphysicians from January 1, 1999 to the date of the subpoena, related to the South Texas Health System. UHS has advised us that since January of 2006,documents were produced on a rolling basis pursuant to this subpoena and several additional requests, including an additional March 9, 2007 subpoena. OnFebruary 16, 2007, UHS’s South Texas Health System affiliates were served with a search warrant in connection with what UHS had been advised was arelated criminal Grand Jury investigation concerning the production of documents. At that time, the government obtained various documents 67Table of Contentsand other property related to the facilities. Follow-up Grand Jury subpoenas for documents and witnesses and other requests for information were subsequentlyserved on South Texas Health System facilities and certain UHS employees and former employees. UHS has advised us that they have received notification from the U.S. Department of Justice (“DOJ”) that, at this time, the DOJ will not be pursuingcriminal prosecutive action against UHS or its South Texas Health System affiliates. The DOJ is still investigating whether or not any individualsindependently obstructed justice as it relates to the civil subpoena dated November 21, 2005. Representatives of UHS have been advised that the CivilDivision of the U.S. Attorney’s office in Houston, Texas is continuing its investigation in connection with the civil subpoena dated November 21, 2005 issuedby the OIG. UHS’s legal representatives continue to meet with representatives of the Civil Division to discuss the status of this matter. UHS understands that,based on those discussions and its investigations to date, the government is focused on certain arrangements entered into by the South Texas Health Systemaffiliates which, the government believes, may have violated Medicare and Medicaid rules and regulations pertaining to payments to physicians and thesolicitation of patient referrals from physicians and other matters relating to payments to various individuals which may have constituted improper payments.UHS is cooperating with the investigations and responding to the matters raised with them. UHS has been negotiating a possible settlement of this matter withthe government. UHS expects to continue its discussions with the government to attempt to resolve this matter in a manner satisfactory to UHS and thegovernment. During 2008, UHS recorded a pre-tax charge of $25 million to establish a reserve in connection with this matter. There is no assurance that UHSwill be able to reach a settlement, and, should a settlement be reached, UHS is unable, at this time, to determine the ultimate settlement amount. If UHS isultimately unable to reach a settlement, UHS is unable, at this time, to determine the extent of the total financial and/or other exposure to them in connectionwith this matter. 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, from time to time UHS is subjected to inquiries or actions with respect to its facilities andthere is no assurance that UHS will not face sanctions, fines or penalties in connection with such inquiries or actions, including with respect to theinvestigation of its South Texas Health System affiliates. Even if UHS were to ultimately prevail, the government’s inquiry and/or action in connection withthis matter could have a material adverse effect on UHS’s future operating results and on the future operating results of McAllen Medical Center. While thebase rentals are guaranteed by UHS through the end of the existing lease term, should this matter adversely impact the future revenues and/or operating resultsof McAllen Medical Center, the future bonus rental earned by us on this facility may be materially, adversely impacted. Bonus rental revenue earned by usfrom McAllen Medical Center amounted to $1.7 million for each of the years ended December 31, 2008 and 2007 and $1.9 million during 2006. We canprovide no assurance that this matter will not have a material adverse impact on underlying value of McAllen Medical Center or on the future base rentalearned on this facility should the existing lease not be renewed at its current lease rate upon the scheduled expiration of the existing lease term in December,2011. 