Universal Health Realty Income Trust
Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-Kx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 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 x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x 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 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes x 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 x Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smallerreporting 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, 2014: $555,012,765 (For the purpose of this calculationonly, all members of the Board of Trustees are deemed to be affiliates). Number of shares of beneficial interest outstanding of registrant as of January 31,2015: 13,301,298 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for our 2015 Annual Meeting of Shareholders, which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 2014 (incorporated by reference under Part III). Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST2014 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS PART I Item 1 Business 1 Item 1A Risk Factors 9 Item 1B Unresolved Staff Comments 19 Item 2 Properties 20 Item 3 Legal Proceedings 26 Item 4 Mine Safety Disclosures 26 PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6 Selected Financial Data 28 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 31 Item 7A Quantitative and Qualitative Disclosures About Market Risk 51 Item 8 Financial Statements and Supplementary Data 52 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 52 Item 9A Controls and Procedures 52 Item 9B Other Information 55 PART III Item 10 Directors, Executive Officers and Corporate Governance 55 Item 11 Executive Compensation 55 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 55 Item 13 Certain Relationships and Related Transactions, and Director Independence 55 Item 14 Principal Accountant Fees and Services 55 PART IV Item 15 Exhibits and Financial Statement Schedules 56 SIGNATURES 58 Index to Financial Statements and Schedule 59 Exhibit Index 94 Exhibit 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, 2014. This Annual Report modifies and supersedes documents filed prior to thisAnnual Report. Information that we file with the Securities and Exchange Commission (the “SEC”) in the future will automatically update and supersedeinformation contained in this Annual Report. In this Annual Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and itssubsidiaries. As disclosed in this Annual Report, including in Part I, Item 1.-Relationship with Universal Health Services, Inc. (“UHS”), a wholly-owned subsidiaryof UHS (UHS of Delaware, Inc.) serves as our Advisor pursuant to the terms of an annually renewable Advisory Agreement dated December 24, 1986. Ourofficers are all employees of UHS through its wholly-owned subsidiary, UHS of Delaware, Inc. In addition, three of our hospital facilities are leased tosubsidiaries of UHS and thirteen medical office buildings, including certain properties owned by limited liability companies in which we either hold 100% ofthe ownership interest or various non-controlling, majority ownership interests, include or will include tenants which are subsidiaries of UHS. Any referenceto “UHS” or “UHS facilities” in this report is referring to Universal Health Services, Inc.’s subsidiaries, including UHS of Delaware, Inc. In this Annual Report, the term “revenues” does not include the revenues of the unconsolidated limited liability companies (“LLCs”) in which we havevarious non-controlling equity interests ranging from 33% to 95%. We currently account for our share of the income/loss from these investments by theequity method (see Note 8 to the Consolidated Financial Statements included herein).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 facilitiescurrently including acute care hospitals, rehabilitation hospitals, sub-acute facilities, surgery centers, free-standing emergency departments, childcare centersand medical office buildings (“MOBs”). As of February 28, 2015 we have sixty-one real estate investments or commitments located in eighteen states in theUnited States consisting of: (i) six hospital facilities including three acute care, one rehabilitation and two sub-acute; (ii) forty-eight MOBs; (iii) three free-standing emergency departments, and; (iv) 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 ourwebsite. 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 atour King of Prussia, PA corporate headquarters. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to orwaivers of any provision of our Code of Ethics for Senior Officers by promptly posting this information on our website. The information posted on ourwebsite is not incorporated 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 2014. 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 February 28, 2015, we have investments in sixty-one facilities, located in eighteen 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.Kindred Hospital Chicago Central(B) Chicago, IL Sub-Acute Care 100% Kindred Healthcare, Inc.Vibra Hospital of Corpus Christi(B) Corpus Christi, TX Sub-Acute Care 100% Kindred Healthcare, Inc.HealthSouth Deaconess Rehabilitation Hospital(F) Evansville, IN Rehabilitation 100% HealthSouth CorporationFamily Doctor’s Medical Office Bldg.(B) Shreveport, LA MOB 100% Christus Health Northern LouisianaKelsey-Seybold Clinic at Kings Crossing(B) Kingwood, TX MOB 100% Kelsey-SeyboldMedical Group, PLLCProfessional Bldgs. at Kings Crossing Building A(B) Kingwood, TX MOB 100% —Building B(B) Kingwood, TX MOB 100% —Chesterbrook Academy(B) Audubon, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs. 1Table of ContentsFacility Name Location Type of Facility Ownership GuarantorChesterbrook Academy(B) New Britain, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Chesterbrook Academy(B) Newtown, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Chesterbrook Academy(B) Uwchlan, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs.Southern Crescent Center I(B) Riverdale, GA MOB 100% —Southern Crescent Center, II(D) Riverdale, GA MOB 100% —Suburban Medical Plaza II(C) Louisville, KY MOB 33% —Desert Valley Medical Center(E) Phoenix, AZ MOB 100% —Cypresswood Professional Center(B) 8101 Spring, TX MOB 100% —8111 Spring, TX MOB 100% —Desert Springs Medical Plaza(D) Las Vegas, NV MOB 100% —701 South Tonopah Bldg.(A) Las Vegas, NV MOB 100% —Santa Fe Professional Plaza(E) Scottsdale, AZ MOB 100% —Sheffield Medical Building(B) Atlanta, GA MOB 100% —Summerlin Hospital MOB I(D) Las Vegas, NV MOB 100% —Summerlin Hospital MOB II(D) Las Vegas, NV MOB 100% —Medical Center of Western Connecticut(B) Danbury, CT MOB 100% —Mid Coast Hospital MOB(C) Brunswick, ME MOB 74% —Rosenberg Children’s Medical Plaza(E) Phoenix, AZ MOB 100% —Gold Shadow(D) 700 Shadow Lane MOB Las Vegas, NV MOB 100% —2010 & 2020 Goldring MOBs Las Vegas, NV MOB 100% —St. Mary’s Professional Office Building(C) Reno, NV MOB 75% —Apache Junction Medical Plaza(E) Apache Junction, AZ MOB 100% —Spring Valley Medical Office Building(E) Las Vegas, NV MOB 100% —Spring Valley Hospital Medical Office Building II(D) Las Vegas, NV MOB 100% —Sierra San Antonio Medical Plaza(E) Fontana, CA MOB 100% —Phoenix Children’s East Valley Care Center(E) Phoenix, AZ MOB 100% —Centennial Hills Medical Office Building(D) Las Vegas, NV MOB 100% —Palmdale Medical Plaza(D) Palmdale, CA MOB 100% —Summerlin Hospital Medical Office Building III(D) Las Vegas, NV MOB 100% —Vista Medical Terrace(D) Sparks, NV MOB 100% —The Sparks Medical Building(D) Sparks, NV MOB 100% —Auburn Medical Office Building II(E) Auburn, WA MOB 100% —Texoma Medical Plaza(G) Denison, TX MOB 95% —BRB Medical Office Building(E) Kingwood, TX MOB 100% —North Valley Medical Plaza(E) Phoenix, AZ MOB 100% —Lake Pointe Medical Arts Building(E) Rowlett, TX MOB 100% —Forney Medical Plaza(E) Forney, TX MOB 100% —Tuscan Professional Building(E) Irving, TX MOB 100% —Emory at Dunwoody Building(E) Atlanta, GA MOB 100% —PeaceHealth Medical Clinic(E)(H) Bellingham, WA MOB 100% —Forney Medical Plaza II(J) Forney, TX MOB 95% —Northwest Texas Professional Office Tower(E) Amarillo, TX MOB 100% —5004 Poole Road MOB(A) Denison, TX MOB 100% —Ward Eagle Office Village(E) Farmington Hills, MI MOB 100% —The Children’s Clinic at Springdale(E) Springdale, AR MOB 100% —The Northwest Medical Center at Sugar Creek(E) Bentonville, AR MOB 100% —Hanover Emergency Center (E)(K) Mechanicsville, VA Free-standingEmergency 100% —Weslaco Free-standing Emergency Department(L) Weslaco, TX Free-standingEmergency 100% —Mission Free-standing Emergency Department(L) Mission, TX Free-standingEmergency 100% —Haas Medical Office Park (E)(I) Ottumwa, IA MOB 100% Regional Hospital Partners (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 noncontrolling ownership interest as indicated above and include tenants who are unaffiliated third-parties.(D)Real estate assets owned by us or an LLC in which we hold 100% ownership interests and include tenants who are subsidiaries of UHS. 2Table of Contents(E)Real estate assets owned by us or an LLC in which we hold 100% ownership interests and include tenants who are unaffiliated third-parties.(F)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 lease with Deaconess is scheduled to expire on May 31, 2019.(G)Real estate assets owned by an LLC in which we have a noncontrolling ownership interest as indicated above. Tenants of this MOB include subsidiaries of UHS.(H)This MOB was acquired during the first quarter of 2012. In connection with the third-party loan agreement on this property, we are required to maintain separate financial records for the related entities.(I)This MOB was acquired during the first quarter of 2015.(J)Real estate assets owned by a limited partnership (“LP”) in which we have a noncontrolling ownership interest as indicated above and include tenants who are unaffiliated third-parties.(K)This free-standing emergency department was acquired during the third quarter of 2014 and has a 10-year initial term lease agreement with HCA Health Services of Virginia, Inc.(L)This free-standing emergency department was acquired during the first quarter of 2015 and has a 10-year initial term lease agreement with a subsidiary of UHS. Other Information Included in our portfolio at December 31, 2014 are six hospital facilities with an aggregate investment of $130.4 million, (excluding the Bridgewaywhich was sold on December 31, 2014, as discussed below). The leases with respect to the seven hospital facilities, including the Bridgeway, comprisedapproximately 33% of our consolidated revenues in 2014 and approximately 36% of our consolidated revenues in each of 2013 and 2012. As of January 1, 2015, the leases on our six hospital facilities have fixed terms with an average of 2.8 years remaining and include renewal optionsranging from one to five, five-year terms. The remaining lease terms for each hospital facility, which vary by hospital, are included herein in Item 2.Properties. 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 and ourinvestors 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 (including Bridgeway which was sold on December 31, 2014, as discussedherein), the combined weighted average Coverage Ratio was approximately 8.0 (ranging from 2.7 to 18.3) during 2014, 6.3 (ranging from 2.5 to 18.5) during2013 and 5.9 (ranging from 2.1 to 14.4) during 2012. The Coverage Ratio for individual facilities varies. See “Relationship with Universal Health Services,Inc.” below for Coverage Ratio information related to the hospital facilities leased to subsidiaries of UHS. Pursuant to the terms of the leases for our hospital facilities, free-standing emergency departments and the preschool and childcare centers, each lessee,including subsidiaries of UHS, is responsible for building operations, maintenance, renovations and property insurance. We, or the LLCs in which we haveinvested, are responsible for the building operations, maintenance and renovations of the MOBs, however, a portion, or in some cases all, of the expensesassociated with the MOBs are passed on directly to the tenants. Cash reserves have been established to fund required building maintenance and renovationsat the multi-tenant MOBs. Lessees are required to maintain all risk, replacement cost and commercial property insurance policies on the leased properties andwe, or the LLC in which we have invested, are also named insureds on these policies. In addition, we, UHS or the LLCs in which we have invested, maintainproperty insurance on all properties. 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 ourtotal assets, liabilities, debt, revenues, income and other operating information. 3Table of ContentsRelationship with Universal Health Services, Inc. (“UHS”) Leases: We commenced operations in 1986 by purchasing properties of certain subsidiaries from UHS and immediately leasing the properties back tothe respective subsidiaries. The hospital leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years withup to six additional 5-year renewal terms. The current base rentals and lease and rental terms for each hospital leased to subsidiaries of UHS are providedbelow. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis basedupon a computation that compares current quarter revenue to a corresponding quarter in the base year. The hospital leases with subsidiaries of UHS areunconditionally 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 36% of our total revenue for the fiveyears ended December 31, 2014 (approximately 28% for the year ended December 31, 2014 and approximately 30% for each of the years endedDecember 31, 2013 and 2012). The decrease during 2014 as compared to 2013, is due primarily to the 2014 purchase of the third-party minority ownershipinterests in eight LLCs in which we previously held noncontrolling majority ownership interests. As a result of these transactions, we own 100% of each ofthese LLCs and began accounting for each on a consolidated basis effective on the date of purchase of the minority ownership interests. Including 100% ofthe revenues generated at the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%, the leases on theUHS hospital facilities accounted for approximately 20% of the combined consolidated and unconsolidated revenue for the five years ended December 31,2014 (approximately 22% for each of the years ended December 31, 2014 and 2013 and 21% for the year ended December 31, 2012). In addition, includingthe two free-standing emergency departments (“FEDs”) acquired by us from subsidiaries of UHS during the first quarter of 2015 (as discussed below), fifteenMOBs/FEDs, that are either wholly or jointly-owned, include tenants which are subsidiaries 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, the Master Lease, asamended during 2006, includes a change of control provision whereby UHS has the right, upon one month’s notice should a change of control of the Trustoccur, to purchase any or all of the three leased hospital properties listed below at their appraised fair market value. During the third quarter of 2014, a wholly-owned subsidiary of UHS provided notification to us that, upon expiration of The Bridgeway’s lease termwhich occurred in December, 2014, it intended to exercise its option to purchase the real property of the facility. Upon expiration of the lease, the wholly-owned subsidiary of UHS exercised its option to purchase the real property of the facility and on December 31, 2014, The Bridgeway, a 103-bed behavioralhealth facility located in North Little Rock, Arkansas, was sold to UHS. Pursuant to the terms of the lease, we and the wholly-owned subsidiary of UHS wereboth required to obtain appraisals of the property to determine its fair market value. Based upon the independent property appraisals obtained by each party,the sales price of The Bridgeway was $17.3 million. A gain on divestiture of approximately $13.0 million is included in our results of operations for thetwelve-month period ended December 31, 2014. During each of the last three years, our revenues, net cash provided by operating activities and funds fromoperations have included approximately $1.1 million earned annually in connection with The Bridgeway’s lease. During the first quarter of 2015, we purchased, from UHS, the real property of two newly-constructed and recently opened FEDs located in Weslaco andMission, Texas. Each FED consists of approximately 13,600 square feet and will be operated by wholly-owned subsidiaries of UHS. In connection with theseacquisitions, 4Table of Contentsten-year lease agreements with six, 5-year renewal terms have been executed with UHS for each FED. The first four, 5-year renewal terms (covering years 2025through 2044) include 2% annual lease rate increases, computed on accumulative and compounded basis, and the last two, 5-year renewal terms (coveringthe years 2045 through 2054) will be at the then fair market value lease rates. The aggregate acquisition cost of these facilities was approximately $12.8million, and the aggregate rental revenues earned by us at the commencement of the leases will be approximately $900,000 annually. These two leases arecross defaulted with one another. The table below details the existing lease terms and renewal options for each of the UHS hospital facilities: Hospital Name Type of Facility AnnualMinimumRent End of Lease Term RenewalTerm(years) McAllen Medical Center Acute Care $5,485,000 December, 2016 15(a) Wellington Regional Medical Center Acute Care $3,030,000 December, 2016 15(b) Southwest Healthcare System, Inland Valley Campus Acute Care $2,648,000 December, 2016 15(b) (a)UHS has three 5-year renewal options at existing lease rates (through 2031).(b)UHS has one 5-year renewal option at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through2031). Management cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates or fair market value leaserates, or any of our other leases, will be renewed at the end of their lease term. If the leases are not renewed at their current rates or the fair market value leaserates, we would be required to find other operators for those facilities and/or enter into leases on terms potentially less favorable to us than the current leases.In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities upon expiration of the lease terms, our futurerevenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currently earnedpursuant to the hospital leases. Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an Advisory Agreement(the “Advisory Agreement”) dated December 24, 1986. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us,to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), toprovide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who areunaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilize independentprofessional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may beterminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees,that the Advisor’s performance has been satisfactory. Our advisory fee was 0.70% during each of 2014 and 2013, and 0.65% during 2012, of our averageinvested real estate assets, as derived from our consolidated balance sheet. In December of 2014, based upon a review of our advisory fee and other generaland administrative expenses, as compared to an industry peer group, the Advisory Agreement was renewed for 2015 pursuant to the same terms as theAdvisory Agreement in place during 2014 and 2013. The average real estate assets for advisory fee calculation purposes exclude certain items from our consolidated balance sheet such as, among otherthings, accumulated depreciation, cash and cash equivalents, base and bonus rent receivables, deferred charges and other assets. The advisory fee is payablequarterly, subject to adjustment at year-end based upon our audited financial statements. In addition, the Advisor is entitled to an annual incentive fee equalto 20% of the amount by which cash available for distribution to shareholders for each 5Table of Contentsyear, as defined in the Advisory Agreement, exceeds 15% of our equity as shown on our consolidated balance sheet, determined in accordance with generallyaccepted 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. No incentive fees were paid during 2014, 2013 or 2012 since the incentive feerequirements were not achieved. Advisory fees incurred and paid (or payable) to UHS amounted to $2.5 million during 2014, $2.4 million during 2013 and$2.1 million during 2012 and were based upon average invested real estate assets of $363 million, $338 million and $326 million during 2014, 2013 and2012, respectively. Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of December 31, 2014 we had nosalaried employees, our officers do typically receive annual stock-based compensation awards in the form of restricted stock. In special circumstances, ifwarranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may also receive one-time compensation awards inthe form of restricted stock and/or cash bonuses. Share Ownership: As of December 31, 2014 and 2013, UHS owned 5.9% and 6.1%, respectively, of our outstanding shares of beneficial interest. SEC reporting requirements of UHS: UHS is subject to the reporting requirements of the Securities and Exchange Commission (“SEC”) and isrequired to file annual reports containing audited financial information and quarterly reports containing unaudited financial information. Since the leases onthe hospital facilities leased to wholly-owned subsidiaries of UHS comprised approximately 28% of our consolidated revenues for the year endedDecember 31, 2014 and 30% of our consolidated revenues for each of the years ended December 31, 2013 and 2012, and since a subsidiary of UHS is ourAdvisor, you are encouraged to obtain the publicly available filings for Universal Health Services, Inc. from the SEC’s website at www.sec.gov. These filingsare the sole responsibility 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, 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 federal corporate incometaxes on our net income that is currently distributed to shareholders. This treatment substantially eliminates the “double taxation”, i.e., at the corporate andshareholder levels, that usually results from investment in the stock of a corporation. Please see the heading “If we fail to maintain our REIT status, we will become subject to federal income tax on our taxable income at regularcorporate 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 the 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 endowmentsand charitable contributions and exempt from property, sales and income taxes. Such exemptions and support are not available to certain operators of ourfacilities, including UHS. In some markets, certain competing facilities may have greater financial resources, be better equipped and offer a broader range ofservices than those available at our 6Table of Contentsfacilities. Certain hospitals that are located in the areas served by our facilities are specialty hospitals that provide medical, surgical and behavioral healthservices that may not be provided by the operators of our hospitals. The increase in outpatient treatment and diagnostic facilities, outpatient surgical centersand freestanding ambulatory surgical centers also increases competition for us. In 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 admission 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 hospitals may experience the effects of a shortage of skilled nursing staff nationwide, which has caused andmay continue to cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Our operators may experience difficulties attractingand retaining qualified physicians, nurses and medical support personnel. We anticipate that our operators, including UHS, will continue to encounterincreased competition in the future that could lead to a decline in patient volumes and harm their businesses, which in turn, could harm our business. A large portion of our non-hospital properties consist of MOBs which are located either close to or on the campuses of hospital facilities. Theseproperties are either directly or indirectly affected by the factors discussed above as well as general real estate factors such as the supply and demand of officespace and market rental rates. To improve our competitive position, we anticipate that we will continue investing in additional healthcare related facilitiesand leasing the facilities to qualified operators, perhaps including subsidiaries of UHS. Regulation and Other Factors During 2014, 2013 and 2012, 25%, 28% and 28%, 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). Our hospital facilities derive a significant portion of their revenue from third-party payors, including the Medicare and Medicaid programs. Changes inthese government programs in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement for healthcareservices. Payments from federal and state government programs are subject to statutory and regulatory changes, administrative rulings, interpretations anddeterminations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease programpayments, as well as affect the cost of providing service to patients and the timing of payments to facilities. Neither we nor the operators of our hospitalfacilities are able to predict the effect of recent and future policy changes on our respective results of operations. In addition, the uncertainty and fiscalpressures placed upon federal and state governments as a result of, among other things, the funding requirements and other provisions of the PatientProtection and Affordable Care Act, may affect the availability of taxpayer funds for Medicare and Medicaid programs. If the rates paid or the scope ofservices covered by government payors are reduced, there could be a material adverse effect on the business, financial position and results of operations ofthe operators of our hospital facilities, and in turn, ours. In addition, the healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local governmentlevels relating to, among other things: hospital billing practices and prices for services; relationships with physicians and other referral sources; adequacy ofmedical care and quality of medical equipment and services; ownership of facilities; qualifications of medical and support personnel; confidentiality,maintenance, privacy and security issues associated with health-related information and patient medical records; the screening, stabilization and transfer ofpatients who have emergency medical conditions; certification, licensure and accreditation of our facilities; operating policies and procedures, and;construction or expansion of facilities and services. 