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 68Table of Contentsus or the Advisor. The Advisory Agreement has been renewed for 2009. All transactions between us and UHS must be approved by the Independent Trustees. The Advisory Agreement provides that the Advisor is entitled to receive an annual advisory fee equal to 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 $1.6 million for2008 and $1.4 million for each of 2007 and 2006. No incentive fees were paid during 2008, 2007 or 2006. Officers and Employees: Our officers are all employees of UHS and although as of December 31, 2008 we had no salaried employees, our officers doreceive stock-based compensation from time-to-time. Share Ownership: As of December 31, 2008, UHS owned 6.6% of our outstanding shares of beneficial interest. (3)ACQUISITIONS AND DISPOSITIONS 2008: Acquisitions: During the third quarter of 2008, we invested $2.3 million for a 95% non-controlling ownership interest in a LLC that purchased the Vista MedicalTerrace and The Sparks Medical Building located in Sparks, Nevada. Both of these medical office buildings are located on the campus of Northern NevadaMedical Center, an acute care hospital owned and operated by a wholly-owned subsidiary of UHS. In February, 2008, we purchased Kindred Hospital-Corpus Christi, an unaffiliated long-term sub-acute care hospital located in Corpus Christi, Texasfor 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. Thelease payments on this facility are unconditionally guaranteed by Kindred Healthcare, Inc. until its scheduled expiration in June, 2019. The proforma effect ofthis acquisition did not have a material impact on our results of operations. The purchase price of this property was allocated to net tangible property assets($6.6 million) and identified intangible assets ($1.5 million) acquired based on their respective fair value at acquisition. Intangible assets include the value ofthe in-place lease at the time of acquisition. There were no dispositions during 2008. 2007: There were no acquisitions during 2007. 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 and 69Table of Contents 2006. 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 $264,000gain which is included in “Equity in income of unconsolidated LLCs” during 2007. 2006: There were no acquisitions or dispositions during 2006. 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. (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 related to properties included in our financial statements on a consolidated basis, excludingincreases resulting from changes in the consumer price index and bonus rents, are as follows (amounts in thousands): 2009 $24,4632010 22,6312011 20,4042012 7,2142013 5,719Thereafter 8,617Total minimum base rents $89,048 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)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 0.75% to 1.125%, or the prime rate plus zero to .125%. A fee of 0.15%to 0.225% is paid on the unused portion of the commitment. The margins over the Eurodollar, prime rate and the commitment fee are based upon our debt tototal capital ratio as defined by the Agreement. As of December 31, 2008, the applicable margin over the Eurodollar rate was 0.75%, the margin over the primerate was zero, and the commitment fee was 0.15%. 70Table of ContentsAt December 31, 2008, we had $39.0 million of outstanding borrowings and $23.0 million of letters of credit outstanding against the Agreement. We had$38.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2008. There are nocompensating balance requirements. The Agreement contains a provision whereby the commitments will be reduced by 50% of the proceeds generated fromany new equity offering. The average amounts outstanding under our revolving credit agreement were $27.0 million in 2008, $11.3 million in 2007 and $11.9million in 2006 with corresponding effective interest rates, including commitment fees and interest rate swap expense, of 3.9% in 2008, 7.1% in 2007 and7.9% in 2006. 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 year end 2008. We have three mortgages, one term loan and one construction loan, all of which are non-recourse to us, included on our consolidated balance sheet as ofDecember 31, 2008, with a combined outstanding balance of $32.7 million. The following table summarizes our outstanding mortgages and construction loanat December 31, 2008 (amounts in thousands): Facility Name OutstandingBalance(in thousands) InterestRate MaturityDateMedical Center of Western Connecticut fixed rate mortgage loan $3,574 8.3% 2010Summerlin Hospital MOB II fixed rate mortgage loan 8,469 8.3% 2010Kindred Hospital-Corpus Christi fixed rate mortgage loan 3,318 6.5% 2019Palmdale Medical Plaza term loan(a) 7,744 5.0% 2009Summerlin Hospital MOB III construction loan(b) 9,587 2.4% 2009Total $32,692 (a)This term loan is scheduled to mature on July 31, 2009 at variable interest rates based upon LIBOR plus 2.6% or the prime rate. This loan can beextended, at our option, for one year to July 31, 2010 at interest rates as provided for in the current loan agreement.(b)This construction loan is scheduled to mature on December 31, 2009 at variable interest rates based upon LIBOR plus 1.8%. This loan can be extended,at our option, for one year to December 31, 2010 at interest rates as provided for in the current loan agreement. The mortgages are secured by the real property of the buildings as well as property leases and rents. These mortgages and other loans have a combinedfair value of approximately $32.6 million as of December 31, 2008. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has noimpact on interest incurred or cash flow. 71Table of ContentsAs of December 31, 2008, our aggregate consolidated scheduled debt repayments (including mortgages, term loan and construction loan) are as follows(amounts in thousands): 2009 $17,7822010 11,7132011 672012(a.) 39,0712013 76Later 2,983Total $71,692 (a.)Consists of borrowings outstanding under the terms of our new $100 million revolving credit agreement entered into in January, 2007. (6)DIVIDENDS Dividends of $2.34 per share were declared and paid in 2008, of which $1.605 per share was ordinary income and $.735 per share was a return ofcapital distribution. 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 acapital gain distribution 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 per share was ordinary income, $0.160 per share was a capital gain distribution and $0.269 per share was a return of capital distribution. (7)INCENTIVE PLANS As discussed in Note 1, effective January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment” and related interpretations and beganexpensing the grant-date fair value of stock options. SFAS No. 123R generally requires companies to recognize the grant-date fair value of stock options andother equity-based compensation. SFAS 123R generally requires that a company account for these transactions using the fair-value based method andeliminates a company’s ability to account for share-based compensation transactions using the intrinsic value method of accounting provided in AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which was permitted under Statement No. 123, as originallyissued. During 2007, upon the expiration of our 1997 Incentive Plan, as discussed below, our Board of Trustees and shareholders approved the UniversalHealth Realty Income Trust 2007 Restricted Stock Plan (the “2007 Plan”). A total of 75,000 shares were authorized for issuance under this plan. During 2008,there were 6,325 restricted Shares of Beneficial Interest issued to Trustees and officers of the Trust pursuant to the 2007 Plan at a weighted average grant priceof $35.10 per share ($222,000 in the aggregate). These restricted shares are scheduled to vest on the second anniversary of the date of grant. During 2008, totalcompensation costs of approximately $44,000 was recognized in connection with these restricted stock grants and the remaining expense associated with theseawards (estimated at $179,000 at December 31, 2008) will be recorded over the remaining weighted average vesting period of 1.6 years. Prior to its expiration in 2007, the Universal Health Realty Income Trust 1997 Incentive Plan (the “1997 Plan”) provided for the granting of stockoptions and dividend equivalents rights (“DERs”) to employees of the Trust, including officers and trustees. Awards granted pursuant to the 1997 Plan priorto its termination date remain exercisable, in accordance with the terms of the outstanding agreements. All stock options were granted with an exercise priceequal to the fair market value on the date of the grant. The options granted vest ratably at 25% per year beginning one year after the date of grant, and expire inten years. DERs on outstanding awards are earned in amounts equal to the cash or stock dividends declared subsequent to the date of grant. We recordedexpenses relating to the dividend equivalent rights of $76,000 in 2008, $112,000 in 2007 and $195,000 in 2006. As of December 31, 2008, there were56,500 options exercisable under The Plan with an average exercise price of $24.82 per share. 72Table of ContentsCompensation costs of $137,000 during each of the years ended December 31, 2008 and 2007 and $82,000 during the year ended December 31, 2006,was recognized related to outstanding stock options and DERs that were granted or have vestings after January 1, 2006. As of December 31, 2008, there wasapproximately $221,000 of unrecognized compensation costs related to unvested options and DERs which is expected to be recognized over the remainingweighted average remaining vesting period of 2.0 years. During the fourth quarter of 2008, the Board of Trustees of the Trust approved amendments to the outstanding stock option agreements made pursuantto the 1997 Plan. These original agreements provided for the deferred payment of dividend equivalents on shares covered by the options, with payment tied tothe date the options were exercised or expire. In order to meet certain recent changes to tax law requirements, the agreements, as amended, provide for the currentpayment of dividend equivalents in the years in which dividends are declared and paid or, if later, when the related options become vested. As ofDecember 31, 2008, dividend equivalent rights with respect to 78,000 shares were outstanding. In January, 2009, $755,563 of dividend equivalents rights,which were accrued as of December 31, 2008 with respect to previously vested options, were paid to officers and Trustees of the Trust. 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, 2008 2007 2006 Volatility (b) 18% 17%Interest rate (b) 4% 4%Expected life (years) (b) 9.5 9.2 Forfeiture rate (b) 2% 2%Dividend yield(a) (b) 0% 0% (a)Fair value calculated at 0% expected dividend yield to provide for effect of DERs.(b)Not applicable since the stock option plan expired during 2007. Stock options to purchase shares of beneficial interest have been granted to eligible individuals, including our officers and trustees. Information withrespect 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, 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, January 1, 2008 83,000 $27.51 $36.53/$14.75Exercised (5,000) $20.5313 $21.4375/$19.625Balance, December 31, 2008 78,000 $27.96 $36.53/$14.75 The total in-the-money value of all stock options exercised during the years ended December 31, 2008 and December 31, 2007 was $66,000 and$836,000, respectively. There were no options granted, exercised or cancelled during 2006. 73Table of ContentsThe following table provides information about unvested options as of December 31, 2008: Shares WeightedAverageGrant DateFair ValueUnvested options as of January 1, 2008 32,000 $14.38Granted — $— Vested (10,500) $14.07Cancelled — $— Unvested options as of December 31, 2008 21,500 $14.53 The following table provides information about options outstanding and exercisable options at December 31, 2008: OptionsOutstanding OptionsExercisable Expectedto VestNumber 78,000 56,500 21,126Weighted average exercise price $27.96 $24.82 $36.21Aggregate intrinsic value $503,600 $502,888 $— Weighted average remaining contractual life 5.0 3.9 7.4 The 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, 2008 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 1.2 24,000 $14.75 N/A N/A$26.09 -$27.65 9,000 26.85 3.9 9,000 26.85 N/A N/A$29.44 -$30.06 4,000 29.60 5.2 3,750 29.56 246 30.06$34.07 -$34.90 17,000 34.70 6.5 13,750 34.66 3,193 34.90$36.53 -$36.53 24,000 36.53 8.2 6,000 36.53 17,687 36.53Total 78,000 $27.96 5.0 56,500 $24.82 21,126 $36.21 (a)Assumes a weighted average forfeiture rate of 1.7% (8)SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES Since January 1, 1995 through December 31, 2008, we have invested $79.5 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, 2008, short-term unsecured advances aggregated $17.4 million due from six LLCs. Including the cumulative adjustmentsfor our share of equity in the net income of the LLCs and cash contributions to and distributions from these investments, our net investment in LLCs was$56.5 million and $52.0 million (excluding consolidated investments) as reflected on our consolidated balance sheets as of December 31, 2008 and 2007,respectively. 74Table of ContentsAs of December 31, 2008, we had investments or commitments to invest in twenty-nine LLCs, twenty-six of which are accounted for by the equitymethod and three that are consolidated into the results of operations. The following tables represent summarized financial and other information related to thetwenty-six LLCs which were accounted for under the equity method as of December 31, 2008: 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(i.) 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 Medical Office Building IIPCH Southern Properties 95% Phoenix Children’s East Valley Care CenterCentennial Medical Properties(b.)(f.) 95% Centennial Hills Medical Office Building ICanyon Healthcare Properties 95% Canyon Springs Medical Plaza653 Town Center Drive(b.)(g.) 95% Summerlin Hospital Medical Office BuildingDesMed(b.)(g.) 99% Desert Springs Medical PlazaDeerval Properties II(h.)(i.) 95% Deer Valley Medical Office Building IIICobre Properties 95% Cobre Valley Medical PlazaSparks Medical Properties(b.)(j.) 95% Vista Medical Terrace & The Sparks Medical BuildingAuburn Medical Properties II(b.)(k.) 95% Auburn Medical Office Building II (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 or will include subsidiaries of UHS.(c.)We have committed to invest a total of $6.3 million in equity, of which $5.2 million has been funded as of December 31, 2008. As of December 31,2008, the LLC has an outstanding mortgage loan balance of $27.3 million from a third party, which is non-recourse to us.