7Table of ContentsThese laws and regulations are extremely complex, and, in many cases, the operators of our facilities do not have the benefit of regulatory or judicialinterpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject the current or past practicesof our operators to allegations of impropriety or illegality or could require them to make changes in their facilities, equipment, personnel, services, capitalexpenditure programs and operating expenses. Although UHS and the other operators of our hospital facilities believe that their policies, procedures andpractices comply with governmental regulations, no assurance can be given that they will not be subjected to additional governmental inquiries or actions, orthat they would not be faced with sanctions, fines or penalties if so subjected. Even if they were to ultimately prevail, a significant governmental inquiry oraction under one of the above laws, regulations or rules could have a material adverse effect upon them, and in turn, us. Each of our hospital facilities is deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations andcertified under the Medicare program. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaidprograms. The operators of our hospital facilities believe that the facilities are in material compliance with applicable federal, state, local and other relevantregulations and standards. However, should any of our hospital facilities lose their deemed certified status and thereby lose certification under the Medicareor Medicaid programs, such facilities would be unable to receive reimbursement from either of those programs and their business, and in turn, ours, could bematerially adversely affected. The various factors and government regulation related to the healthcare industry, such as those outlined above, affects us because: (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 on the three acute care hospitals operated by subsidiaries of UHS are based on our lessees’ net revenues which in turn are affected bythe amount of reimbursement such lessees receive from the government. A significant portion of the revenue earned by the operators of our acute care hospitals is derived from federal and state healthcare programs, includingMedicare and Medicaid. Under the statutory framework of the Medicare and Medicaid programs, many of the general acute care operations are subject toadministrative rulings, interpretations and discretion that may affect payments made under either or both of such programs as well as by other third partypayors. The federal government makes payments to participating hospitals under its Medicare program based on various formulas. For inpatient services, theoperators of our acute care hospitals are subject to an inpatient prospective payment system (“IPPS”). Under IPPS, hospitals are paid a predetermined fixedpayment amount for each hospital discharge. The fixed payment amount is based upon each patient’s Medicare severity diagnosis related group (“MS-DRG”). Every MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with thatparticular diagnosis. These rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care.The MS-DRG rates are adjusted annually based on geographic region and are weighted based upon a statistically normal distribution of severity. For outpatient services, acute care hospitals are paid under an outpatient prospective payment system (“PPS”) according to ambulatory procedurecodes. The outpatient PPS rate is a geographic adjusted national payment amount that includes the Medicare payment and the beneficiary co-payment.Special payments under the outpatient PPS may be made for certain new technology items and services through transitional pass-through payments andspecial reimbursement rates. Three of our acute care hospital facilities operated by subsidiaries of UHS and two sub-acute care hospital facilities operated by an unaffiliated third-party are located in Texas, Florida, California and Illinois. The 8Table of Contentsmajority of these states have reported significant budget deficits that have resulted in reductions of Medicaid funding during the last few years and whichcould adversely affect future levels of Medicaid reimbursement received by certain operators of our facilities, including the operators of our hospitalfacilities. We can provide no assurance that reductions to Medicaid revenues earned by operators of certain of our facilities, particularly our hospitaloperators in the above-mentioned states, will not have a material adverse effect on the future operating results of those operators which, in turn, could have amaterial adverse effect on us. Executive Officers of the Registrant Name Age PositionAlan B. Miller 77 Chairman of the Board, Chief Executive Officer and PresidentCharles F. Boyle 55 Vice President and Chief Financial OfficerCheryl K. Ramagano 52 Vice President, Treasurer and SecretaryTimothy J. Fowler 59 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, 2003. He had previously served as our President until 1990. Mr. Miller has been Chairman of the Board and Chief Executive Officer of UHS sinceits inception in 1978. He previously held the title of President of UHS as well, until 2009 when Marc D. Miller was elected as President of UHS. He is thefather of Marc D. Miller, who was elected to our Board of Trustees in December, 2008 and also serves as President and a member of the Board of Directors ofUHS. Mr. Charles F. Boyle was appointed Chief Financial Officer in February, 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, 2003 and has 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. The revenues and results of operations of the tenants of our hospital facilities, including UHS, and our medical office buildings, are significantlyaffected by payments received from the government and other third party payors. The operators of our hospital facilities and tenants of our medical office buildings derive a significant portion of their revenue from third party payors,including the Medicare and Medicaid programs. Changes in these government programs in recent years have resulted in limitations on reimbursement and, insome cases, reduced levels of reimbursement for health care services. Payments from federal and state government programs are subject to statutory andregulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions,all of which could materially 9Table of Contentsincrease or decrease program payments, as well as affect the cost of providing service to patients and the timing of payments to facilities. Our tenants areunable to predict the effect of recent and future policy changes on their operations. Three of our acute care hospital facilities operated by subsidiaries of UHS and two sub-acute care hospital facilities operated by an unaffiliated third-party are located in Texas, Florida, California and Illinois. The majority of these states have reported significant budget deficits that have resulted inreductions of Medicaid funding during the last few years and which could adversely affect future levels of Medicaid reimbursement received by certainoperators of our facilities, including the operators of our hospital facilities. We can provide no assurance that reductions to Medicaid revenues earned byoperators of certain of our facilities, particularly our hospital operators in the above-mentioned states, will not have a material adverse effect on the futureoperating results of those operators which, in turn, could have a material adverse effect on us. In addition, the uncertainty and fiscal pressures placed uponfederal and state governments as a result of, among other things, the funding requirements and other provisions of the Patient Protection and Affordable CareAct, may affect the availability of taxpayer funds for Medicare and Medicaid programs. If the rates paid or the scope of services covered by governmentpayors are reduced, there could be a material adverse effect on the business, financial position and results of operations of the operators of our hospitalfacilities, and in turn, ours. In addition to changes in government reimbursement programs, the ability of our hospital operators to negotiate favorable contracts with privatepayors, including managed care providers, significantly affects the revenues and operating results of those facilities. Private payors, including managed careproviders, increasingly are demanding that hospitals accept lower rates of payment. Our hospital operators expect continued third party efforts toaggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third party payors could have a materialadverse effect on the financial position and results of operations of our hospital operators. Reductions or changes in Medicare funding could have a material adverse effect on the future operating results of the operators of our facilities,including UHS, which could, in turn, materially reduce our revenues and net income. On January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “2012 Act”). The 2012 Act postponed for twomonths sequestration cuts mandated under the Budget Control Act of 2011. The postponed sequestration cuts include a 2% annual reduction over ten yearsin Medicare spending to providers. Medicaid is exempt from sequestration. In order to offset the cost of the legislation, the 2012 Act reduces payments toother providers totaling almost $26 billion over ten years. Approximately half of those funds will come from reductions in Medicare reimbursement tohospitals. Although the Bipartisan Budget Act of 2013 has reduced certain sequestration-related budgetary cuts, spending reductions related to the Medicareprogram remain in place. On December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes thePathway for SGR Reform Act of 2013 (“the Act”). In addition, on February 15, 2014, Public Law 113-082 was enacted. The Act and subsequent federallegislation achieves new savings by extending sequestration for mandatory programs – including Medicare – for another three years, through 2024. The 2012 Act includes a document and coding (“DCI”) adjustment and a reduction in Medicaid disproportionate share hospital (“DSH”) payments.Expected to save $10.5 billion over 10 years, the DCI adjustment decreases projected Medicare hospital payments for inpatient and overnight care through adownward adjustment in annual base payment increases. These reductions are meant to recoup what Medicare authorities consider to be “overpayments” tohospitals that occurred as a result of the transition to Medicare Severity Diagnosis Related Groups. The reduction in Medicaid DSH payments is expected tosave $4.2 billion over 10 years. This provision extends the changes regarding DSH payments established by the Legislation and determines future allotmentsoff of the rebased level. We cannot predict the effect this enactment will have on operators (including UHS), and, thus, our business. 10Table of ContentsThe uncertainties of health care reform could materially affect the business and future results of operations of the operators of our facilities,including UHS, which could, in turn, materially reduce our revenues and net income. In March, 2010, the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act were enacted into lawand created significant changes to health insurance coverage for U.S. citizens as well as material revisions to the federal Medicare and state Medicaidprograms. The two combined primary goals of these acts are to provide for increased access to coverage for healthcare and to reduce healthcare-relatedexpenses. Medicare, Medicaid and other health care industry changes are scheduled to be implemented at various times during this decade. We cannotpredict the effect, if any, these enactments will have on operators (including UHS) and, thus, our business. There have been several attempts in Congress to repeal or modify various provisions of the Patient Protection and Affordable Care Act (the “PPACA”).We cannot predict whether or not any of these proposed changes to the PPACA will become law and therefore can provide no assurance that changes to thePPACA, as currently implemented, will not have a material adverse effect on the future operating results of the tenants/operators of our properties and, thus,our business. In addition, a case currently pending before The Supreme Court of the United States, King vs. Burwell, challenges the federal government’s ability tosubsidize premiums paid by certain eligible individuals that obtain health insurance policies through federally facilitated exchanges. A number of ourproperties are located in states that utilize federally facilitated exchanges. The Supreme Court of the United States’ decision in this case could result in anincreased number of uninsured patients in the states that utilize federally facilitated exchanges which would have an adverse impact on the future operatingresults of the tenants/operators of our facilities located in these states and, thus, our business. Increased competition in the health care industry has resulted in lower revenues and higher costs for our operators, including UHS, and may affectour 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 and physicians hasintensified in recent years. In most geographical areas in which our facilities are operated, there are other facilities that provide services comparable to thoseoffered by our facilities. In addition, some competing facilities are owned by tax-supported governmental agencies or by nonprofit corporations and may besupported by endowments and charitable contributions and exempt from property, sales and income taxes. Such exemptions and support are not available tocertain operators of our facilities, including UHS. In some markets, certain competing facilities may have greater financial resources, be better equipped and offer a broader range of services than thoseavailable at our facilities. Certain hospitals that are located in the areas served by our facilities are specialty hospitals that provide medical, surgical andbehavioral health services that may not be provided by the operators of our hospitals. The increase in outpatient treatment and diagnostic facilities,outpatient surgical centers and freestanding ambulatory surgical centers also increases competition for our operators. In addition, the operators of our facilities face competition from other health care providers, including physician owned facilities and other competingfacilities, including certain facilities operated by UHS but the real property of which is not owned by us. Such competition is experienced in marketsincluding, but not limited to, McAllen, Texas, the site of our McAllen Medical Center, a 430-bed acute care hospital, and Riverside County, California, thesite of our Southwest Healthcare System-Inland Valley Campus, a 132-bed acute care hospital. 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 11Table of Contentsadmission decisions and for directing the course of patient treatment. Since the operators of our facilities also compete with other health care providers, theymay experience difficulties in recruiting and retaining qualified hospital management, nurses and other medical personnel. We anticipate that our operators, including UHS, will continue to encounter increased competition in the future that could lead to a decline in patientvolumes 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 certification requirements,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 regulationsinclude, among other items: hospital billing practices and prices for service; relationships with physicians and other referral sources; adequacy of medicalcare; quality of medical equipment and services; qualifications of medical and support personnel; the implementation of, and continued compliance with,electronic health records’ regulations; confidentiality, maintenance and security issues associated with health-related information and patient medicalrecords; the screening, stabilization and transfer of patients who have emergency medical conditions; certification, licensure and accreditation of ourfacilities; 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 tous or to continue operating its facility. In addition, our bonus rents are based on net revenues of the UHS hospital facilities, which in turn are affected by theamount of reimbursement 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. A worsening of the economic and employment conditions in the United States could materially affect our business and future results of operations ofthe operators of our facilities which could, in turn, materially reduce our revenues and net income. Our future results of operations could be unfavorably impacted by deterioration in general economic conditions which could result in increases in thenumber of people unemployed and/or uninsured. Our operators’ patient volumes, revenues and financial results depend significantly on the universe ofpatients with health 12Table of Contentsinsurance, which to a large extent is dependent on the employment status of individuals in certain markets. A worsening of economic conditions may resultin a higher unemployment rate which will likely increase the number of individuals without health insurance. As a result, the operators of our facilities mayexperience a decrease in patient volumes. Should that occur, it may result in decreased occupancy rates at our medical office buildings as well as a reductionin the revenues earned by the operators of our hospital facilities which would unfavorably impact our future bonus rentals (on the UHS hospital facilities) andmay potentially have a negative impact on the future lease renewal terms and the underlying value of the hospital properties. 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. 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.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 agreement. If any of the lenders were unable to fulfill their future commitments, our liquidity could be impacted,which could have a material unfavorable impact on 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 the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing onacceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on ourresults 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, or elects not to renew the leases on our three acute care hospitals, our revenues could be materially reduced. For the year ended December 31, 2014, UHS accounted for 35% of our consolidated revenues. In addition, as of December 31, 2014, subsidiaries ofUHS leased three of the six hospital facilities owned by us with terms expiring in 2016 (The Bridgeway was sold on December 31, 2014). We cannot assureyou that UHS will renew the leases at existing lease rates or fair market value lease rates, or continue to satisfy its obligations to us. In addition, if subsidiariesof UHS exercise their options to purchase the respective leased hospital facilities upon expiration of the lease terms, our future revenues could decrease if wewere unable to earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currently earned pursuant to the hospital leases.The failure or inability of UHS to satisfy its obligations to us, or should UHS elect not to renew the leases on our three acute care hospitals, our revenues andnet income could be materially reduced, which could in turn reduce the amount of dividends we pay and cause our stock price to decline. 13Table of ContentsOur relationship with UHS may create conflicts of interest. In addition to being dependent upon UHS for a substantial portion of our revenues and leases, since 1986, UHS of Delaware, Inc. (the “Advisor”), awholly-owned subsidiary of UHS, has served as our Advisor. Pursuant to our Advisory Agreement, the Advisor is obligated to present an investment programto us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity tous), to provide administrative services to us and to conduct our day-to-day affairs. Further, all of our officers are employees of the Advisor. As ofDecember 31, 2014 we had no salaried employees although our officers do typically receive annual stock-based compensation awards in the form ofrestricted stock. In special circumstances, if warranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers mayalso receive one-time compensation awards in the form of restricted stock and/or cash bonuses. 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 they will not becomedetrimental to us in the future. All transactions with UHS must be approved by a majority of our Independent Trustees. We believe that our current leases and business dealings withUHS have been entered into on commercially reasonable terms. However, because of our historical and continuing relationship with UHS and its subsidiaries,in the future, our business dealings may not be on the same or as favorable terms as we might achieve with a third party with whom we do not have such arelationship. Disputes may arise between us and UHS that we are unable to resolve or the resolution of these disputes may not be as favorable to us as aresolution we might achieve with a third party. We hold significant, non-controlling equity ownership interests in various LLCs. For the year ended December 31, 2014, 22% of our consolidated and unconsolidated revenues were generated by LLCs in which we hold, or held, amajority, non-controlling equity ownership interest. As of December 31, 2014, we hold non-controlling equity ownership interests, ranging from 33% to95%, in five LLCs/LPs. Our level of investment and lack of control exposes us to potential losses of our investments and revenues. Although our ownership arrangements havebeen beneficial to us in the past, we cannot guarantee that they will continue to be beneficial in the future. Pursuant to the operating and/or partnership agreements of most of the five LLCs in which we continue to hold non-controlling majority ownershipinterests, the third-party member and the Trust, at any time, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-OfferingMember”) 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 asdetermined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at theequivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchase the entire ownership interest of the OfferingMember at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing ofthe transfer must occur within 60 to 90 days of the acceptance by the Non-Offering Member. In addition to the above-mentioned rights of the third-party members, from time to time, we have had discussions with third-party members aboutpurchasing or selling the interests to each other or a third party. If we were to sell our interests, we may not be able to redeploy the proceeds into assets at thesame or greater return as we currently receive. During any such time that we were not able to do so, our ability to increase or maintain our dividend at currentlevels could be adversely affected which could cause our stock price to decline. 