(d.)We have committed to invest a total of up to $5.2 million in equity and debt financing, of which $3.1 million in equity and $1.6 million in debtfinancing has been funded as of December 31, 2008. The LLC has a $5.9 million loan from a third party, which is non-recourse to us. This medicaloffice building opened during the first quarter of 2006.(e.)We have committed to invest a total of up to $12.0 million in equity and debt financing, of which $10.8 million has been funded as of December 31,2008. This building was completed and opened during the second quarter of 2007.(f.)We have committed to invest up to $5.4 million in equity and debt financing, $1.7 million of which has been funded as of December 31, 2008. TheLLC has a $15.7 million construction loan commitment from a third- party, which is non-recourse to us, of which $15.4 million has been borrowed asof December 31, 2008. This building was completed and opened during the fourth quarter of 2007.(g.)We began recording these LLCs on an unconsolidated basis during the fourth quarter of 2006. 75Table of Contents(h.)We have committed to invest up to $5.0 million in equity and debt financing, of which $1.3 million has been funded as of December 31, 2008, inexchange for a 95% non-controlling interest in a LLC that will construct, own and operate the Deer Valley Medical Office Building III in Phoenix,Arizona. The LLC has a $13.6 million construction loan commitment with a third-party, which is non-recourse to us, of which $6.6 million has beenborrowed as of December 31, 2008. This project is scheduled to be completed and opened during the first quarter of 2009.(i.)Deerval Parking Company, LLC, which owns the real property of a parking garage located near Deer Valley Medical Office Buildings II and III, is 50%owned by each of Deerval Properties and Deerval Properties II. We have committed to invest a total of up to $2.0 million in equity in this LLC, of which$1.3 million has been funded as of December 31, 2008. This LLC has a $5.7 million third party financing commitment, of which $4.7 million hasbeen borrowed as of December 31, 2008.(j.)We have committed to invest up to $4.8 million in equity and debt financing, of which $2.3 million has been funded as of December 31, 2008. TheseMOBs, which are on the campus of a UHS hospital, were acquired by the LLC during the third quarter of 2008.(k.)We have committed to invest up to $4.7 million in debt or equity, none of which has been funded as of December 31, 2008, in exchange for a 95% non-controlling equity interest in a LLC that will construct, own and operate the Auburn Medical Office Building II, located in Auburn, Washington on thecampus of a UHS hospital. This building, tenants of which will include subsidiaries of UHS, is scheduled to be completed and opened during thefourth quarter of 2009. Below are the combined statements of income for the LLCs accounted for under the equity method: For the Year Ended December 31, 2008 2007 2006 (amounts in thousands)Revenues $46,612 $40,040 $34,524Operating expenses 21,444 17,987 14,853Depreciation and amortization 8,843 7,189 5,603Interest, net 14,904 12,100 10,631Net income before gain 1,421 2,764 3,437Gains on sales — 339 — Net income $1,421 $3,103 $3,437Our share of net income before gains on divestitures(a.) $2,052 $2,557 $2,381Our share of gains on divestitures(b.) — 264 1,860Our share of net income $2,052 $2,821 $4,241 (a.)Our share of net income during 2008, 2007 and 2006, includes interest income earned by us on various advances made to LLCs of approximately $1.4million, $700,000 and $155,000, respectively.(b.)During the first 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. 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 76Table of Contentsfourth quarter of 2006 for these two properties were $834,000, the combined operating expenses were $377,000, the combined depreciation and amortizationexpenses were $172,000 and the combined net interest expense was $192,000. For the year ended December 31, 2006, the amount of combined revenuereflected on our consolidated income statement for these two LLCs while accounted for on a consolidated basis, and therefore not included in the table above,totaled $3.8 million, the amount of combined operating expenses were $1.6 million, the combined depreciation and amortization expenses were $736,000 andthe combined net interest expense was $715,000. There was no impact on our net income as a result of recording these two LLCs on an unconsolidated basis. Below are the combined balance sheets for the LLCs accounted for under the equity method: December 31, 2008 2007 (amounts in thousands)Net property, including CIP $268,588 $247,514Other assets 23,143 22,859Total assets $291,731 $270,373Liabilities $11,418 $10,707Mortgage notes payable, non-recourse to us 230,481 214,912Notes payable to us 17,350 14,035Equity 32,482 30,719Total liabilities and equity $291,731 $270,373Our share of equity and notes receivable from LLCs $56,462 $52,030 As of December 31, 2008, 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): 2009 $10,6622010 63,1022011 11,8162012 21,0532013 10,251Later 113,597Total $230,481 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, three 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 or advanced a total of $9.7 million, are not covered by earthquake insurance since earthquake insurance is no longeravailable at rates which are economical in relation to the risks covered. 77Table of Contents(9)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. (10)QUARTERLY RESULTS (unaudited) 2008 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts)Revenues $6,979 $7,237 $7,426 $7,542 $29,184Net income/(loss) $4,158 $4,159 $4,206 $(870) $11,653Total basic earnings/(loss) per share $0.35 $0.35 $0.35 $(0.07) $0.98Total diluted earnings/(loss) per share $0.35 $0.35 $0.35 $(0.07) $0.98 During the fourth quarter of 2008, we recorded a $4.6 million provision for asset impairment in connection with a medical office building complexlocated in Georgia. 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. 78Table of ContentsSchedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation—December 31, 2008(amounts in thousands) Initial Cost toUniversal HealthRealty Income Trust Net costcapitalized/divestedsubsequent toacquisition Gross amount atwhich carriedat close of period AccumulatedDepreciationas of Dec. 31,2008 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 $14,596 $2,050 $25,297 — $27,347 $6,911 2007 1986 43 YearsMcAllen Medical CenterMcAllen, Texas 4,720 31,442 10,188 6,281 40,069 — 46,350 18,714 1994 1986 42 YearsWellington Regional Medical CenterWest Palm Beach, Florida 1,190 14,652 17,370 1,663 31,549 — 33,212 9,804(a.) 2006 1986 42 YearsThe BridgewayNorth Little Rock, Arkansas 150 5,395 4,571 150 9,966 — 10,116 4,029 2006 1986 35 YearsHealthSouth Deaconess Rehabilitation HospitalEvansville, Indiana 500 6,945 1,062 500 8,007 — 8,507 3,850 1993 1989 40 YearsKindred Hospital Chicago CentralChicago, Illinois 158 6,404 1,837 158 8,241 — 8,399 7,007 1993 1986 25 YearsFamily Doctor’s Medical Office BuildingShreveport, Louisiana 54 1,526 494 54 2,020 — 2,074 616 1991 1995 45 YearsKelsey-Seybold Clinic at King’s Crossing 439 1,618 256 439 1,874 — 2,313 566 1995 1995 45 YearsProfessional Center at King’s CrossingKingwood, Texas 439 1,837 142 439 1,979 — 2,418 574 1995 1995 45 YearsChesterbrook AcademyAudubon, Pennsylvania 307 996 — 307 996 — 1,303 280 1996 1996 45 YearsChesterbrook AcademyNew Britain, Pennsylvania 250 744 — 250 744 — 994 210 1991 1996 45 YearsChesterbrook AcademyUwchlan, Pennsylvania 180 815 — 180 815 — 995 229 1992 1996 45 YearsChesterbrook AcademyNewtown, Pennsylvania 195 749 — 195 749 — 944 211 1992 1996 45 YearsThe Southern Crescent Center I(c.) 1,130 5,092 (3,095) 1,130 1,997 — 3,127 1,512 1994 1996 45 YearsThe Southern Crescent Center II(c.)Riverdale, Georgia — — 3,798 806 2,992 — 3,798 1,076 2000 1998 35 YearsThe Cypresswood Professional CenterSpring, Texas 573 3,842 355 573 4,197 — 4,770 1,313 1997 1997 35 YearsOrthopaedic Specialists of Nevada BuildingLas Vegas, Nevada — 1,579 — — 1,579 — 1,579 584 1999 1999 25 YearsSheffield Medical BuildingAtlanta, Georgia 1,760 9,766 1,700 1,760 11,466 — 13,226 4,135 1999 1999 25 YearsMedical Center of Western Connecticut—Bldg. 73(a.)Danbury, Connecticut 1,151 5,176 356 1,151 5,532 — 6,683 1,633 2000 2000 30 YearsSummerlin Hospital MOB II(b.)Las Vegas, Nevada 158 13,073 1,697 158 14,770 — 14,928 2,714 2000 2000 40 YearsPalmdale Medical Plaza(d.)Palmdale, California — 11,414 — — 11,414 — 11,414 146 2007 2007 39 YearsKindred Hospital-Corpus Christi(e.)Corpus Christi, Texas 1,104 5,508 — 1,104 5,508 — 6,612 141 2008 2008 35 YearsSummerlin Hospital MOB III(f.)Las Vegas, Nevada — — — — — 9,795 9,795 — 2008 2008 n/aTOTALS $16,508 $139,274 $55,327 $19,348 $191,761 $9,795 $220,904 $66,255 (a.)At December 31, 2008 this property had an outstanding mortgage balance of $3.6 million. The mortgage carries a 8.3% interest rate and matures on February 1, 2010. The mortgage is non-recourse to us and issecured by the real estate assets of Medical Center of Western Connecticut. 79Table of Contents(b.)At December 31, 2008 this property had an outstanding mortgage balance of $8.5 million. The mortgage carries a 8.3% interest rate and matures on December 10, 2010. The mortgage is non-recourse to us andis secured by the real estate assets of Summerlin Hospital MOB II.(c.)During 2008, a $4.6 million provision for asset impairment was recorded in connection with the real estate assets of Southern Crescent Center I & Southern Crescent Center II.