14Table of ContentsThe bankruptcy, default, insolvency or financial deterioration of our tenants could significantly delay our ability to collect unpaid rents or requireus 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 ableto meet their obligations, which may result in their bankruptcy or insolvency. Although our leases and loans provide us the right to terminate an investment,evict an 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. Required regulatory approvals can delay or prohibit transfers of our healthcare facilities. Transfers of healthcare facilities to successor tenants or operators may be subject to regulatory approvals or ratifications, including, but not limited to,change of ownership approvals under certificate of need laws and Medicare and Medicaid provider arrangements that are not required for transfers of othertypes of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval processof any federal, state or local government agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. Ifwe are unable to find a suitable replacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which might expose us tosuccessor liability or require us to indemnify subsequent operators to whom we might transfer the operating rights and licenses, all of which may materiallyadversely affect our business, results of operations, and financial condition. 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 increase inthe development of medical office condominiums in certain markets; • costs that may be incurred relating to maintenance and repair, and the need to make expenditures due to changes in governmental regulations,including the Americans with Disabilities Act; • environmental hazards at our properties for which we may be liable, including those created by prior owners or occupants, existing tenants,mortgagors or other persons, and; • defaults and bankruptcies by our tenants. In addition to the foregoing risks, we cannot predict whether the leases on our properties, including the leases on the properties leased to subsidiaries ofUHS, which have options to purchase the respective leased facilities at the end of the lease or renewal terms at the appraised fair market value, will berenewed at their current rates at the end of the lease terms in 2016. 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. 15Table of ContentsSignificant potential liabilities and rising insurance costs and availability may have an adverse effect on the operations of our operators, which maynegatively 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, class action lawsuits and other legal actions. Some of these actions may involve large claims, as well as significant defense costs. Iftheir ultimate liability for professional and general liability claims could change materially from current estimates, if such policy limitations should bepartially or fully exhausted in the future, or payments of claims exceed estimates or are not covered by insurance, it could have a material adverse effect onthe operations of our operators and, in turn, us. Property insurance rates, particularly for earthquake insurance in California, have also continued to increase. We own two MOBs in California thatcould 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 and mortgages and thereby potentially expose us tothose risks. In addition, our tenants and operators may be unable to pay their lease or mortgage payments, which could potentially decrease our revenues andincrease our collection and litigation costs. Moreover, to the extent we are required to foreclose on the affected facilities, our revenues from those facilitiescould be reduced or eliminated for an extended period of time. In addition, we may in some circumstances be named as a defendant in litigation involvingthe actions of our operators. Although we have no involvement in the activities of our operators and our standard leases generally require our operators tocarry insurance to cover us in certain cases, a significant judgment against us in such litigation could exceed our and our operators’ insurance coverage,which would require us to make payments to cover the judgment. 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. Also, if disqualified, we will not be allowed a deduction for distributions to stockholders incomputing our taxable income and we could be subject to increased state and local income taxes. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxeson any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes.Any of these taxes would decrease cash available for the payment of our debt obligations. Dividends paid by REITs generally do not qualify for reduced tax rates. In general, dividends (qualified) paid by a U.S. corporation to individual U.S. shareholders are subject to Federal income tax at a maximum rate of 20%(subject to certain additional taxes for certain taxpayers). In contrast, since we are a REIT, our distributions to individual U.S. shareholders are not eligible forthe reduced rates which apply to distributions from regular corporations, and thus may be subject to Federal income tax at a rate as high as 39.6% (subject tocertain additional taxes for certain taxpayers). 16Table of ContentsShould we be unable to comply with the strict income distribution requirements applicable to REITs utilizing only cash generated by operatingactivities, we would be required to generate cash from other sources which could adversely affect our financial condition. To obtain the favorable tax treatment associated with qualifying as a REIT, in general, we are required each year to distribute to our shareholders atleast 90% of our net taxable income. In addition, we are subject to a tax on any undistributed portion of our income at regular corporate rates and might alsobe subject to a 4% excise tax on this undistributed income. To meet the distribution requirements necessary to achieve the tax benefits associated withqualifying as a REIT, we could be required to: (i) seek borrowed funds even if conditions are not favorable for borrowing; (ii) issue equity which could have adilutive effect on the future dividends and share value of our existing shareholders, and/or; (iii) divest assets that we might have otherwise decided to retain.Securing funds through these other non-operating means could adversely affect our financial condition and future results of operations. Complying with REIT requirements may cause us to forego otherwise attractive opportunities. To qualify as a REIT for federal income tax purposes, we continually must satisfy tests concerning, among other things, the sources of our income, thenature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursueinvestments that would be otherwise advantageous to us in order to satisfy the source-of-income, asset-diversification or distribution requirements forqualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments. 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, financial markets or overall interest rate environment, or other developments affecting the healthcare industry. Ownership limitations and anti-takeover provisions in our declaration of trust and bylaws and under Maryland law and in our leases with UHS maydelay, defer or prevent a change in control or other transactions that could provide shareholders with a take-over premium. We are subject to significantanti-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. The rightof 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 overthe market price for our common stock or otherwise be in the best interests of our shareholders. 17Table of ContentsThe Master Lease Documents by and among us and certain subsidiaries of UHS, which governs the three acute care hospital properties and thefreestanding emergency departments leased to subsidiaries of UHS, includes a change of control provision. The change of control provision grants UHS theright, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the leased hospital properties at their appraised fairmarket values. The exercise of this purchase option may result in a less favorable rate of return earned on the sales proceeds received than the rental revenuecurrently earned on such facilities. 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 our operators’local hospital management personnel could harm our business. The expertise and efforts of our senior executives and key members of our operators’ local hospital management personnel are critical to the success ofour business. The loss of the services of one or more of our senior executives or of a significant portion of our operators’ local hospital management personnelcould significantly undermine our management expertise and our operators’ ability to provide efficient, quality health care services at our facilities, whichcould harm their business, and in turn, harm our business. Increasing investor interest in our sector and consolidation at the operator or REIT level could increase competition and reduce our profitability. 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. Increased competition makes it more challenging for us to identify and successfully capitalize onopportunities that meet our business goals and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment,acquisition and development activities. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcarefacilities at favorable prices or if we are unable to finance acquisitions on commercially favorable terms, our business, results of operations and financialcondition may be materially adversely affected. We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants. Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generallyrequired to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant-specific. A newor replacement operator or tenant may require different features in a property, depending on that operator’s or tenant’s particular operations. If a currentoperator or tenant is unable to pay rent and vacates a property, we may incur substantial expenditures to modify a property before we are able to secureanother operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, we may incur substantial expendituresbefore we are able to re-lease the space. These expenditures or renovations may materially adversely affect our business, results of operations and financialcondition. We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us toliability 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 18Table of Contentsnewly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicablecorporate regulations. For example, we cannot provide assurance that in the future our management will not find a material weakness in connection with itsannual review of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that wecould correct any such weakness to allow our management to assess the effectiveness of our internal control over financial reporting as of the end of our fiscalyear in time to enable our independent registered public accounting firm to state that we have maintained effective internal control over financial reportingas of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctionsor litigation. If we must disclose any material weakness in our internal control over financial reporting, our stock price could decline. Different interpretations of accounting principles could have a material adverse effect on our results of operations or financial condition. Generally accepted accounting principles are complex, continually evolving and may be subject to varied interpretation by us, our independentregistered public accounting firm and the SEC. Such varied interpretations could result from differing views related to specific facts and circumstances.Differences in interpretation of generally accepted accounting principles could have a material adverse effect on our financial position or results ofoperations. Item 1B.Unresolved Staff Comments None. 19Table of ContentsITEM 2.Properties The following table shows our investments in hospital facilities leased to UHS and other non-related parties and also provides information related tovarious properties in which we have significant investments, some of which are accounted for by the equity method. The capacity in terms of beds (for thehospital facilities) and the five-year occupancy levels are based on information provided by the lessees. Type offacility Numberofavailablebeds @12/31/14 Lease Term % of RSFunderlease withguaranteedescalators Range ofguaranteedescalation Hospital Facility Name andLocation Average Occupancy(1) Minimumrent(5) End ofinitialorrenewedterm Renewalterm(years) 2014 2013 2012 2011 2010 Southwest Healthcare System:Inland Valley Campus(2)(7)Wildomar, California Acute Care 132 59% 58% 62% 70% 78% $2,648,000 2016 15 0% — McAllen Medical Center(3)(7)McAllen, Texas Acute Care 430 44% 43% 43% 45% 47% 5,485,000 2016 15 0% — Wellington Regional Medical Center(7)West Palm Beach, Florida Acute Care 153 59% 58% 69% 73% 70% 3,030,000 2016 15 0% — HealthSouth Deaconess Rehab. Hospital(8)Evansville, Indiana Rehabilitation 85 80% 79% 79% 75% 71% 714,000 2019 5 0% — Vibra Hospital of Corpus ChristiCorpus Christi, Texas Sub-Acute Care 74 58% 58% 53% 54% 64% 742,000 2019 25 100% 3% Kindred Hospital Chicago Central(9)Chicago, Illinois Sub-Acute Care 84 54% 51% 51% 46% 40% 1,474,000 2016 5 0% — Typeoffacility Lease Term Facility Name and Location Average Occupancy(1) Minimumrent(5) End ofinitialorrenewedterm Renewalterm(years) % of RSFunderlease withguaranteedescalators Range ofguaranteedescalation 2014 2013 2012 2011 2010 Spring Valley MOB I(4)Las Vegas, Nevada MOB 60% 64% 68% 75% 93% $544,000 2015-2018 Various 69% 2%-3% Spring Valley MOB II(4)Las Vegas, Nevada MOB 77% 76% 76% 67% 53% 1,087,000 2016-2020 Various 25% 1%-3% Summerlin Hospital MOB I(4)Las Vegas, Nevada MOB 66% 77% 81% 90% 91% 778,000 2015-2020 Various 43% 2%-3% Summerlin Hospital MOB II(4)Las Vegas, Nevada MOB 78% 74% 82% 83% 97% 1,263,000 2015-2021 Various 52% 2%-3% Summerlin Hospital MOB III(4)Las Vegas, Nevada MOB 90% 81% 71% 64% 63% 1,920,000 2015-2024 Various 45% 2%-3% St. Mary’s Professional Office Building(11)Reno, Nevada MOB 100% 98% 99% 100% 99% 4,448,000 2015-2025 Various 28% 2%-3% Rosenberg Children’s Medical PlazaPhoenix, Arizona MOB 99% 99% 100% 100% 100% 1,989,000 2015-2019 Various 56% 2%-4% Phoenix Children’s East Valley Care Center Phoenix, Arizona MOB 100% 100% 100% 100% 100% 936,000 2032 20 0% — Gold Shadow—700 Shadow(4)Las Vegas, Nevada MOB 97% 84% 82% 78% 86% 811,000 2015-2020 Various 38% 2% Gold Shadow—2010 & 2020 Goldring MOBs(4) Las Vegas, Nevada MOB 64% 92% 95% 95% 91% 889,000 2015-2021 Various 46% 2%-3% Centennial Hills MOB(4)Las Vegas, Nevada MOB 71% 62% 62% 63% 58% 1,459,000 2015-2024 Various 44% 2%-3% Suburban Medical Plaza II(11)Louisville, Kentucky MOB 98% 100% 100% 100% 98% 2,500,000 2015-2025 Various 21% 3% Lake Pointe Medical Arts Building(6) Rowlett, Texas MOB 100% 97% 96% 95% — 1,555,000 2017-2023 Various 24% 3%-4% Tuscan Medical Properties(6)Las Colinas, Texas MOB 91% 99% 98% 100% — 903,000 2015-2022 Various 100% 2%-3% PeaceHealth Medical Clinic(10)Bellingham, Washington MOB 100% 100% 100% — — 2,563,000 2021 20 100% 1% 20Table of Contents (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, 2014. Average available beds is the number of beds which are actually in service at any given time for immediate patient use with thenecessary equipment and staff available for patient care. A hospital may have appropriate licenses for more beds than are in service for a number ofreasons, including lack of demand, incomplete construction and anticipation of future needs. The average occupancy rate of a hospital is affected by anumber of factors, including the number of physicians using the hospital, changes in the number of beds, the composition and size of the population ofthe community in which the hospital is located, general and local economic conditions, variations in local medical and surgical practices and the degreeof outpatient use of the hospital services. Average occupancy rate for the multi-tenant medical office buildings is based on the occupied square footageof each building, including any applicable master leases.(2)In July, 2002, the operations of Inland Valley Regional Medical Center (“Inland Valley”) were merged with the operations of Rancho Springs MedicalCenter (“Rancho Springs”), an acute care hospital located in California and also operated by UHS, the real estate assets of which are not owned by us.Inland Valley, our lessee, was merged into Universal Health Services of Rancho Springs, Inc. The merged entity is now doing business as SouthwestHealthcare System (“Southwest Healthcare”). As a result of merging the operations of the two facilities, the revenues of Southwest Healthcare include therevenues of both Inland Valley and Rancho Springs. Although we do not own the real estate assets of the Rancho Springs facility, Southwest Healthcarebecame the lessee on the lease relating to the real estate assets of the Inland Valley facility. Since the bonus rent calculation for the Inland Valley campusis based on net revenues and the financial results of the two facilities are no longer separable, the lease was amended during 2002 to exclude from thebonus rent calculation the estimated net revenues generated at the Rancho Springs campus (as calculated pursuant to a percentage based allocationdetermined at the time of the merger). The average occupancy rates shown for this facility for all years were based on the combined number of bedsoccupied at the Inland Valley and Rancho Springs campuses.(3)During the first quarter of 2001, UHS purchased the assets and operations of the 60-bed McAllen Heart Hospital located in McAllen, Texas. Upon theacquisition by UHS, the Heart Hospital began operating under the same license as an integrated department of McAllen Medical Center. As a result ofcombining the operations of the two facilities, the revenues of McAllen Medical Center include revenues generated by the Heart Hospital, the realproperty of which is not owned by us. Accordingly, since the bonus rent calculation for McAllen Medical Center is based on the combined net revenuesof the two facilities, the McAllen Medical Center lease was amended during 2001 to exclude from the bonus rent calculation, the estimated net revenuesgenerated at the Heart Hospital (as calculated pursuant to a percentage based allocation determined at the time of the merger). In addition, during 2000,UHS purchased the South Texas Behavioral Health Center, a behavioral health care facility located in McAllen, Texas. In 2006, a newly constructedreplacement facility for the South Texas Behavioral Health Center was completed and opened. The license for this facility, the real property of which isnot owned by us, was also merged with the license for McAllen Medical Center. There was no amendment to the McAllen Medical Center lease relatedto the operations of the South Texas Behavioral Health Center and its revenues are excluded from the bonus rent calculation. In 2015, the newlyconstructed Weslaco and Mission Free Standing Emergency Departments (“FEDs”) were completed and opened. The license for these facilities is part ofthe license of McAllen Medical Center. The real property of these two FEDs was purchased by us and leased back to McAllen Medical Center. There wasno amendment to the McAllen Medical Center lease related to the operations of the FEDs and their revenues will be excluded from the bonus rentcalculation. No assurance can be given as to the effect, if any, the consolidation of the facilities as mentioned above, had on the underlying value ofMcAllen Medical Center. Base rental commitments and the guarantee by UHS under the original lease continue for the remainder of the lease terms. Theaverage occupancy rates are based upon the combined occupancy and combined number of beds at McAllen Medical Center and McAllen HeartHospital.(4)The real estate assets of this facility are owned by us (either directly or through an LLC in which we hold 100% of the ownership interest) and includetenants who are subsidiaries of UHS.(5)Minimum rent amounts contain impact of straight-line rent adjustments, if applicable.(6)These properties were acquired in 2011.(7)See Note 2 to the consolidated financial statements-Relationship with UHS and Related Party Transactions, regarding UHS’s purchase option, right offirst refusal and change of control purchase option related to these properties.(8)The lessee of this facility has a purchase option which is exercisable, subject to certain terms and conditions, at the expiration of each lease term. Ifexercised, the purchase option stipulates that the purchase price be the fair market value of the facility, subject to stipulated minimum and maximumprices. As currently being utilized, we believe the estimated current fair market value of the property is between the stipulated minimum and maximumprices. The lessee also has a first refusal to purchase right which, if applicable and subject to certain terms and conditions, grants the lessee the option topurchase the property at the same terms and conditions as an accepted third-party offer. 21Table of Contents(9)The lessee of this facility has a purchase option which is exercisable, subject to certain terms and conditions, at the expiration of each lease term. Ifexercised, the purchase option stipulates that the purchase price be the fair market value of the facility, subject to a stipulated minimum price. Webelieve the estimated current fair market value of the property exceeds the stipulated minimum price. The lessee also has a first refusal to purchase rightwhich, if applicable and subject to certain terms and conditions, grants the lessee the option to purchase the property at the same terms and conditions asan accepted third-party offer.(10)This MOB was acquired in January, 2012.(11)The real estate assets of these facilities are owned by LLCs in which we hold non-controlling ownership interests (75% applicable to St. Mary’sProfessional Office Building and 33% applicable to Suburban Medical Plaza II). Leasing Trends at Our Significant Medical Office Buildings During 2014, we had a total of 80 new or renewed leases related to the medical office buildings indicated above, in which we have significantinvestments, some of which are accounted for by the equity method. These leases comprised approximately 11% of the aggregate rentable square feet of theseproperties (6% related to renewed leases and 5% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property toproperty based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity tohospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. The weighted-average tenant improvement costsassociated with these new or renewed leases was approximately $22 per square foot during 2014. The weighted-average leasing commissions on the new andrenewed leases commencing during 2014 was approximately 2% of base rental revenue over the term of the leases. The average aggregate value of the tenantconcessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during 2014 was approximately 2%of the future aggregate base rental revenue over the lease terms. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. In connection with lease renewals executed during 2014, the weighted-average rentalrates, as compared to rental rates on the expired leases, decreased by approximately 1%. Set forth is information detailing the rentable square feet (“RSF”) associated with each of our investments as of December 31, 2014 and the percentageof RSF on which leases expire during the next five years and thereafter. For the MOBs that have scheduled lease expirations during 2015 of 20% or greater(of RSF), we have included information regarding estimated market rates relative to lease rates on the expiring leases. Percentage of RSF with lease expirations TotalRSF Availablefor LeaseJan. 1,2015 2015 2016 2017 2018 2019 2020andLater Hospital Investements McAllen Medical Center 422,276 0% 0% 100% 0% 0% 0% 0% Wellington Regional Medical Center 196,489 0% 0% 100% 0% 0% 0% 0% Southwest Healthcare System—Inland Valley Campus 164,377 0% 0% 100% 0% 0% 0% 0% Kindred Hospital Chicago Central 115,554 0% 0% 100% 0% 0% 0% 0% HealthSouth Deaconess Rehab. Hospital 77,440 0% 0% 0% 0% 0% 100% 0% Vibra Hospital of Corpus Christi 69,700 0% 0% 0% 0% 0% 100% 0% Sub-total Hospitals 1,045,836 0% 0% 86% 0% 0% 14% 0% Other Investements Medical Office Buildings: Saint Mary’s Professional Office Building 190,754 0% 5% 1% 8% 0% 2% 84% Goldshadow—2010—2020 Goldring MOB’s(a) 74,774 32% 21% 5% 21% 2% 0% 19% Goldshadow—700 Shadow Lane MOB(a) 42,060 3% 45% 6% 11% 0% 12% 23% Texoma Medical Plaza 115,284 4% 10% 0% 2% 6% 2% 76% Suburban Medical Plaza II 103,011 4% 2% 9% 1% 6% 2% 76% Desert Springs Medical Plaza 102,579 44% 13% 2% 0% 6% 8% 27% Peace Health Medical Clinic 98,886 0% 0% 0% 0% 0% 0% 100% Centennial Hills Medical Office Building 96,573 26% 7% 6% 2% 13% 5% 41% Summerlin Hospital Medical Office Building II(a) 92,313 23% 20% 7% 14% 9% 16% 11% Summerlin Hospital Medical Office Building I(a) 89,636 38% 23% 23% 4% 4% 2% 6% The Sparks Medical Building 35,127 8% 9% 13% 4% 6% 3% 57% Vista Medical Terrace 50,921 50% 9% 1% 10% 9% 7% 14% North Valley Medical Plaza 80,379 59% 14% 5% 4% 10% 3% 5% Summerlin Hospital Medical Office Building III 77,713 0% 2% 13% 0% 6% 44% 35% 22Table of Contents Percentage of RSF with lease expirations TotalRSF Availablefor LeaseJan. 1,2015 2015 2016 2017 2018 2019 2020andLater Mid Coast Hospital MOB 74,629 0% 0% 77% 0% 7% 0% 16% Sheffield Medical Building 73,446 58% 3% 5% 8% 0% 4% 22% North West Texas Professional Office Tower 72,351 0% 3% 46% 3% 0% 0% 48% Rosenberg Children’s Medical Plaza 66,231 1% 3% 17% 0% 74% 5% 0% Sierra San Antonio Medical Plaza 59,160 32% 4% 6% 9% 7% 3% 39% Palmdale Medical Plaza 58,150 47% 0% 0% 5% 9% 0% 39% Spring Valley Medical Office Building 57,828 40% 19% 11% 21% 9% 0% 0% Spring Valley Medical Office Building II 57,432 17% 0% 13% 0% 39% 14% 17% Southern Crescent Center II 53,680 35% 0% 11% 0% 0% 15% 39% Desert Valley Medical Center 53,625 21% 14% 15% 9% 11% 0% 30% Tuscan Professional Building 52,868 12% 17% 8% 0% 12% 0% 51% Lake Pointe Medical Arts Building 50,974 0% 0% 0% 33% 23% 14% 30% Forney Medical Plaza 50,947 9% 0% 0% 0% 80% 0% 11% Southern Crescent Center I 41,897 46% 0% 0% 6% 21% 27% 0% Auburn Medical Office Building 41,311 10% 0% 0% 9% 0% 0% 81% BRB Medical Office Building 40,733 0% 17% 4% 0% 9% 3% 67% Cypresswood Professiona Center—8101(b) 10,200 0% 100% 0% 0% 0% 0% 0% Cypresswood Professional Center—8111 29,882 5% 7% 0% 11% 0% 16% 61% Medical Center of Western Connecticut 36,141 0% 0% 4% 24% 5% 67% 0% Phoenix Children’s East Valley Care Center 30,960 0% 0% 0% 0% 0% 0% 100% Forney Medical Plaza II 30,507 67% 0% 0% 0% 5% 0% 28% Apache Junction Medical Plaza 26,901 31% 9% 4% 22% 0% 0% 34% Santa Fe Professional Plaza 24,883 28% 0% 27% 11% 11% 0% 23% Professional Bldg at King’s Crossing—Bldg A (d) 11,528 100% 0% 0% 0% 0% 0% 0% Professional Bldg at King’s Crossing—Bldg B(c) 12,790 0% 36% 41% 11% 0% 12% 0% The Children’s Clinic at Springdale 9,761 0% 0% 0% 0% 0% 0% 100% Northwest Medical Center at Sugar Creek 13,696 0% 0% 0% 0% 0% 0% 100% Kelsey-Seybold Clinic at King’s Crossing 20,470 0% 0% 0% 0% 0% 0% 100% Emory at Dunwoody Building 20,366 0% 0% 0% 0% 0% 0% 100% Ward Eagle Office Village 16,282 0% 0% 0% 0% 0% 0% 100% Family Doctor’s MOB 12,050 0% 0% 100% 0% 0% 0% 0% 701 South Tonopah Building 10,747 0% 0% 0% 0% 0% 0% 100% 5004 Pool Road MOB 4,400 0% 0% 0% 0% 0% 0% 100% Preschool and Childcare Centers: Chesterbrook Academy—Audubon 8,300 0% 0% 0% 0% 0% 0% 100% Chesterbrook Academy—Uwchlan 8,163 0% 0% 0% 0% 0% 0% 100% 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% Free-Standing Emergency Departments: Hanover Freestanding Emergency Center 22,000 0% 0% 0% 0% 0% 0% 100% Sub-total Other Investments 2,531,397 19% 8% 10% 6% 9% 6% 42% Total 3,577,233 13% 6% 32% 4% 7% 8% 30% (a)The estimated market rates related to the 2015 expiring RSF are greater than the lease rates on the expiring leases by an average of approximately 3%.(b)The estimated market rates related to the 2015 expiring RSF are less than the lease rates on the expiring leases by an average of approximately 5%.(c)The estimated market rates related to the 2015 expiring RSF are less than the lease rates on the expiring leases by an average of approximately 11%.(d)A new lease was executed on this building subsequent to January 1, 2015 for 100% of the available space on January 1, 2015. On a combined basis, based upon the aggregate revenues and square footage for the hospital facilities owned as of December 31, 2014 (including TheBridgeway which was sold on December 31, 2014) and 2013, the average effective annual rental per square foot was $17.47 and $17.22, respectively. On acombined basis, based upon the aggregate consolidated and unconsolidated revenues and the estimated average occupied square footage for our MOBs andchildcare centers owned as of December 31, 2014 and 2013, the average effective annual rental per square foot was $27.22 and $27.47, respectively. On acombined basis, based upon the aggregate consolidated and unconsolidated revenues and estimated average occupied square footage for all of our propertiesowned as of December 31, 2014 and 2013, the average effective annual rental per square foot was $23.83 and $23.82, respectively. The estimated averageoccupied square footage for 2014 was calculated by averaging the unavailable rentable square footage on January 1, 2014 and January 1, 2015. Theestimated average occupied square footage for 2013 was calculated by averaging the unavailable rentable square footage on January 1, 2013 and January 1,2014. 23Table of ContentsDuring 2014, one of the UHS-related hospitals (McAllen Medical Center) generated revenues that comprised more than 10% of our consolidatedrevenues. None of the properties had book values greater than 10% of our consolidated assets as of December 31, 2014. Including 100% of the revenuesgenerated at the properties owned by our unconsolidated LLCs, none of our unconsolidated LLCs had revenues greater than 10% of the combinedconsolidated and unconsolidated revenues during 2014. Including 100% of the book values of the properties owned by our unconsolidated LLCs, none ofthe properties had book values greater than 10% of the consolidated and unconsolidated assets. The following table sets forth the average effective annual rental per square foot for 2014, based upon average occupied square feet for McAllenMedical Center: Property 2014AverageOccupiedSquareFeet 2014Revenues 2014AverageEffectiveRentalPer SquareFoot McAllen Medical Center 422,276 $7,121,000 $16.86 The following table sets forth lease expirations for each of the next ten years for properties owned or invested in as of December 31, 2014. ExpiringSquareFeet NumberofTenants Annual Rentals ofExpiringLeases(1) PercentageofAnnualRentals(2) Hospital properties 2015 0 0 $0 0% 2016 898,696 4 $12,414,000 17% 2017 0 0 $0 0% 2018 0 0 $0 0% 2019 147,140 2 $1,491,000 2% 2020 0 0 $0 0% 2021 0 0 $0 0% 2022 0 0 $0 0% 2023 0 0 $0 0% 2024 0 0 $0 0% Thereafter 0 0 $0 0% Subtotal-hospital facilities 1,045,836 6 $13,905,000 19% Other consolidated properties 2015 176,967 68 $4,764,000 7% 2016 188,920 54 $4,864,000 7% 2017 126,827 45 $3,219,000 4% 2018 220,209 56 $7,855,000 11% 2019 137,163 34 $3,981,000 6% 2020 166,357 38 $5,026,000 7% 2021 200,366 23 $5,612,000 8% 2022 124,565 13 $2,994,000 4% 2023 91,357 18 $2,671,000 4% 2024 42,544 4 $1,209,000 1% Thereafter 86,506 9 $2,253,000 3% Subtotal-other consolidated properties 1,561,781 362 $44,448,000 62% 24Table of Contents ExpiringSquareFeet NumberofTenants Annual Rentals ofExpiringLeases(1) PercentageofAnnualRentals(2) Other unconsolidated properties(MOBs) 2015 84,344 7 $2,221,000 3% 2016 11,976 9 $330,000 0% 2017 19,146 6 $558,000 1% 2018 19,434 6 $560,000 1% 2019 7,333 3 $208,000 0% 2020 135,931 11 $3,906,000 5% 2021 16,915 5 $459,000 1% 2022 27,802 6 $755,000 1% 2023 24,808 6 $815,000 1% 2024 47,394 8 $1,397,000 2% Thereafter 94,948 8 $2,716,000 4% Subtotal-other unconsolidated properties 490,031 75 $13,925,000 19% Total all properties at December 31, 2014 3,097,648 443 $72,278,000 100% (1)The annual rentals of expiring leases reflected above were calculated based upon each property’s 2014 average rental rate per occupied square footapplied to each property’s scheduled lease expirations (on a square foot basis). These amounts include the data related to the unconsolidated LLCs inwhich we hold various non-controlling ownership interests at December 31, 2014 and exclude the bonus rentals earned on the UHS hospital facilities.(2)The percentages of annual rentals reflected above were calculated based upon the annual rentals of expiring leases (as reflected above) divided by thetotal annual rentals of expiring leases (as reflected above). 25Table of ContentsITEM 3.Legal Proceedings None ITEM 4.Mine Safety Disclosures Not applicable PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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, 2014 and 2013 are summarized below: 2014 2013 HighPrice LowPrice HighPrice LowPrice First Quarter $44.21 $40.03 $58.03 $51.82 Second Quarter $44.55 $41.73 $58.85 $41.47 Third Quarter $44.74 $41.26 $46.53 $38.52 Fourth Quarter $49.13 $41.47 $45.60 $40.06 Holders As of January 31, 2015, there were approximately 380 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 theInternal Revenue Code governing REITs. Our revolving credit facility limits our ability to increase dividends in excess of 95% of cash available fordistribution, as defined in our revolving credit agreement, unless additional distributions are required to be made so as to comply with applicable sections ofthe Internal Revenue Code and related regulations governing REITs. In each of the past two years, dividends per share were declared as follows: 2014 2013 First Quarter $.625 $.620 Second Quarter .630 .625 Third Quarter .630 .625 Fourth Quarter .635 .625 $2.520 $2.495 26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. (included until July, 2011 when it wasacquired by Ventas, Inc.), Omega Healthcare Investors, Inc., Health Care REIT, Inc., Healthcare Realty Trust, Inc., LTC Properties, Inc., and National HealthInvestors, Inc. 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 2009. BasePeriodDec 09 INDEXED RETURNSYears Ending Company Name / Index Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Universal Health Realty Income Trust $100 $122.24 $139.02 $190.69 $159.53 $202.90 S&P 500 Index $100 $115.06 $117.49 $136.30 $180.44 $205.14 Peer Group $100 $119.16 $137.75 $163.34 $149.74 $205.10 27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, 2014. You should read thistable in conjunction with our consolidated financial statements and related notes contained elsewhere in this Annual Report and Part II, Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operations. (000s, except per share amounts) 2014 2013 2012 2011 2010 Operating Results: Total revenues(1) $59,786 $54,280 $53,950 $29,494 $28,878 Net income(2) $51,551 $13,169 $19,477 $73,794 $16,310 Balance Sheet Data: Real estate investments, net of accumulated depreciation(1)(3) $380,109 $297,748 $314,386 $288,633 $125,257 Investments in LLCs, net(1)(4) 8,605 39,201 28,636 33,057 80,442 Intangible assets, net of accumulated amortization(3) 23,123 20,782 26,293 28,081 1,080 Total assets(1)(3) 428,866 373,145 383,038 370,929 216,135 Total indebtedness, including debt premium(1)(3)(5) 213,155 199,987 197,936 174,836 67,563 Other Data: Funds from operations(6) $35,937 $34,955 $34,280 $32,468 $32,582 Cash provided by (used in): Operating activities 32,796 31,294 30,783 21,372 23,049 Investing activities (4,038) (13,373) (8,565) (7,454) (15,202) Financing activities (29,815) (17,491) (30,819) (7,426) (7,798) Per Share Data: Basic earnings per share: Total basic earnings per share(2) $3.99 $1.04 $1.54 $5.84 $1.33 Diluted earnings per share: Total diluted earnings per share(2) $3.99 $1.04 $1.54 $5.83 $1.33 Dividends per share $2.520 $2.495 $2.460 $2.425 $2.415 Other Information (in thousands) Weighted average number of shares outstanding—basic 12,927 12,689 12,661 12,644 12,259 Weighted average number of shares and share equivalents outstanding—diluted 12,934 12,701 12,669 12,649 12,262 (1)As discussed in Note 1 “Summary of Significant Accounting Policies—Investments in Limited Liability Companies”, our consolidated financialstatements include the consolidated accounts of our consolidated investments and those investments that meet the criteria of a variable interest entity.Please see Note 1 for further discussions.(2)Net income and earnings per share during 2014 includes: (i) a $25.4 million gain recorded in connection with our purchase of third-party minorityownership interests in eight LLCs (January and August, 2014, as discussed below) in which we formerly held non-controlling majority ownershipinterests (we own 100% of each of these entities since the effective dates); (ii) a $13.0 million gain on the divestiture of real property (the Bridgeway),and; (iii) $427,000 of transaction costs related to the 2014 acquisition and divestiture activity previously mentioned. Net income and earnings pershare during 2013 includes approximately $200,000 of transaction costs related to the acquisition of three MOBs during 2013 and the first quarter of2014. Net income and earnings per share during 2012 includes an $8.5 million gain on the divestitures of properties owned by two unconsolidatedLLCs in which we formerly held non-controlling majority ownership interests, and $680,000 of transaction costs related to the acquisition of a medicalclinic and 28Table of Contents medical office building in 2012. Net income and earnings per share data during 2011 includes: (i) a $28.6 million gain recorded in connection with ourpurchase of third-party minority ownership interests in various LLCs in which we formerly held non-controlling majority ownership interests (we own100% of each of these entities since that time); (ii) a $35.8 million gain on the divestitures of properties owned by unconsolidated LLCs in which weformerly held non-controlling majority ownership interests; (iii) $518,000 of transaction costs related to the acquisition of four MOBs during 2011 andthe first quarter of 2012, and; (iv) a $5.4 million charge for a provision for asset impairment recorded on a certain MOB.(3)Amounts include: (i) the fair value of the real property (as of 2014) of the eight previously unconsolidated LLCs, which we began consolidating duringthe first and third quarters of 2014, subsequent to our purchase of the third-party minority ownership interests on January 1, 2014 and August 1, 2014(we owned 100% of each of these entities at December 31, 2014), and; (ii) the fair values of the real property (as of 2011) of various previouslyunconsolidated LLCs, which we began consolidating during the fourth quarter of 2011 subsequent to our purchase of the third-party minorityownership interests (we owned 100% of each of these entities at December 31, 2011).(4)Investments in LLCs at December 31, 2014, 2013, 2012 and 2011 reflect the consolidation of various LLCs, as mentioned in notes 2 and 3 above, aswell as the divestiture of property owned by various unconsolidated LLCs during 2012 and 2011. Additionally, at December 31, 2013, Investments inLLCs reflects the deconsolidation of Palmdale Medical Properties. This LLC was deemed to be a variable interest entity during the term of the masterlease and was consolidated in our financial statements through June 30, 2013 since we were the primary beneficiary through that date. Effective July 1,2013, this LLC is no longer be deemed a variable interest entity and is accounted for in our financial statements on an unconsolidated basis pursuant tothe equity method. Effective January 1, 2014, Investments in LLCs reflects the consolidation of Palmdale Medical Properties, since we purchased thethird-party minority ownership interests in Palmdale and began accounting for this LLC on a consolidated basis as of that date.(5)Excludes third-party debt that is non-recourse to us, incurred by unconsolidated LLCs in which we hold various non-controlling equity interests asfollows: $52.7 million as of December 31, 2014, $80.1 million as of December 31, 2013, $77.5 million as of December 31, 2012, $101.8 million as ofDecember 31, 2011 and $271.7 million as of December 31, 2010 (See Note 8 to the consolidated financial statements).(6)Our funds from operations (“FFO”) during 2014, 2013, 2012 and 2011 are net of reductions for transaction costs of $427,000, $203,000, $680,000 and$518,000, respectively. Funds from operations (“FFO”) is a widely recognized measure of performance for Real Estate Investment Trusts (“REITs”). We believe that FFO andFFO per diluted share, and adjusted funds from operations (“AFFO”) and AFFO per diluted share, which are non-GAAP financial measures (“GAAP” isGenerally Accepted Accounting Principles in the United States of America), are helpful to our investors as measures of our operating performance. Wecompute FFO, as reflected below, in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), whichmay not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREITdefinition differently than we interpret the definition. AFFO was also computed for 2014, 2013, 2012, 2011 and 2010, as reflected below, since we believe itis helpful to our investors since it adjusts for the transaction costs related to acquisitions. FFO/AFFO do not represent cash generated from operating activitiesin accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. In addition, FFO/AFFOshould not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) an alternative to cash flow from operatingactivities determined in accordance with GAAP; (iii) a measure of our liquidity, or; (iv) an indicator of funds available for our cash needs, including ourability to make cash distributions to shareholders. 29Table of ContentsA reconciliation of our reported net income to FFO and AFFO for each of the last five years is shown below: (000s) 2014 2013 2012 2011 2010 Net income $51,551 $13,169 $19,477 $73,794 $16,310 Depreciation and amortization expense on real property/intangibles: Consolidated investments 20,548 18,496 20,030 7,173 6,156 Unconsolidated affiliates 2,290 3,290 3,293 10,558 10,116 Provision for asset impairment — — — 5,354 — Less gains: Gains on fair value recognition resulting from the purchase of minority interestsin majority-owned LLCs, net (25,409) — — (28,576) — Gain on divestiture of real property (13,043) — — — — Gains on divestiture of properties owned by unconsolidated LLCs, net — — (8,520) (35,835) — Funds From Operations 35,937 34,955 34,280 32,468 32,582 Transaction costs 427 203 680 518 — Adjusted Funds From Operations $36,364 $35,158 $34,960 $32,986 $32,582 30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 facilitiescurrently including acute care hospitals, rehabilitation hospitals, sub-acute facilities, surgery centers, free-standing emergency departments, childcare centersand medical office buildings (“MOBs”). As of February 28, 2015, we have sixty-one real estate investments or commitments in eighteen states consisting of: • six hospital facilities including three acute care, one rehabilitation and two sub-acute; • three free-standing emergency departments; • forty-eight medical office buildings (“MOBs”), including five owned by unconsolidated LLCs, and; • four preschool and childcare centers. Forward Looking Statements This 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 of operations,business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on ourbusiness or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and thebenefits 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”). We cannot assure you thatsubsidiaries of UHS will renew the leases on our three acute care hospitals at existing lease rates or fair market value lease rates. In addition, ifsubsidiaries of UHS exercise their options to purchase the respective leased hospital facilities upon expiration of the lease terms, our futurerevenues and results of operations could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as comparedto the rental revenue currently earned pursuant to the hospital leases; • a number of legislative initiatives have recently been passed into law that may result in major changes in the health care delivery system on anational or state level to the operators of our facilities, including UHS. No assurances can be given that the implementation of these new lawswill not have a material adverse effect on the business, financial condition or results of operations of our operators; • a subsidiary of UHS is our Advisor and our officers are all employees of a wholly-owned subsidiary of UHS, which may create the potential forconflicts of interest; • lost revenues resulting from the exercise of purchase options, lease expirations and renewals, loan repayments and other restructuring; 31Table of Contents • our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund future growth of our business. Our $150 millionrevolving credit agreement is scheduled to expire on July 24, 2015. We are in the process of renegotiating our Credit Agreement and, althoughwe can provide no assurance we will do so, we expect to complete the replacement credit facility by March 31, 2015; • the outcome of known and unknown litigation, government investigations, and liabilities and other claims asserted against us or the operators ofour facilities; • failure of the operators of our hospital facilities to comply with governmental regulations related to the Medicare and Medicaid licensing andcertification requirements could have a material adverse impact on our future revenues and the underlying value of the property; • the potential unfavorable impact on our business of deterioration in national, regional and local economic and business conditions, including aworsening of credit and/or capital market conditions, which may adversely affect, our ability to obtain capital which may be required to fund thefuture growth of our business and refinance existing debt with near term maturities; • a deterioration in general economic conditions which could result in increases in the number of people unemployed and/or insured and likelyincrease the number of individuals without health insurance; as a result, the operators of our facilities may experience decreases in patientvolumes which could result in decreased occupancy rates at our medical office buildings; • a worsening of the economic and employment conditions in the United States could materially affect the business of our operators, includingUHS, which may unfavorably impact our future bonus rentals (on the UHS hospital facilities) and may potentially have a negative impact on thefuture lease renewal terms and the underlying value of the hospital properties; • 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 resulting from, among otherthings, the various health care reform initiatives being implemented; • there have been several attempts in Congress to repeal or modify various provisions of the Patient Protection and Affordable Care Act (the“PPACA”). We cannot predict whether or not any of these proposed changes to the PPACA will become law and therefore can provide noassurance that changes to the PPACA, as currently implemented, will not have a material adverse effect on the future operating results of thetenants/operators of our properties and, thus, our business. In addition, a case currently pending before The Supreme Court of the United States,King vs. Burwell, challenges the federal government’s ability to subsidize premiums paid by certain eligible individuals that obtain healthinsurance policies through federally facilitated exchanges. A number of our properties are located in states that utilize federally facilitatedexchanges. The Supreme Court of the United States’ decision in this case could result in an increased number of uninsured patients in the statesthat utilize federally facilitated exchanges which would have an adverse impact on the future operating results of the tenants/operators of ourfacilities located in these states and, thus, our business; • 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 by third party payors orgovernment programs, including Medicare (including, but not limited to, the potential unfavorable impact of future reductions to Medicarereimbursements resulting from the Budget Control Act of 2011, as discussed below) and Medicaid (most states have reported significant budgetdeficits that have, in the past, resulted in the reduction of Medicaid funding to the operators of our facilities, including UHS); demographicchanges; the ability to enter into managed care provider agreements on acceptable terms; an increase in uninsured and self-pay patients whichunfavorably impacts the collectability of patient accounts; 32Table of Contents 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; • in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act imposed annual spending limits for mostfederal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by theCongressional Budget Office. The 2011 Act provides for new spending on program integrity initiatives intended to reduce fraud and abuse underthe Medicare program. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint SelectCommittee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federalbudget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented on March 1, 2013resulting in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs. Wecannot predict whether Congress will restructure the implemented Medicare payment reductions or what federal other deficit reductioninitiatives may be proposed by Congress. We also cannot predict the effect this enactment will have on operators (including UHS), and, thus, ourbusiness; • in March, 2010, the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act were enacted intolaw and created significant changes to health insurance coverage for U.S. citizens as well as material revisions to the federal Medicare and stateMedicaid programs. The two combined primary goals of these acts are to provide for increased access to coverage for healthcare and to reducehealthcare-related expenses. Medicare, Medicaid and other health care industry changes are scheduled to be implemented at various times duringthis decade. We cannot predict the effect, if any, these enactments will have on operators (including UHS) and, thus, our business; • two of our MOBs, which are located in California, could not obtain earthquake insurance at rates which are economically beneficial in relation tothe risks covered; • competition for our operators from other REITs; • the operators of our facilities face competition from other health care providers, including physician owned facilities and other competingfacilities, including certain facilities operated by UHS but the real property of which is not owned by us. Such competition is experienced inmarkets including, but not limited to, McAllen, Texas, the site of our McAllen Medical Center, a 430-bed acute care hospital, and RiversideCounty, California, the site of our Southwest Healthcare System-Inland Valley Campus, a 132-bed acute care hospital; • changes in, or inadvertent violations of, tax laws and regulations and other factors than can affect REITs and our status as a REIT; • should we be unable to comply with the strict income distribution requirements applicable to REITs, utilizing only cash generated by operatingactivities, we would be required to generate cash from other sources which could adversely affect our financial condition; • our majority ownership interests in five LLCs in which we hold non-controlling equity interests. In addition, pursuant to the operating and/orpartnership agreements of most of the five LLCs in which we continue to hold non-controlling majority ownership interests, the third-partymember and the Trust, at any time, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) inwhich 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 asdetermined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer toPurchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 33Table of Contents days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest tothe Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 to 90 days of the acceptanceby the Non-Offering Member; • 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 tomake estimates 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 accountingpolicies to 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. The minimum rent for all hospital facilities is fixed over the initial term or renewal term of the respective leases. Rental income recorded by ourproperties, including our consolidated and unconsolidated 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,stipulated rent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of oneyear. As a result, the straight-line adjustments to rental revenue may vary from period-to-period. Bonus rents are recognized when earned based uponincreases in each facility’s net revenue in excess of stipulated amounts. Bonus rentals are determined and paid each quarter based upon a computation thatcompares the respective facility’s current quarter’s net revenue to the corresponding quarter in the base year. Tenant reimbursements for operating expensesare accrued as revenue in the same period the related expenses are incurred. Real Estate Investments: On the date of acquisition, the purchase price of a property is allocated to the property’s land, buildings and intangibleassets based upon our estimates of their fair values. Depreciation is computed using the straight-line method over the useful lives of the buildings and capitalimprovements. The value of intangible assets is amortized over the remaining lease term. 34Table of ContentsAsset 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,are less than the carrying value of the 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 balancesheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated action to betaken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially impact our netincome. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of thecarrying amount of the property 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. If we determine that theintangible assets are not recoverable from future cash flows, the excess of carrying value of the intangible asset over its estimated fair value is charged toincome. An other than temporary impairment of an investment/advance in an LLC is recognized when the carrying value of the investment is not consideredrecoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flow. To the extent impairment hasoccurred, the excess carrying value of the asset over its estimated fair value is charged to income. Investments in Limited Liability Companies (“LLCs”): Our consolidated financial statements include the consolidated accounts of our controlledinvestments and those investments that meet the criteria of a variable interest entity where we are the primary beneficiary. In accordance with the FASB’sstandards and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs which we donot control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, butnot limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95%non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to,and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investmentsmay be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied. At December 31, 2014, we have non-controlling equity investments or commitments in five jointly-owned LLCs which own medical office buildings.These LLCs are included in our financial statements for all periods presented on an unconsolidated basis pursuant to the equity method since they are notvariable interest entities. These LLCs are joint-ventures between us and non-related parties that manage and hold minority ownership interests in the entities.Each LLC is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and servicethe third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities sincethey are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures,leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash fundings aretypically advanced as equity or member loans. 35Table of ContentsPalmdale Medical Properties was consolidated in our financial statements through June 30, 2013 at which time its master lease with a wholly-ownedsubsidiary of UHS expired. For the period of July 1, 2013 through December 31, 2013, we accounted for Palmdale Medical Properties under the equitymethod. As discussed below, as a result of our purchase of the third-party minority ownership interest in Palmdale Medical Properties, effective January 1,2014, we began accounting for Palmdale Medical Properties on a consolidated basis. Effective August 1, 2014, we purchased the third-party minority ownership interests, ranging from 5% to 15%, in six LLCs (Desert Valley MedicalCenter, Santa Fe Professional Plaza, Rosenberg Children’s Medical Plaza, Sierra San Antonio Medical Plaza, Phoenix Children’s East Valley Care Center and3811 E. Bell Medical Building Medical Plaza). Effective January 1, 2014, we purchased the third-party minority ownership interests (5% for each LLC) inPalmdale Medical Properties and Sparks Medical Properties. We formerly held non-controlling majority ownership interests in all of these LLCs, and as aresult of our purchase of the minority ownership interests, we now hold 100% of the ownership interests in these LLCs which own MOBs. As a result, webegan accounting for the six LLCs mentioned above on a consolidated basis effective August 1, 2014 and we began accounting for Palmdale MedicalProperties and Sparks Medical Properties on a consolidated basis effective January 1, 2014, as discussed below. Each of the property’s assets and liabilitieswere recorded at their fair values (see Note 3 to the consolidated financial statements for additional disclosure). Other than an increase in depreciation andamortization expense resulting from the fair value recognition related to the purchase of the minority ownership interests, we do not expect these transactionsto have a material impact on our future results of operations. Federal Income Taxes: No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856 to 860 of theInternal Revenue Code of 1986, and intend to continue to remain so qualified. As such, we are exempt from federal income taxes and we are required todistribute at least 90% of our real estate investment taxable income to our shareholders. We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary incomeplus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax hasbeen reflected in the financial statements as no tax is expected to be 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 subsidiaryof UHS, serves as our advisor (the “Advisor”) under an Advisory Agreement dated December 24, 1986 between the Advisor and us (the “AdvisoryAgreement”). Our officers are all employees of a wholly-owned subsidiary of UHS and although as of December 31, 2014 we had no salaried employees, ourofficers do receive stock-based compensation. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investmentssuitable for such program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and toconduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who are unaffiliated with UHS (the “IndependentTrustees”). 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 may be terminated for any reason upon sixty days writtennotice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by theIndependent Trustees, that the Advisor’s performance has been satisfactory. Our advisory fee was 0.70% during each of 2014 and 2013, and 0.65% during2012, of our 36Table of Contentsaverage invested real estate assets, as derived from our consolidated balance sheet. In December of 2014, based upon a review of our advisory fee and othergeneral and administrative expenses, as compared to an industry peer group, the Advisory Agreement was renewed for 2015 pursuant to the same terms as theAdvisory Agreement in place during 2014 and 2013. The combined revenues generated from the leases on the UHS hospital facilities comprised approximately 28% for the year ended December 31, 2014and 30% for each of the years ended December 31, 2013 and 2012. The decrease during 2014, as compared to 2013, is due primarily to the 2014 purchase ofthe third-party minority ownership interests in eight LLCs in which we previously held noncontrolling majority ownership interests (we began recording thefinancial results of the entities in our financial statements on a consolidated basis at the effective dates). Including 100% of the revenues generated at theunconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%, the leases on the UHS hospital facilitiesaccounted for 22% of the combined consolidated and unconsolidated revenues for each of the years ended December 31, 2014 and 2013 and 21% of thecombined consolidated and unconsolidated revenues for the year ended December 31, 2012. The hospital leases with subsidiaries of UHS areunconditionally guaranteed by UHS and are cross-defaulted with one another. In addition, including the two free-standing emergency departments (“FEDs”)acquired by us from subsidiaries of UHS during the first quarter of 2015, fifteen MOBs/FEDs, that are either wholly or jointly-owned, include tenants whichare subsidiaries of UHS. For additional disclosure related to our relationship with UHS, please refer to Note 2 to the consolidated financial statements—Relationship with UHSand Related Party Transactions. 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, 2014. Results of Operations Year ended December 31, 2014 as compared to the year ended December 31, 2013: Effective August 1, 2014, we purchased the minority ownership interests, ranging from 5% to 15%, held by third-party members in six LLCs in whichwe previously held noncontrolling majority ownership interests. As a result of these minority ownership purchases, we now own 100% of each of these sixLLCs and our Consolidated Statement of Income for the year ended December 31, 2014 includes the revenues and expenses associated with each of theseproperties for the five-month period ended December 31, 2014. Prior to August 1, 2014, these LLCs were accounted for on an unconsolidated basis pursuantto the equity method, as discussed above. Effective January 1, 2014, we purchased the 5% minority ownership interests held by third-party members in Palmdale Medical Properties (“Palmdale”)and Sparks Medical Properties, two LLCs in which we previously held noncontrolling majority ownership interests. As a result of these minority ownershippurchases, we now own 100% of each of these LLCs and our Consolidated Statement of Income for the year ended December 31, 2014 includes the revenuesand expenses associated with each of these properties. Prior to January 1, 2014, these LLCs were accounted for on an unconsolidated basis pursuant to theequity method. Prior to our purchase of the minority ownership interest in Palmdale, and as a result of a master lease agreement with a wholly-ownedsubsidiary of UHS which expired on July 1, 2013, Palmdale was previously included in our financial statements on a consolidated basis during the period ofJanuary 1, 2013 through June 30, 2013, and on an unconsolidated basis during the period of July 1, 2013 through December 31, 2013. The table below provides supplemental financial information related to each of the above-mentioned entities for the year ended December 31, 2013and also presents 2013 on an “As Adjusted” financial statement presentation basis similar to the presentation applied for each entity for the year endedDecember 31, 2014. Other than the increased depreciation and amortization expense resulting from the amortization of the intangible assets recorded inconnection with these transactions, there was no material impact to our net income as a result of the consolidation of these LLCs. 37Table of ContentsYear Ended December 31, 2014 as compared to the Year Ended December 31, 2013: As reported inConsolidatedStatementsof Income forthe YearEndedDecember 31,2014 As reported inConsolidatedStatementsof Income forthe YearEndedDecember 31,2013 Year EndedDecember 31,2013Statementsof IncomeAdjustments(a.) “AsAdjusted”YearEndedDecember 31,2013 “AsAdjusted”Variance Revenues $59,786 $54,280 $4,184 $58,464 $1,322 Expenses: Depreciation and amortization 20,885 18,753 1,044 19,797 (1,088)Advisory fees to UHS 2,545 2,369 0 2,369 (176)Other operating expenses 16,882 14,409 2,083 16,492 (390)Transaction costs 427 203 0 203 (224) 40,739 35,734 3,127 38,861 (1,878)Income before equity in income of unconsolidated LLCs, interestexpense and gains 19,047 18,546 1,057 19,603 (556)Equity in income of unconsolidated LLCs 2,428 2,095 (207) 1,888 540 Gains on fair value recognition resulting from purchase ofminority interests in majority-owned LLCs 25,409 0 0 0 25,409 Gain on divestiture of real property 13,043 0 0 0 13,043 Interest expense, net (8,376) (7,472) (850) (8,322) (54)Net income $51,551 $13,169 $0 $13,169 $38,382 (a.)Adjustments include: (i) revenue and expense impact for the five months ended December 31, 2013, for the six LLCs that we began consolidatingeffective August 1, 2014, as mentioned above, and; (ii) revenue and expense impact for the six months ended December 31, 2013 for Palmdale MedicalProperties that we began consolidating effective January 1, 2014 (this LLC was accounted for on a consolidated basis for the first six months of 2013),and; (iii) revenue and expense impact for the year ended December 31, 2013 for Sparks Medical Properties that we began consolidating effectiveJanuary 1, 2014. During 2014, net income increased $38.4 million to $51.6 million as compared to $13.2 million during 2013. The increase was primarily attributableto the following, as computed utilizing the “As Adjusted” Variance column indicated on the table above: • an increase of $25.4 million from the aggregate gain recorded during 2014 on the fair value recognition resulting from purchase of minorityinterests in majority-owned LLCs, as discussed above; • an increase of $13.0 million from the gain recorded during 2014 on the divestiture of real property (The Bridgeway); • an increase of $347,000 in bonus rental earned on the hospital facilities leased to wholly-owned subsidiaries of UHS; • a decrease of approximately $1.1 million (As Adjusted) attributable to a net increase in depreciation and amortization expense, resultingprimarily from the fair value recognition recorded in connection with our acquisition of minority ownership interests in eight LLCs in Januaryand August, 2014; • a decrease of $224,000 resulting from the increase in transaction costs, and; • other combined net increase of approximately $895,000, including net income generated at properties acquired during 2014 and 2013. 38Table of ContentsTotal revenues increased by $1.3 million (As Adjusted) during 2014 as compared to 2013 primarily due to: (i) the revenues generated at MOBsacquired during 2014 and 2013; (ii) an increase in bonus rental revenue, as mentioned above, and; (iii) other combined net changes at existing properties. Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $15.5 million and $14.8million (“As Adjusted”) for 2014 and 2013, respectively. A large portion of the expenses associated with our consolidated medical office buildings is passedon directly to the tenants either directly as tenant reimbursements of common area maintenance expenses or included in base rental amounts. 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 consolidated statements of income. During 2014, we had a total of 80 new or renewed leases related to the medical office buildings, in which we have significant investments, some ofwhich are accounted for by the equity method. These leases comprised approximately 11% of the aggregate rentable square feet of these properties (6%related to renewed leases and 5% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property to property basedupon factors such as, but not limited to, the current occutopancy and age of our buildings, local overall economic conditions, proximity to hospital campusesand the vacancy rates, rental rates and capacity of our competitors in the market. The weighted-average tenant improvement costs associated with these newor renewed leases was approximately $22 per square foot during 2014. The weighted-average leasing commissions on the new and renewed leasescommencing during 2014 was approximately 2% of base rental revenue over the term of the leases. The average aggregate value of the tenant concessions,generally consisting of rent abatements, provided in connection with new and renewed leases commencing during 2014 was approximately 2% of the futureaggregate base rental revenue over the lease terms. Rent abatements were, or will be, recognized in our results of operations under the straight-line methodover the lease term regardless of when payments are due. In connection with lease renewals executed during 2014, the weighted-average rental rates, ascompared to rental rates on the expired leases, decreased by approximately 1%. Funds from operations (“FFO”) is a widely recognized measure of performance for Real Estate Investment Trusts (“REITs”). We believe that FFO andFFO per diluted share, and adjusted funds from operations (“AFFO”) and AFFO per diluted share, which are non-GAAP financial measures (“GAAP” isGenerally Accepted Accounting Principles in the United States of America), are helpful to our investors as measures of our operating performance. Wecompute FFO, as reflected below, in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), whichmay not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREITdefinition differently than we interpret the definition. AFFO was also computed for the years ended 2014 and 2013, as reflected below, since we believe it ishelpful to our investors since it adjusts for the effect of the transaction costs related to acquisitions. FFO/AFFO do not represent cash generated fromoperating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. Inaddition, FFO/AFFO should not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) an alternative to cashflow from operating activities determined in accordance with GAAP; (iii) a measure of our liquidity, or; (iv) an indicator of funds available for our cash needs,including our ability to make cash distributions to shareholders. 39Table of ContentsBelow is a reconciliation of our reported net income to FFO and AFFO for 2014 and 2013 (in thousands): 2014 2013 Net income $51,551 $13,169 Depreciation and amortization expense on real property/intangibles of consolidated investments 20,548 18,496 Depreciation and amortization expense on real property/intangibles of unconsolidated affiliates 2,290 3,290 Gains on fair value recognition resulting from the purchase of minority interests in majority-owned LLCs (25,409) — Gain on divestiture of real property (13,043) — Funds From Operations 35,937 34,955 Transaction costs 427 203 Adjusted Funds From Operations $36,364 $35,158 Our FFO increased $1.0 million to $35.9 million during 2014 as compared to $35.0 million during 2013. The increase was primarily due to: (i) afavorable change of $38.4 million in net income, as discussed above; (ii) minus the $38.5 million of combined gains, as discussed above, plus; (iii) thefavorable effect of the adding back increased depreciation expense incurred by us and our unconsolidated affiliates amounting to approximately $1.1million. Our AFFO, which excludes transactions costs incurred during each year, were $36.4 million during 2014 as compared to $35.2 million during 2013. 