(d.)At December 31, 2008 this property had an outstanding term loan balance of $7.7 million which carried a 5.0% interest rate and is scheduled to mature on July 31, 2009. This loan can be extended, at our option,for one year to July 31, 2010.(e.)At December 31, 2008 this property had an outstanding mortgage balance of $3.3 million. The mortgage carries a 6.5% interest rate and is scheduled to mature in 2019. The mortgage is non-recourse to us and issecured by the Kindred Hospital-Corpus Christi.(f.)At December 31, 2008 this property had an outstanding construction loan balance of $9.6 million which carries a variable interest rate (2.4% as of December 31, 2008) and is scheduled to mature onDecember 31, 2009. This loan can be extended, at our option, for one year to December 31, 2010. 80Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO SCHEDULE IIIDECEMBER 31, 2008(amounts in thousands) (1)RECONCILIATION OF REAL ESTATE PROPERTIES The following table reconciles the Real Estate Properties from January 1, 2006 to December 31, 2008: 2008 2007 2006 Balance at January 1, $204,424 $200,298 $210,594 Initial consolidation of variable interest entities — 2,017 — Impact of deconsolidating two LLCs — — (31,804)Property additions 14,684 6,163 1,294 Acquisitions 6,607 — — Provision for asset impairment (4,575) — — Replacement property from UHS — 2,508 22,214 Divestitures/disposals (236) (6,562) (2,000)Balance at December 31, $220,904 $204,424 $200,298 (2)RECONCILIATION OF ACCUMULATED DEPRECIATION The following table reconciles the Accumulated Depreciation from January 1, 2006 to December 31, 2008: 2008 2007 2006 Balance at January 1, $60,627 $56,935 $57,729 Impact of deconsolidating two LLCs — — (6,232)Sale of real property — (1,438) — Other (86) (37) — Current year depreciation expense 5,714 5,167 5,438 Balance at December 31, $66,255 $60,627 $56,935 81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 4, 2008, 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 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.10.7* 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.10.8 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.10.9 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.10.10 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. 82Table of ContentsExhibit No. Exhibit10.11 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.10.12* Universal Health Realty Income Trust 2007 Restricted Stock Plan, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form8-K, dated April 27, 2007, is incorporated herein by reference.10.13* 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 theSarbanes-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 theSarbanes-Oxley Act of 2002. *Management contract or compensatory plan or arrangement. 83Exhibit 10.2December 4, 2008Steve 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 4, 2008 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, 2009, 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 ConnecticutCypresswood Investments, L.P GeorgiaRiverdale Realty, LLC GeorgiaSheffield Properties, LLC GeorgiaCimarron Medical Properties, LLC TexasSaratoga 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. 333-143944 and 333-57815) on Form S-8 and in the registration statements(Nos. 333-81763 and 333-60638) on Form S-3 of Universal Health Realty Income Trust of our reports dated March 12, 2009, with respect to the consolidatedbalance sheets of Universal Health Realty Income Trust as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’equity, cash flows for each of the years in the three-year period ended December 31, 2008, and the related financial statement schedule, and the effectiveness ofinternal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 annual report on Form 10-K of UniversalHealth Realty Income Trust./s/ KPMG LLPPhiladelphia, PennsylvaniaMarch 12, 2009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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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 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 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 12, 2009 /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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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 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 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 12, 2009 /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, 2008 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 results 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 12, 2009A 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, 2008, 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 results 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 12, 2009A 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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