40Table of ContentsYear ended December 31, 2013 as compared to the year ended December 31, 2012: Our Consolidated Statement of Income for the year ended December 31, 2012, includes the revenue and expenses associated with Palmdale MedicalProperties, an LLC in which we held a 95% non-controlling equity interest as of December 31, 2013 (we now hold 100% of the ownership in this LLCeffective as of January 1, 2014). As previously discussed, effective July 1, 2013, the master lease agreement between Palmdale Medical Properties andPalmdale Regional Medical Center, a wholly-owned subsidiary of UHS, expired. Therefore, effective on July 1, 2013, this LLC was no longer considered avariable interest entity and we began accounting for this LLC on an unconsolidated basis pursuant to the equity method. Prior to the expiration of the masterlease, this LLC was accounted for on a consolidated basis, through June 30, 2013. The table below reflects the “As Adjusted” Statement of Income for thetwelve months ended December 31, 2012, reflecting the revenue and expense impact of the deconsolidation of this LLC as if it had been deconsolidatedeffective July 1, 2012, since our Consolidated Statement of Income for the first six months of 2013 includes the revenue and expenses associated withPalmdale Medical Properties. There was no material impact to our net income as a result of the deconsolidation of this LLC. Year Ended December 31, 2013 Year Ended December 31, 2012 As reportedinConsolidatedStatementsof Income As reportedinConsolidatedStatementsof Income July 1 –December 31,2012Statementsof IncomeforPalmdaleMedicalProperties “AsAdjusted” “AsAdjusted”Variance Revenues $54,280 $53,950 $657 $53,293 $987 Expenses: Depreciation and amortization 18,753 20,216 172 20,044 1,291 Advisory fees to UHS 2,369 2,119 — 2,119 (250) Other operating expenses 14,409 14,575 266 14,309 (100) Transaction costs 203 680 — 680 477 35,734 37,590 438 37,152 1,418 Income before equity in income ofunconsolidated LLCs, interest expense andgains, net 18,546 16,360 219 16,141 2,405 Equity in income of unconsolidated LLCs 2,095 2,365 (13) 2,378 (283) Gains on divestiture of properties owned byunconsolidated LLCs — 8,520 — 8,520 (8,520) Interest expense, net (7,472) (7,768) (206) (7,562) 90 Net income $13,169 $19,477 $— $19,477 ($6,308) During 2013, net income decreased $6.3 million to $13.2 million as compared to $19.5 million during 2012. The decrease was primarily attributable tothe following, as computed utilizing the “As Adjusted” Variance column indicated on the table above: • an unfavorable change of $8.5 million resulting from the aggregate net gains recorded during 2012 on divestiture of properties owned by twounconsolidated LLCs in which we formerly held noncontrolling majority ownership interests, as discussed below and herein (see Note 3 to theConsolidated Financial Statements); 41Table of Contents • a favorable change of $1.3 million (As Adjusted) resulting from a decrease in depreciation and amortization expense, resulting primarily from a$1.7 million decrease in amortization expense recorded on intangible assets, partially offset by an increase in depreciation expense resultingfrom MOBs acquired during 2013 and the fourth quarter of 2012; • a favorable change of $477,000 resulting from a decrease in transaction costs; • a favorable change of $90,000 (As Adjusted) in interest expense due primarily to a decrease in the average effective borrowing rate pursuant tothe terms of our $150 million revolving credit agreement, partially offset by an increase in our average outstanding borrowings (as discussedbelow in Credit facilities and mortgage debt), and; • other combined net favorable changes of $354,000 including the aggregate net operating income (before depreciation and amortization andinterest expense) generated at three MOBs acquired during 2013 and the fourth quarter of 2012, partially offset by the net operating lossesincurred at a newly constructed MOB that opened in April, 2013 (property is owned by an unconsolidated LLC in which we hold anoncontrolling majority ownership interest). Total revenues increased approximately $1.0 million (As Adjusted) during 2013, as compared to 2012, due primarily from increases resulting fromMOBs acquired during 2013 and the fourth quarter of 2012, partially offset by other combined revenue decreases experienced at certain properties. Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $12.9 million and $12.6million (As Adjusted basis), for 2013 and 2012, respectively. The increase in other operating expenses during 2013, as compared to 2012, is primarilyattributable to expenses related to the MOBs acquired during 2013 and the fourth quarter of 2012. A large portion of the expenses associated with ourconsolidated medical office buildings is passed on to the tenants either directly as tenant reimbursements of common area maintenance expenses or includedin base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and areincluded in tenant reimbursements and other revenue in our consolidated statements of income. During 2013, we had a total of 106 new or renewed leases related to the medical office buildings indicated above, in which we have significantinvestments, some of which are accounted for by the equity method. These leases comprised approximately 13% of the aggregate rentable square feet of theseproperties (8% related to renewed leases and 5% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property toproperty based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity tohospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. The weighted-average tenant improvement costsassociated with these new or renewed leases was approximately $17 per square foot during 2013. The weighted-average leasing commissions on the new andrenewed leases commencing during 2013 was approximately 3% of base rental revenue over the term of the leases. The average aggregate value of the tenantconcessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during 2013 was approximately 2%of the future aggregate base rental revenue over the lease terms. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. In connection with lease renewals executed during 2013, the weighted-average rentalrates, as compared to rental rates on the expired leases, decreased by approximately 6%. 42Table of ContentsBelow is a reconciliation of our reported net income to FFO and AFFO for 2013 and 2012 (in thousands): 2013 2012 Net income $13,169 $19,477 Depreciation and amortization expense on real property/intangibles of consolidated investments 18,496 20,030 Depreciation and amortization expense on real property/intangibles of unconsolidated affiliates 3,290 3,293 Gains (net of related transaction costs) on divestiture of properties owned by unconsolidated LLCs — (8,520) Funds From Operations 34,955 34,280 Transaction costs 203 680 Adjusted Funds From Operations $35,158 $34,960 Our FFO increased $675,000 to $35.0 million during 2013 as compared to $34.3 million during 2012. The increase was primarily due to: (i) anunfavorable change of $6.3 million resulting from the decrease in net income, as discussed above; (ii) an unfavorable change of $1.5 million in the add-backof depreciation and amortization expense on real property/intangibles, and; (iii) a favorable change of $8.5 million in gains recorded on divestiture ofproperties owned by an unconsolidated LLCs. Our AFFO, which excludes transactions costs incurred during each year, were $35.2 million during 2013 ascompared to $35.0 million during 2012. Effects of Inflation Inflation has not had a material impact on our results of operations over the last three years. However, since the healthcare industry is very laborintensive and salaries and benefits are subject to inflationary pressures, as are supply and other costs, we and the operators of our hospital facilities cannotpredict the impact that future economic conditions may have on our/their ability to contain future expense increases. Depending on general economic andlabor market conditions, the operators of our hospital facilities may experience unfavorable labor market conditions, including a shortage of nurses whichmay cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Their ability to pass on increased costs associated with providinghealthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit theirability to increase prices. Therefore, there can be no assurance that these factors will not have a material adverse effect on the future results of operations ofthe operators of our facilities which may affect 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,our future operating results may be adversely impacted by the effects of inflation. 43Table of ContentsLiquidity and Capital Resources Year ended December 31, 2014 as compared to December 31, 2013: Net cash provided by operating activities Net cash provided by operating activities was $32.8 million during 2014 as compared to $31.3 million during 2013. The $1.5 million increase wasattributable to: • a favorable change of $2.2 million due to an increase in net income plus the adjustments to reconcile net income to net cash provided byoperating activities (depreciation and amortization, amortization on debt premium, restricted stock-based compensation, gain on divestiture ofreal property and gains on purchases of minority interests in majority owned LLCs), as discussed above in Results of Operations; • an unfavorable change of $1.0 million in accrued expenses and other liabilities resulting primarily from the timing of accrued expenses and otherliabilities disbursements; • an unfavorable change of $319,000 in tenant reserves, escrows, deposits and prepaid rents resulting primarily from a decrease in prepaid rents,and; • other combined net favorable changes of $646,000, including a favorable change in rent receivable of approximately $200,000. Net cash used in investing activities Net cash used in investing activities was $4.0 million during 2014 as compared to $13.4 million during 2013. 2014: During 2014, we used $4.0 million of net cash in investing activities as follows: • spent $1.3 million to fund equity investments in unconsolidated LLCs; • spent $2.9 million on additions to real estate investments primarily for tenant improvements at various MOBs; • spent $15.6 million to acquire the real estate assets of three medical office buildings; • spent $4.7 million (plus a net note payable of $2.3 million to the previous third-party minority interest member, which was satisfied duringJanuary, 2015) to acquire the minority interests in eight majority-owned LLCs in two separate transactions effective August 1, 2014 andJanuary 1, 2014, as previously discussed; • spent $100,000 consisting of a deposit on real estate assets related to the acquisition of a medical office buildings that we purchased during thefirst quarter of 2015; • received $17.3 million of cash proceeds in connection with the sale of The Bridgeway, as discussed above; • received $2.3 million of cash distribution proceeds in connection with refinancing of third-party debt by the LLC that owns the Texoma MedicalPlaza in which we have a 95% non-controlling equity interest, and; • received $1.0 million of cash in excess of income related to our unconsolidated LLCs ($3.4 million of cash distributions received less $2.4million of equity in income of unconsolidated LLCs); 44Table of Contents2013: During 2013, we used $13.4 million of net cash in investing activities as follows: • spent $3.0 million to fund equity investments in unconsolidated LLCs; • spent $4.6 million in advances in the form of member loans to unconsolidated LLCs; • spent $3.4 million on additions to real estate investments primarily for tenant improvements at various MOBs; • spent $4.7 million to acquire the real estate assets of two medical office buildings; • spent $150,000 consisting of a deposit on real estate assets related to the acquisition of two medical office buildings that we purchased duringthe first quarter of 2014; • received $2.3 million of cash in excess of income related to our unconsolidated LLCs ($4.4 million of cash distributions received less $2.1million of equity in income of unconsolidated LLCs), and; • received $114,000 in repayments of advances previously made to an unconsolidated LLC. Net cash used in financing activities Net cash used in financing activities was $29.8 million during 2014 as compared to $17.5 million during 2013. The $29.8 million of net cash used in financing activities during 2014 consisted of: (i) generated $19.3 million of net cash from the issuance of sharesof beneficial interest, $19.0 million of which related to our at-the-market equity issuance program (as discussed below) and approximately $250,000 of whichwas primarily related to our dividend reinvestment program; (ii) paid $32.7 million of dividends; (iii) paid $12.3 million on mortgage and other notespayable that are non-recourse to us (including the pay-off of the $9.1 million outstanding mortgage balance on the Summerlin Hospital Medical OfficeBuilding I utilizing borrowed funds under our revolving credit facility); (iv) paid $4.0 million net repayments on our revolving line of credit, and; (v) paid$94,000 as partial settlement of accrued dividend equivalent rights. The $17.5 million of net cash used in financing activities during 2013 consisted of: (i) generated $12.0 million of additional net borrowings on ourrevolving line of credit; (ii) generated $11.2 million of proceeds related to a new mortgage note payable (refinance) that is non-recourse to us; (iii) generated$5.8 million of net cash from the issuance of shares of beneficial interest, $5.5 million of which related to our at-the-market equity issuance program (asdiscussed below) and approximately $250,000 of which was related to our dividend reinvestment program; (iv) paid $31.8 million of dividends; (v) paid$14.4 million on mortgage and other notes payable that are non-recourse to us (including the pay-off of a mortgage note payable that was refinanced duringthe first quarter of 2013, resulting in the above-mentioned $11.2 million of mortgage proceeds to us); (vi) paid $101,000 as partial settlement of accrueddividend equivalent rights, and; (vii) paid $95,000 of financing costs on mortgage and other notes payable. During the fourth quarter of 2013, we commenced an at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we may sell, fromtime-to-time, common shares of our beneficial interest up to an aggregate sales price of $50 million to or through Merrill Lynch, Pierce, Fenner and Smith,Incorporated (“Merrill Lynch”), as sales agent and/or principal. Since inception of this program, we have issued 580,900 shares at an average price of $45.97 per share, which generated approximately $25.6 millionof net cash proceeds or receivables (net of approximately $1.1 million, consisting of compensation of $667,000 to Merrill Lynch, as well as $391,000 ofother various fees and expenses), as follows: • 2014: We issued 426,187 shares at an average price of $47.51 per share which generated approximately $19.5 million of net cash proceeds orreceivables (net of approximately $700,000, consisting of compensation of $506,000 to Merrill Lynch, as well as $195,000 of other various feesand expenses), and; 45Table of Contents • 2013: We issued 154,713 shares at an average price of $41.71 per share which generated approximately $6.1 million of net cash proceeds orreceivables (net of $357,000, consisting of compensation of $161,000 to Merrill Lynch, as well as $196,000 of other various fees and expenses). In connection with this ATM program, our consolidated balance sheet includes approximately $1.1 million at December 31, 2014, and $600,000 atDecember 31, 2013, of net proceeds due to us in connection with shares issued in late December 2014 and 2013. The net cash proceeds related to these shareswas received by us in early January 2015, and early January, 2014, respectively. The net proceeds receivable were non-cash items, as presented on theConsolidated Statements of Cash Flows at December 31, 2014 and 2013. Year ended December 31, 2013 as compared to December 31, 2012: Net cash provided by operating activities Net cash provided by operating activities was $31.3 million during 2013 as compared to $30.8 million during 2012. The $511,000 increase wasattributable to: • a favorable change of $1.1 million due to an increase in net income plus the adjustments to reconcile net income to net cash provided byoperating activities (depreciation and amortization, amortization on debt premium, restricted stock-based compensation and net gains ondivestiture of properties owned by unconsolidated LLCs), as discussed above in Results of Operations; • a favorable change of $116,000 in rent receivable; • an unfavorable change of $191,000 in tenant reserves, escrows, deposits and prepaid rents, and; • other combined net unfavorable changes of $526,000, resulting primarily from an increase in leasing commissions paid during 2013, ascompared to 2012. Net cash used in investing activities Net cash used in investing activities was $13.4 million during 2013 as compared to $8.6 million during 2012. The factors contributing to the $13.4million of net cash used in investing activities during 2013 are detailed above. 2012: During 2012, we used $8.6 million of net cash in investing activities as follows: • spent $3.0 million to fund equity investments in unconsolidated LLCs; • spent $8.0 million to fund an advance in the form of a member loan to an unconsolidated LLC that owned the Centinela Medical BuildingComplex to extinguish its third-party debt (this entity divested its property during the fourth quarter of 2012 and the member loan was repaid tous in full); • spent $4.0 million on additions to real estate investments primarily for tenant improvements at various MOBs; • spent $16.9 million (net of certain acquired liabilities, third-part debt and prepaid deposits) to acquire the real estate assets of two medical officebuildings; • spent $711,000 on payments made in settlement of assumed liabilities related to the acquired properties; • received $8.6 million in repayments of advances previously provided to unconsolidated LLCs as follows: • $8.0 million from the LLC that owned the Centinela Medical Building in which we had a 90% non-controlling equity interest (thisproperty was divested during the fourth quarter of 2012), and; • $600,000 from various other LLCs in which we own non-controlling equity interests. 46Table of Contents • received $3.2 million of cash in excess of income related to our unconsolidated LLCs ($5.6 million of cash distributions received less $2.4million of equity in income of unconsolidated LLCs); • received $12.2 million, net, of cash in connection with our share of the proceeds received from the divestiture of property owned by twounconsolidated LLCs, and; • received $100,000 of refunded real estate deposits. Net cash used in financing activities Net cash used in financing activities was $17.5 million during 2013 as compared to $30.8 million during 2012. The factors contributing to the $17.5million of net cash used in financing activities during 2013 are detailed above. The $30.8 million of net cash used in financing activities during 2012 consisted of: (i) generated $4.6 million from additional net borrowings on ourrevolving line of credit; (ii) generated $14.0 million of proceeds related to two mortgage notes payable that are non-recourse to us; (iii) generated $350,000of net cash from the issuance of shares of beneficial interest; (iv) paid $31.2 million of dividends; (v) paid $18.1 million on mortgage and other notes payablethat are non-recourse to us (including the pay-offs of two mortgage notes payable that were refinanced during the second and fourth quarters of 2012,resulting in the $14.0 million of proceeds, as mentioned above, as well as a $600,000 mortgage principal pay-down); (vi) paid $384,000 of financing costs onmortgage and other notes payable, and; (vii) paid $106,000 as partial settlement of accrued dividend equivalent rights. Additional cash flow and dividends paid information for 2014, 2013 and 2012: As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of $32.8 million during 2014, $31.3million during 2013 and $30.8 million during 2012. As also indicated on our statements of cash flows, noncash expenses such as depreciation andamortization expense, amortization on debt premium, restricted stock-based compensation expense and provision for asset impairment, as well as the gainsrecorded during 2014 and 2012, are the primary differences between our net income and net cash provided by operating activities for each year. In addition,as reflected in the cash flows from investing activities section, we received $1.0 million during 2014, $2.3 million during 2013 and $3.2 million during 2012,of cash distributions in excess of income from various unconsolidated LLCs which represents our share of the net cash flow distributions from these entities.These cash distributions in excess of income represent operating cash flows net of capital expenditures and debt repayments made by the LLCs. We generated $33.8 million during 2014, $33.6 million during 2013 and $34.0 million during 2012 related to the operating activities of our propertiesrecorded on a consolidated and an unconsolidated basis. We paid dividends of $32.7 million during 2014, $31.8 million during 2013 and $31.2 millionduring 2012. During 2014, the $33.8 million of net cash generated related to the operating activities of our properties exceeded the $32.7 million ofdividends paid by approximately $1.1 million. During 2013, the $33.6 million of net cash generated related to the operating activities of our propertiesexceeded the $31.8 million of dividends paid by approximately $1.9 million. During 2012, the $34.0 million of net cash generated related to the operatingactivities of our properties exceeded the $31.2 million of dividends paid by approximately $2.8 million. As indicated in the cash flows from investing activities and cash flows from financing activities sections of the statements of cash flows, there werevarious other sources and uses of cash during each of the last three years. Therefore, the funding source for our dividend payments is not wholly dependent onthe operating cash flow generated by our properties in any given period. Rather, our dividends, as well as our capital reinvestments into our existingproperties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses ofcash from the properties we own either in whole or through LLCs, as outlined above. 47Table of ContentsIn determining and monitoring our dividend level on a quarterly basis, our management and Board of Trustees consider many factors in determiningthe amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order tomaintain our REIT status; (ii) the current and projected operating results of our properties, including those jointly-owned in LLCs, and; (iii) our future capitalcommitments and debt repayments, including those of our jointly-owned LLCs. Based upon the information discussed above, as well as consideration ofprojections and forecasts of our future operating cash flows, management and the Board of Trustees have determined that our operating cash flows have beensufficient to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to ourprojected future results of operations. Included in the various sources of cash were: (i) funds generated from the repayments of advances made from us to LLCs ($114,000 in 2013 and $8.6million in 2012); (ii) cash distributions of refinancing proceeds from LLCs of $2.3 million in 2014; (iii) $17.3 million in 2014 of funds generated from thedivestiture of real property; (iv) net borrowings on our revolving credit agreement ($12.0 million during 2013 and $4.6 million during 2012); and;(v) issuance of shares of beneficial interest ($19.3 million during 2014, $5.8 million during 2013 and $350,000 during 2012). In addition, during 2012, fundswere generated from the divestiture of property owned by unconsolidated LLCs, our share of which was $12.2 million. In addition to the dividends paid, the following were also included in the various uses of cash: (i) investments in LLCs ($1.3 million during 2014 and$3.0 million during each of 2013 and 2012); (ii) advances made to LLCs/third-party partners ($4.6 million during 2013 and $8.0 million during 2012);(iii) additions to real estate investments and acquisitions of real property ($2.9 million in 2014, $3.4 million in 2013 and $4.0 million in 2012);(iv) acquisitions of medical office buildings ($15.6 million in 2014, $4.7 million in 2013 and $16.9 million in 2012); (v) acquisition of minority interests inmajority-owned LLCs ($4.7 million in 2014); (vi) net repayments on our revolving credit agreement ($4.0 million during 2014); (vii) net repayments ofmortgage, construction, third-party partners and other loans payable of consolidated MOBs and LLCs, net of financing costs ($12.3 million during 2014,$3.3 million during 2013 and $4.5 million during 2012); (viii) partial settlement of dividend equivalent rights (approximately $100,000 during each of2014, 2013 and 2012); (ix) deposits on real estate assets ($100,000 during 2014 and $150,000 during 2013), and; (x) payments of assumed liabilities onacquired properties ($711,000 in 2012). We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally generated and additional funds. Additional fundsmay be obtained through: (i) the issuance of equity pursuant to our at-the-market (“ATM”) equity issuance program (which has $23.3 million of grossproceeds remaining for issuance as of December 31, 2014); (ii) borrowings under our $150 million revolving credit facility (which has $54.0 million ofavailable borrowing capacity, net of outstanding borrowings and letters of credit, as of December 31, 2014); (iii) borrowings under or refinancing of existingthird-party debt pursuant to mortgage loan agreements entered into by our LLCs, and/or; (iv) the issuance of other long-term debt. We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our revolving credit facility and equityissuance capacity pursuant to the terms of the ATM program, and access to the capital markets provide us with sufficient capital resources to fund ouroperating, investing and financing requirements for the next twelve months, including providing sufficient capital to allow us to make distributionsnecessary to enable us to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. In the event we need to access thecapital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptabletime. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial conditionand liquidity. Credit facilities and mortgage debt In July, 2011, we entered into a $150 million revolving credit agreement (“Credit Agreement”) which is scheduled to expire on July 24, 2015. We arein the process of renegotiating our Credit Agreement and, although 48Table of Contentswe can provide no assurance we will do so, we expect to complete a replacement credit facility by March 31, 2015. The Credit Agreement includes a $50million sub limit for letters of credit and a $20 million sub limit for swingline/short-term loans. The Credit Agreement also provides an option to increase thetotal facility borrowing capacity by an additional $50 million, subject to lender agreement. Borrowings made pursuant to the Credit Agreement will bearinterest, at our option, at one, two, three, or six month LIBOR plus an applicable margin ranging from 1.75% to 2.50% or at the Base Rate plus an applicablemargin ranging from 0.75% to 1.50%. The Credit Agreement defines “Base Rate” as the greatest of: (a) the administrative agent’s prime rate; (b) the federalfunds effective rate plus 0.50%, and; (c) one month LIBOR plus 1%. A fee of 0.30% to 0.50% will be charged on the unused portion of the commitment. Themargins over LIBOR, Base Rate and the commitment fee are based upon our ratio of debt to total capital. At December 31, 2014, the applicable margin overthe LIBOR rate was 2.00%, the margin over the Base Rate was 1.00%, and the commitment fee was 0.35%. At December 31, 2014, we had $89.8 million of outstanding borrowings and $6.3 million of letters of credit outstanding against our Credit Agreement.We had $54.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2014. There areno compensating balance requirements. The average amounts outstanding under our Credit Agreement were $104.6 million in 2014, $86.3 million in 2013and $75.4 million in 2012 with corresponding effective interest rates, including commitment fees, of 2.4% in 2014, 2.2% in 2013 and 2.4% in 2012. Thecarrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was $89.8 million at December 31, 2014. 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 of 1986 and related regulationsgoverning real estate investment trusts. We are in compliance with all of the covenants at December 31, 2014. We also believe that we would remain incompliance if the full amount of our commitment was borrowed. The following table includes a summary of the required compliance ratios, giving effect to the covenants contained in the Credit Agreement (dollaramounts in thousands): Covenant December 31,2014 Tangible net worth $125,000 $181,458 Debt to total capital < 55% 30.0% Debt service coverage ratio >3.00x 25.4x Debt to cash flow ratio < 3.50x 1.29x We have sixteen mortgages, all of which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2014, with a combinedoutstanding balance of $122.9 million (excluding net debt premium of $523,000 at December 31, 2014). The following table summarizes our outstandingmortgages at December 31, 2014 (amounts in thousands): Facility Name OutstandingBalance(in thousands) (a) InterestRate MaturityDateSpring Valley Medical Office Building fixed rate mortgage loan (b.) $4,920 5.50% February, 2015Desert Valley Medical Center floating rate mortgage loan (c.) 3,861 3.41% October, 2015Palmdale Medical Plaza fixed rate mortgage loan (c.) 6,008 3.69% October, 2015Summerlin Hospital Medical Office Building III floating rate mortgage loan 11,025 3.41% December, 2016Peace Health fixed rate mortgage loan 21,248 5.64% April, 2017Auburn Medical II floating rate mortgage loan 7,183 2.90% April, 2017Medical Center of Western Connecticut fixed rate mortgage loan 4,785 6.00% June, 2017 49Table of ContentsFacility Name OutstandingBalance(in thousands) (a) InterestRate MaturityDateSummerlin Hospital Medical Office Building II fixed rate mortgage loan 11,729 5.50% October, 2017Phoenix Children’s East Valley Care Center fixed rate mortgage loan 6,485 5.88% December, 2017Centennial Hills Medical Office Building floating rate mortgage loan 10,642 3.41% January, 2018Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan 4,479 3.41% February, 2018Rosenberg Children’s Medical Plaza fixed rate mortgage loan 8,479 4.85% May, 2018Vibra Hospital of Corpus Christi fixed rate mortgage loan 2,902 6.50% July, 2019700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 6,601 4.54% June, 2022BRB Medical Office Building fixed rate mortgage loan 6,673 4.27% December, 2022Tuscan Professional Building fixed rate mortgage loan 5,862 5.56% June, 2025Total $122,882 (a.)Amortized principal payments are made on a monthly basis.(b.)This loan was repaid in full on February 10, 2015, utilizing funds borrowed under our revolving credit facility.(c.)We expect these loans, which have a maturity date in October, 2015, to be refinanced at the then current market interest rates or repaid utilizing fundsborrowed under our revolving credit facility. The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages have a combined fair value ofapproximately $124.7 million as of December 31, 2014. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact oninterest incurred or cash flow. Contractual Obligations: The following table summarizes the schedule of maturities of our outstanding borrowing under our revolving credit facility (“Credit Agreement”), theoutstanding mortgages applicable to our properties recorded on a consolidated basis and our other contractual obligations as of December 31, 2014 (amountsin thousands): Payments Due by Period (dollars in thousands) Debt and Contractual Obligation Total Less than 1 Year 2-3 years 4-5 years More than5 years Long-term non-recourse debt-fixed(a)(b) $85,692 $12,973 $45,421 $12,432 $14,866 Long-term non-recourse debt-variable(a)(b) 37,190 4,923 18,578 13,689 — Long-term debt-variable(c) 89,750 89,750 — — — Estimated future interest payments on debt outstanding as ofDecember 31, 2014(d) 18,450 6,484 8,134 1,961 1,871 Equity and debt financing commitments(e) 2,639 2,639 — — — Total contractual obligations $233,721 $116,769 $72,133 $28,082 $16,737 (a)The mortgages are secured by the real property of the buildings as well as property leases and rents. Property-specific debt is detailed above.(b)Consists of non-recourse debt with a fair value of approximately $124.7 million as of December 31, 2014. Changes in market rates on our fixed ratedebt impacts the fair value of debt, but it has no impact on interest incurred or cash flow. Excludes $52.7 million of combined third-party debtoutstanding as of December 31, 2014, that is non-recourse to us, at the unconsolidated LLCs in which we hold various non-controlling ownershipinterests (see Note 8 to the consolidated financial statements).(c)Consists of $89.8 million of borrowings outstanding as of December 31, 2014 under the terms of our $150 million Credit Agreement which matures onJuly 24, 2015. The amount outstanding approximates fair value 50Table of Contents as of December 31, 2014. We are in the process of renegotiating our Credit Agreement, and although we can provide no assurance we will do so, weexpect to complete a replacement credit facility by March 31, 2015.(d)Assumes that all debt outstanding as of December 31, 2014, including borrowings under the Credit Agreement, and the sixteen loans, which are non-recourse to us, remain outstanding until the stated maturity date of the debt agreements at the same interest rates which were in effect as ofDecember 31, 2014. We have the right to repay borrowings under the Credit Agreement at any time during the terms of the agreement, without penalty.Interest payments are expected to be paid utilizing cash flows from operating activities or borrowings under our revolving Credit Agreement.(e)As of December 31, 2014, we have equity investment and debt financing commitments remaining in connection with our investments in variousunconsolidated LLCs. As of December 31, 2014, we had outstanding letters of credit which secured the majority of these equity and debt financingcommitments. The $54.0 million of available borrowing capacity as of December 31, 2014, pursuant to the terms of our Credit Agreement, is net of thestandby letters of credit outstanding at that time. Our remaining financing commitments related to our investments in unconsolidated LLCs are asfollows (in thousands): Amount Grayson Properties $406 FTX MOB Phase II 1,076 Arlington Medical Properties 1,157 Total $2,639 Off Balance Sheet Arrangements As of December 31, 2014, 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, 2014 totaled $6.3 millionconsisting of: (i) $2.1 million related to Centennial Hills Medical Properties; (ii) $1.3 million related to Palmdale Medical Properties; (iii) $1.3 millionrelated to Banburry Medical Properties; (iv) $1.1 million related to FTX MOB Phase II, and; (v) $478,000 related to Arlington Medical Properties. ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk Market Risks Associated with Financial Instruments As of December 31, 2014, 2013, and 2012, we had no material outstanding interest rate swap agreements. During the third quarter of 2013, we entered into an interest rate cap on a total notional amount of $10 million whereby we paid a premium of$136,000. During the first quarter of 2014, we entered into two additional interest rate cap agreements on a total notional amount of $20 million whereby wepaid premiums of $134,500. In exchange for the premium payments, the counterparties agreed to pay us the difference between 1.50% and one-month LIBORif one-month LIBOR rises above 1.50% during the term of the cap. From inception through December 31, 2014, no payments have been made to us by thecounterparties pursuant to the terms of these caps which expire on January 13, 2017. The sensitivity analysis related to our fixed and variable rate debt assumes current market rates with all other variables held constant. The fair value ofour debt is approximately $214 million. The difference between actual amounts outstanding and fair value is approximately $1.8 million. 51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, 2014. 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) 2015 2016 2017 2018 2019 Thereafter Total Long-term debt: Fixed rate: Debt(a) $12,973 $2,154 $43,267 $8,969 $3,463 $14,866 $85,692 Average interest rates 5.3% 5.4% 5.2% 5.1% 5.0% 4.8% 5.1% Variable rate: Debt(b) $94,673 $11,446 $7,132 $13,689 $— $— $126,940 Average interest rates 2.6% 3.3% 3.5% 3.4% — — 3.2% Interest rate caps: Notional amount $— $— $30,000 $— $— $— $30,000 Interest rates 1.5% (a)Consists of non-recourse mortgage notes payable.(b)Includes $37.2 million of non-recourse mortgage notes payable and of $89.8 million of outstanding borrowings under the terms of our $150 millionrevolving credit agreement. As calculated based upon our variable rate debt outstanding as of December 31, 2014 that is subject to interest rate fluctuations, each 1% change ininterest rates would impact our net income by approximately $1.7 million. ITEM 8.Financial Statements and Supplementary Data Our Consolidated Balance Sheets, Consolidated Statements of Income, Changes in Equity and Cash Flows, together with the report of KPMG LLP, anindependent 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, 2014, 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 2014 that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting. 52Table of ContentsManagement’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 evaluatethe effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted anassessment, including testing, using the criteria in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2014,based on criteria in Internal Control—Integrated Framework (2013), issued by the COSO. The effectiveness of our internal control over financial reporting asof December 31, 2014 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. 53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, 2014, based on criteriaestablished in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Universal Health Realty Income Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness 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 financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with 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, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway 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, 2014 and 2013, and the related consolidated statements of income,comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the financial statementschedule III, real estate and accumulated depreciation, and our report dated March 6, 2015 expressed an unqualified opinion on those consolidated financialstatements and financial statement schedule III. (signed) KPMG LLP Philadelphia, PennsylvaniaMarch 6, 2015 54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, 2014. 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 withthe Securities and Exchange Commission within 120 days after December 31, 2014. 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, 2014. 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“Corporate Governance” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2014. ITEM 14.Principal Accounting Fees and Services There is hereby incorporated herein by reference the information to appear under the caption “Relationship with Independent Registered PublicAccounting Firm” in our Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2014. 55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 Schedule” (2)Financial Statement Schedules: See “Index to Financial Statements and Schedule” (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. 3.4 Amendment to the bylaws, effective as of September 6, 2013, previously filed as Exhibit 3.2 to the Trust’s Current Report on Form 8-K datedSeptember 6, 2013, is incorporated herein by reference. 10.1 Advisory Agreement, dated as of December 24, 1986, between UHS of Delaware, Inc. and the Trust, previously filed as Exhibit 10.2 to the Trust’sCurrent Report on Form 8-K dated December 24, 1986, is incorporated herein by reference. 10.2 Agreement dated December 4, 2014, to renew Advisory Agreement dated as of December 24, 1986 between Universal Health Realty Income Trustand UHS of Delaware, Inc. is filed herewith. 10.3 Contract of Acquisition, dated as of August 1986, between the Trust and certain subsidiaries of Universal Health Services, Inc., previously filed asExhibit 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), isincorporated 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 July 25, 2011, by and among the Trust, the financial institutions from time to time party thereto and Wells FargoBank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent and Fifth Third Bank, N.A., JPMorgan Chase Bank, N.A.and SunTrust Bank as Co-Documentation Agents, previously filed as Exhibit 10.1 to the Trust’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2011, is incorporated herein by reference. 56Table of Contents10.9 Dividend Reinvestment and Share Purchase Plan included in the Trust’s Registration Statement on Form S-3 (Registration No. 333-81763) filedon 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 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. 10.14 ATM Equity Offering Sales Agreement, dated November 8, 2013, among the Trust, UHS of Delaware, Inc., and Merrill Lynch, Pierce, Fenner &Smith Incorporated, previously filed as Exhibit 1.1 to the Trust’s Current Report on Form 8-K dated November 8, 2013, is incorporated herein by reference. 11 Statement re computation of per share earnings is set forth on the Consolidated Statements of Income. 21 Subsidiaries of Registrant, filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm, filed herewith. 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, filedherewith. 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, filedherewith. 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, filed herewith. 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, filed herewith. 101.INS XBRL Instance Document, filed herewith. 101.SCH XBRL Taxonomy Extension Schema Document, filed herewith. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document, filed herewith. 101.LAB XBRL Taxonomy Extension Label Linkbase Document, filed herewith. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith. *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 Trust. 57SM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 be signedon 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 6, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant 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 6, 2015/S/ JAMES E. DALTON, JR. James E. Dalton, Jr. Trustee March 6, 2015/S/ MILES L. BERGER Miles L. Berger Trustee March 6, 2015/S/ ELLIOT J. SUSSMAN Elliot J. Sussman, M.D., M.B.A. Trustee March 6, 2015/S/ ROBERT F. MCCADDEN Robert F. McCadden Trustee March 6, 2015/S/ MARC D. MILLER Marc D. Miller Trustee March 6, 2015/S/ CHARLES F. BOYLE Charles F. Boyle Vice President and Chief Financial Officer(Principal Financial and AccountingOfficer) March 6, 2015 58Table of ContentsINDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Schedule 60 Consolidated Balance Sheets—December 31, 2014 and December 31, 2013 61 Consolidated Statements of Income—Years Ended December 31, 2014, 2013 and 2012 62 Consolidated Statements of Comprehensive Income 63 Consolidated Statements of Changes in Equity—Years Ended December 31, 2014, 2013 and 2012 64 Consolidated Statements of Cash Flows—Years Ended December 31, 2014, 2013 and 2012 65 Notes to the Consolidated Financial Statements 67 Schedule III—Real Estate and Accumulated Depreciation—December 31, 2014 90 Notes to Schedule III—December 31, 2014 93 59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 as of December 31, 2014 and2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited financial statement scheduleIII, real estate and accumulated depreciation. These consolidated financial statements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based onour audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 Health RealtyIncome Trust and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statementschedule III, real estate and accumulated depreciation, when considered in relation to the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal Health Realty IncomeTrust’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2015 expressed anunqualified opinion on the effectiveness of the Company’s internal control over financial reporting. (signed) KPMG LLP Philadelphia, PennsylvaniaMarch 6, 2015 60Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED BALANCE SHEETS(dollar amounts in thousands) December 31,2014 December 31,2013 Assets: Real Estate Investments: Buildings and improvements $451,005 $368,295 Accumulated depreciation (106,480) (97,921) 344,525 270,374 Land 35,584 27,374 Net Real Estate Investments 380,109 297,748 Investments in and advances to limited liability companies (“LLCs”), net 8,605 39,201 Other Assets: Cash and cash equivalents 3,861 3,337 Base and bonus rent receivable from UHS 2,086 2,053 Rent receivable—other 4,219 3,310 Intangible assets (net of accumulated amortization of $19.7 million and $13.7 million at December 31, 2014 andDecember 31, 2013, respectively) 23,123 20,782 Deferred charges, goodwill and other assets, net 6,863 6,714 Total Assets $428,866 $373,145 Liabilities: Line of credit borrowings $89,750 $93,700 Mortgage and other notes payable, non-recourse to us (including net debt premium of $523,000 and $834,000 atDecember 31, 2014 and December 31, 2013, respectively) 123,405 106,287 Accrued interest 545 491 Accrued expenses and other liabilities 8,522 5,156 Tenant reserves, escrows, deposits and prepaid rents 2,063 1,881 Total Liabilities 224,285 207,515 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: 2014 - 13,301,204 2013 -12,858,643 133 128 Capital in excess of par value 240,835 220,691 Cumulative net income 531,595 480,044 Cumulative dividends (567,894) (535,176) Accumulated other comprehensive loss (88) (57) Total Equity 204,581 165,630 Total Liabilities and Equity $428,866 $373,145 See the accompanying notes to these consolidated financial statements. 61Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF INCOME(amounts in thousands, except per share amounts) Year ended December 31, 2014 2013 2012 Revenues: Base rental—UHS facilities $15,601 $14,773 $15,438 Base rental—Non-related parties 31,386 27,955 27,213 Bonus rental—UHS facilities 4,607 4,260 4,142 Tenant reimbursements and other—Non-related parties 7,490 6,812 6,674 Tenant reimbursements and other—UHS facilities 702 480 483 59,786 54,280 53,950 Expenses: Depreciation and amortization 20,885 18,753 20,216 Advisory fees to UHS 2,545 2,369 2,119 Other operating expenses 16,882 14,409 14,575 Transaction costs 427 203 680 40,739 35,734 37,590 Income before equity in income of unconsolidated limited liability companies (“LLCs”), interest expense and gains 19,047 18,546 16,360 Equity in income of unconsolidated LLCs 2,428 2,095 2,365 Gains on fair value recognition resulting from the purchase of minority interests in majority-owned LLCs 25,409 0 0 Gain on divestiture of real property 13,043 0 0 Gains on divestitures of properties owned by unconsolidated LLCs 0 0 8,520 Interest expense, net (8,376) (7,472) (7,768) Net income $51,551 $13,169 $19,477 Basic earnings per share $3.99 $1.04 $1.54 Diluted earnings per share $3.99 $1.04 $1.54 Weighted average number of shares outstanding—Basic 12,927 12,689 12,661 Weighted average number of share equivalents 7 12 8 Weighted average number of shares and equivalents outstanding—Diluted 12,934 12,701 12,669 See the accompanying notes to these consolidated financial statements. 62Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(dollar amounts in thousands) Year ended December 31, 2014 2013 2012 Net Income $51,551 $13,169 $19,477 Other comprehensive loss: Unrealized losses on interest rate caps (115) (57) 0 Amortization of interest rate cap fees 84 0 0 Total other comprehensive loss: (31) (57) 0 Total comprehensive income $51,520 $13,112 $19,477 See the accompanying notes to these consolidated financial statements. 63Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Common Shares Capital inexcess ofpar value Accumulated othercomprehensiveloss UHTShareholders’Equity Numberof Shares Amount Cumulativenet income Cumulativedividends Non-controllingInterests TotalEquity January 1, 2012 12,667 $127 $213,566 $447,398 ($472,230) — $188,861 $84 $188,945 Shares of Beneficial Interest: Issued 22 — 305 — — — 305 — 305 Partial settlement of dividend equivalent rights — — (106) — — — (106) — (106) Restricted stock-based compensation expense — — 329 — — — 329 — 329 Dividends ($2.46/share) — — — — (31,195) — (31,195) — (31,195) Comprehensive income: Net income — — — 19,477 — — 19,477 (10) 19,467 January 1, 2013 12,689 127 214,094 466,875 (503,425) — 177,671 74 177,745 Shares of Beneficial Interest: Issued 170 1 6,323 — — — 6,324 — 6,324 Partial settlement of dividend equivalent rights — — (101) — — — (101) — (101) Restricted stock-based compensation expense — — 375 — — — 375 — 375 Dividends ($2.495/share) — — — — (31,751) — (31,751) — (31,751) Deconsolidation of LLC — — — — — — 0 (74) (74) Comprehensive income: Net income — — — 13,169 — — 13,169 13,169 Unrealized loss on interest rate cap — — — — — (57) (57) (57) Subtotal - comprehensive income 13,169 (57) 13,112 0 13,112 January 1, 2014 12,859 128 220,691 480,044 (535,176) (57) 165,630 0 165,630 Shares of Beneficial Interest: Issued 443 5 19,839 — — — 19,844 — 19,844 Partial settlement of dividend equivalent rights — — (94) — — — (94) — (94) Restricted stock-based compensation expense — — 399 — — — 399 — 399 Dividends ($2.52/share) — — — — (32,718) — (32,718) — (32,718) Comprehensive income: Net income — — — 51,551 — — 51,551 51,551 Unrealized loss on interest rate cap — — — — — (31) (31) — (31) Subtotal - comprehensive income — — — 51,551 — (31) 51,520 0 51,520 December 31, 2014 13,302 $133 $240,835 $531,595 ($567,894) ($88) $204,581 $0 $204,581 See the accompanying notes to these consolidated financial statements. 64Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands) Year ended December 31, 2014 2013 2012 Cash flows from operating activities: Net income $51,551 $13,169 $19,477 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,975 18,843 20,216 Amortization on debt premium (312) (433) (657) Restricted/stock-based compensation expense 399 375 329 Gain on divestiture of real property (13,043) 0 0 Gains on purchase of minority interests in majority-owned LLCs (25,409) 0 0 Gains on divestiture of properties owned by unconsolidated LLCs 0 0 (8,520) Changes in assets and liabilities: Rent receivable (555) (746) (862) Accrued expenses and other liabilities (509) 523 278 Tenant reserves, escrows, deposits and prepaid rents (303) 16 207 Accrued interest (62) (22) 66 Other, net 64 (431) 249 Net cash provided by operating activities 32,796 31,294 30,783 Cash flows from investing activities: Investments in LLCs (1,337) (3,013) (2,973) Repayments of advances made to LLCs 0 114 8,551 Advances made to LLCs 0 (4,580) (8,000) Cash distributions in excess of income from LLCs 1,029 2,346 3,169 Cash distribution of refinancing proceeds from LLCs 2,280 0 0 Additions to real estate investments, net (2,866) (3,415) (3,985) Deposits on real estate assets (100) (150) 100 Net cash paid for acquisition of medical office buildings (15,600) (4,675) (16,891) Payment of assumed liabilities on acquired properties 0 0 (711) Cash paid to acquire minority interests in majority-owned LLCs (4,744) 0 0 Cash proceeds received from divestiture of property owned by unconsolidated LLCs, net 0 0 12,175 Cash proceeds received from divestiture of real property 17,300 0 0 Net cash used in investing activities (4,038) (13,373) (8,565) Cash flows from financing activities: Net borrowings on line of credit 0 11,950 4,600 Net repayments on line of credit (3,950) 0 0 Proceeds from mortgages and other notes payable 0 11,150 14,000 Repayments of mortgages and other notes payable (12,327) (14,401) (18,084) Financing costs paid on mortgage and other notes payable 0 (95) (384) Dividends paid (32,718) (31,751) (31,195) Partial settlement of dividends equivalent rights (94) (101) (106) Issuance of shares of beneficial interest, net 19,274 5,757 350 Net cash used in financing activities (29,815) (17,491) (30,819) (Decrease)/increase in cash and cash equivalents (1,057) 430 (8,601) Increase/(decrease) in cash due to recording of LLCs on a consolidated/unconsolidated basis 1,581 (141) 0 Cash and cash equivalents, beginning of period 3,337 3,048 11,649 Cash and cash equivalents, end of period $3,861 $3,337 $3,048 65Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)(amounts in thousands) Year ended December 31, 2014 2013 2012 Supplemental disclosures of cash flow information: Interest paid $8,268 $7,517 $7,994 Supplemental disclosures of non-cash transactions: Debt assumed on acquisition of real estate $0 $0 $22,441 Supplemental disclosures of non-cash transactions: Consolidation of LLCs: Net real estate investments $84,064 $0 $0 Cash and cash equivalents 1,581 0 0 Intangible assets 6,490 0 0 Rent receivable - other 388 0 0 Deferred charges, goodwill and other assets, net 100 0 0 Investment in LLCs (28,616) 0 0 Mortgage and other notes payable, non-recourse to us (29,758) 0 0 Accrued interest (116) 0 0 Accrued expenses and other liabilities (1,245) 0 0 Tenant reserves, escrows, deposits and prepaid rents (485) 0 0 Note payable to previous third party member (2,250) 0 0 Gains on purchases of minority interests in majority-owned LLCs (25,409) 0 0 Cash paid for purchase of minority interests in majority-owned LLCs $4,744 $0 $0 Deconsolidation of LLC: Net real estate investments $0 $11,597 $0 Cash and cash equivalents 0 141 0 Rent receivable - other 0 207 0 Deferred charges, goodwill and other assets, net 0 135 0 Mortgage and other notes payable, non-recourse to us 0 (6,215) 0 Other liabilities 0 (368) 0 Third-party equity interest 0 (54) 0 Investment in LLC $0 $5,443 $0 See accompanying notes to these consolidated financial statements. 66Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2014 (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 healthcare andhuman service related facilities currently including acute care hospitals, rehabilitation hospitals, sub-acute facilities, surgery centers, free-standingemergency departments, childcare centers and medical office buildings. As of February 28, 2015, we have sixty-one real estate investments or commitmentslocated in eighteen states consisting of: • six hospital facilities including three acute care, one rehabilitation and two sub-acute; • three free-standing emergency departments; • forty-eight medical office buildings, including five owned by unconsolidated limited liability companies (“LLCs”), and; • four preschool and childcare centers. Our future results of operations could be unfavorably impacted by deterioration in general economic conditions which could result in increases in thenumber of people unemployed and/or uninsured. Should that occur, it may result in decreased occupancy rates at our medical office buildings as well as areduction in the revenues earned by the operators of our hospital facilities which would unfavorably impact our future bonus rentals (on the three UniversalHealth Services, Inc. hospital facilities) and may potentially have a negative impact on the future lease renewal terms and the underlying value of the hospitalproperties. Additionally, the general real estate market has been unfavorably impacted by the deterioration in economic and credit market conditions whichmay adversely impact the underlying value of our properties. The tightening in the credit markets and the instability in certain banking and financialinstitutions over the past several years has not had a material impact on us. However, there can be no assurance that unfavorable credit market conditions willnot materially increase our cost of borrowings and/or have a material adverse impact on our ability to finance our future growth through borrowed funds. Management is unable to predict the effect, if any, that the factors discussed above will have on the operating results of our lessees or on their ability tomeet their obligations under the terms of their leases with us. Management’s estimate of future cash flows from our leased properties could be materiallyaffected in the near term, if certain of the leases are not renewed or renewed with less favorable terms 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 and reimbursementsfrom 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 ourproperties, including our consolidated and unconsolidated 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,stipulated rent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of oneyear. As a result, the straight-line adjustments to rental revenue may vary from period-to-period. Bonus rents are recognized 67Table of Contentswhen earned based upon increases in each facility’s net revenue in excess of stipulated amounts. Bonus rentals are determined and paid each quarter basedupon a computation that compares the respective facility’s current quarter’s net revenue to the corresponding quarter in the base year. Tenant reimbursementsfor operating expenses are accrued as revenue in the same period the related expenses are incurred. Real Estate Investments On the date of acquisition, the purchase price of a property is allocated to the property’s land, buildings and intangible assets based upon our estimatesof their fair values. Intangible assets include the value of in-place leases, above market leases and leasehold interest in land at the time of acquisition.Substantially all of our intangible assets consist of the value of in-place leases at December 31, 2014, and will be amortized over the remaining lease terms(aggregate weighted average of 4.4 years at December 31, 2014) and is expected to result in estimated aggregate amortization expense of $5.6 million,$4.5 million, $3.9 million $2.5 million and $1.9 million for 2015, 2016, 2017, 2018 and 2019, respectively. Amortization expense on intangible values of inplace leases was $6.1 million for the year ended December 31, 2014, $6.0 million for the year ended December 31, 2013 and $7.8 million for the year endedDecember 31, 2012. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and capital improvements. Theestimated original useful lives of our buildings ranges from 25-45 years and the estimated original useful lives of capital improvements ranges from 3-35years. On a consolidated basis, depreciation expense was $14.4 million for the year ended December 31, 2014, $12.5 million for the year ended December 31,2013 and $12.2 million for the year ended December 31, 2012. 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 thecarrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if management’s estimate of theaggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than thecarrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as theeffects 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 balancesheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated action to betaken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially impact our netincome. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of thecarrying amount of the property 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. If we determine that theintangible assets are not recoverable from future cash flows, the excess of carrying value of the intangible asset over its estimated fair value is charged toincome. An other than temporary impairment of an investment/advance in an LLC is recognized when the carrying value of the investment is not consideredrecoverable based on evaluation of the severity and duration of the 68Table of Contentsdecline in value, including projected declines in cash flow. To the extent impairment has occurred, the excess carrying value of the asset over its estimatedfair value is charged to income. 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 FASB’s standards and guidance relating to accounting for investmentsand real estate ventures, we account for our unconsolidated investments in LLCs which we do not control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budgetapproval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at ourcost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certainagreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared toownership interests after specified preferred return rate thresholds have been satisfied. At December 31, 2014, we have non-controlling equity investments or commitments in five jointly-owned LLCs which own medical office buildings.These LLCs are included in our financial statements for all periods presented on an unconsolidated basis pursuant to the equity method since they are notvariable interest entities for which we are the primary beneficiary, nor do we hold a controlling voting interest. These LLCs are joint-ventures between us andnon-related parties that manage and hold minority ownership interests in the entities. Each LLC is generally self-sustained from a cash flow perspective andgenerates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Althoughthere is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, providefunding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are notobligated to do so, if approved by us at our sole discretion, additional cash fundings are typically advanced as equity or member loans. Palmdale Medical Properties was consolidated in our financial statements through June 30, 2013 at which time its master lease with a wholly-ownedsubsidiary of UHS expired. For the period of July 1, 2013 through December 31, 2013, we accounted for Palmdale Medical Properties under the equitymethod. As discussed below, as a result of our purchase of the third-party minority ownership interest in Palmdale Medical Properties, effective January 1,2014, we began accounting for Palmdale Medical Properties on a consolidated basis. Effective August 1, 2014, we purchased the third-party minority ownership interests, ranging from 5% to 15%, in six LLCs (Desert Valley MedicalCenter, Santa Fe Professional Plaza, Rosenberg Children’s Medical Plaza, Sierra San Antonio Medical Plaza, Phoenix Children’s East Valley Care Center and3811 E. Bell Medical Building Medical Plaza). Effective January 1, 2014, we purchased the third-party minority ownership interests (5% for each LLC) inPalmdale Medical Properties and Sparks Medical Properties. We formerly held non-controlling majority ownership interests in all of these LLCs, and as aresult of our purchase of the minority ownership interests, we now hold 100% of the ownership interests in these LLCs which own MOBs. As a result, webegan accounting for the six LLCs mentioned above on a consolidated basis effective August 1, 2014 and we began accounting for Palmdale MedicalProperties and Sparks Medical Properties on a consolidated basis effective January 1, 2014, as discussed below. Each of the property’s assets and liabilitieswere recorded at their fair values (see Note 3 to the consolidated financial statements for additional disclosure). Other than an increase in depreciation andamortization expense resulting from the fair value recognition related to the purchase of the minority ownership interests, we do not expect these transactionsto have a material impact on our future results of operations. 69Table of ContentsFederal 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 $469 million and $316 million,respectively, at December 31, 2014. Stock-Based Compensation We expense the grant-date fair value of restricted stock awards over the vesting period. We recognize the grant-date fair value of equity-basedcompensation and account for these transactions using the fair-value based method. 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 Fair value is a market-based measurement, not an entity-specific measurement and determined based upon the assumptions that market participantswould use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, accounting requirementsestablish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of thereporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about marketparticipant assumptions (unobservable inputs classified within Level 3 of the hierarchy). In instances when it is necessary to establish the fair value of ourreal estate investments and investments in LLCs we use unobservable inputs which are typically based on our own assumptions. The fair value of our real estate investments, components of real estate investments and debt assumed in conjunction with acquisition and impairmentactivity, are considered to be Level 3 valuations as they are primarily based upon an income capitalization approach. Significant inputs into the models usedto determine fair value of real estate investments and components of real estate investments include future cash flow projections, holding period, terminalcapitalization rate and discount rates. Additionally the fair value of land takes into consideration comparable sales, as adjusted for site specific factors. Thefair value of real estate investments is based upon significant judgments made by management, and accordingly, we typically obtain assistance from thirdparty valuation specialists. Significant inputs into the models used to determine the fair value of assumed mortgages included the outstanding balance, term,stated interest rate and current market rate of the mortgage. 70Table of ContentsThe carrying amounts reported in the balance sheet for cash, receivables, and short-term borrowings approximate their fair values due to the short-termnature of these instruments. Accordingly, these items are excluded from the fair value disclosures included elsewhere in these notes to the consolidatedfinancial statements. See Note 3-Acquisitions and Dispositions, for disclosure related to the $25.4 million net gain recorded during 2014 in connection with the fair valuerecognition of the assets and liabilities, including third-party debt, resulting from the purchase of minority ownership interests in majority-owned LLCs. 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. New Accounting Standards Except as noted below, there were no new accounting pronouncements during 2014 that impacted, or are expected to impact us. In August 2014, FASB issued ASU No. 2014-15, “Preparation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertaintiesabout an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). Continuation of a reporting entity as a going concern is presumed as the basis forpreparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption iscommonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should beprepared under the liquidation basis of accounting in accordance with Subtopic 205-30, “Presentation of Financial Statements—Liquidation Basis ofAccounting”. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability tocontinue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but thenew criteria in ASU 2014-15 should be followed to determine whether to disclose information about the relevant conditions and events. The amendments inASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application ispermitted. We will evaluate the going concern considerations in this ASU. In April 2014, the Financial Accounting Standards Board updated the accounting guidance related to the definition of a discontinued operation andthe related disclosures. The updated accounting guidance defines a discontinued operation as a disposal of a component or a group of components that is tobe disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.We adopted this updated guidance in 2014 and the adoption of this update did not have a material impact on our consolidated financial statements. (2) RELATIONSHIP WITH UHS AND RELATED PARTY TRANSACTIONS Leases: We commenced operations in 1986 by purchasing properties of certain subsidiaries from UHS and immediately leasing the properties back tothe respective subsidiaries. The hospital leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years withup to six additional 5-year renewal terms. The current base rentals and lease and rental terms for each hospital leased to subsidiaries of UHS are providedbelow. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis basedupon a computation that compares current quarter revenue to a corresponding quarter in the base year. The hospital leases with subsidiaries of UHS areunconditionally guaranteed by UHS and are cross-defaulted with one another. 71Table of ContentsThe combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 36% of our total revenue for the fiveyears ended December 31, 2014 (approximately 28% for the year ended December 31, 2014 and approximately 30% for each of the years endedDecember 31, 2013 and 2012). The decrease during 2014 as compared to 2013, is due primarily to the 2014 purchase of the third-party minority ownershipinterests in eight LLCs in which we previously held noncontrolling majority ownership interests. As a result of these transactions, we own 100% of each ofthese LLCs and began accounting for each on a consolidated basis effective on the date of purchase of the minority ownership interests. Including 100% ofthe revenues generated at the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%, the leases on theUHS hospital facilities accounted for approximately 20% of the combined consolidated and unconsolidated revenue for the five years ended December 31,2014 (approximately 22% for each of the years ended December 31, 2014 and 2013 and 21% for the year ended December 31, 2012). In addition, includingthe two free-standing emergency departments (“FEDs”) acquired by us from subsidiaries of UHS during the first quarter of 2015 (as discussed below), fifteenMOBs/FEDs, that are either wholly or jointly-owned, include tenants which are subsidiaries 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, the Master Lease, asamended during 2006, includes a change of control provision whereby UHS has the right, upon one month’s notice should a change of control of the Trustoccur, to purchase any or all of the three leased hospital properties listed below at their appraised fair market value. During the third quarter of 2014, a wholly-owned subsidiary of UHS provided notification to us that, upon expiration of The Bridgeway’s lease termwhich occurred in December, 2014, it intended to exercise its option to purchase the real property of the facility. Upon expiration of the lease, the wholly-owned subsidiary of UHS exercised its option to purchase the real property of the facility and on December 31, 2014, The Bridgeway, a 103-bed behavioralhealth facility located in North Little Rock, Arkansas, was sold to UHS. Pursuant to the terms of the lease, we and the wholly-owned subsidiary of UHS wereboth required to obtain independent appraisals of the property to determine its fair market value. Based upon the property appraisals obtained by each party,the sales price of The Bridgeway was $17.3 million. A gain on divestiture of approximately $13.0 million is included in our results of operations for thetwelve-month period ended December 31, 2014. During each of the last three years, our revenues, net cash provided by operating activities and funds fromoperations have included approximately $1.1 million earned annually in connection with The Bridgeway’s lease. During the first quarter of 2015, we purchased, from UHS, the real property of two newly-constructed and recently opened FEDs located in Weslaco andMission, Texas. Each FED consists of approximately 13,600 square feet and will be operated by wholly-owned subsidiaries of UHS. In connection with theseacquisitions, ten-year lease agreements with six, 5-year renewal terms have been executed with UHS for each FED. The first four, 5-year renewal terms(covering years 2025 through 2044) include 2% annual lease rate increases, computed on accumulative and compounded basis, and the last two, 5-yearrenewal terms (covering the years 2045 through 2054) will be at the then fair market value lease rates. The aggregate acquisition cost of these facilities wasapproximately $12.8 million, and the aggregate rental revenues earned by us at the commencement of the leases will be approximately $900,000 annually. 72Table of ContentsThe table below details the existing lease terms and renewal options for each of the UHS hospital facilities: Hospital Name Type of Facility AnnualMinimumRent End ofLease Term RenewalTerm(years) McAllen Medical Center Acute Care $5,485,000 December, 2016 15(a) Wellington Regional Medical Center Acute Care $3,030,000 December, 2016 15(b) Southwest Healthcare System, Inland Valley Campus Acute Care $2,648,000 December, 2016 15(b) (a)UHS has three 5-year renewal options at existing lease rates (through 2031).(b)UHS has one 5-year renewal option at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through2031). Management cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates or fair market value leaserates, or any of our other leases, will be renewed at the end of their lease term. If the leases are not renewed at their current rates or the fair market value leaserates, we would be required to find other operators for those facilities and/or enter into leases on terms potentially less favorable to us than the current leases.In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities upon expiration of the lease terms, our futurerevenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currently earnedpursuant to the hospital leases. As discussed above, Palmdale Medical Plaza, which is located in Palmdale, California, on the campus of a UHS hospital, had a master leasecommitment by a wholly-owned subsidiary of UHS which expired effective as of July 1, 2013. This MOB, tenants of which include subsidiaries of UHS, wascompleted and opened during the third quarter of 2008 at which time the master lease commenced. The LLC that owns this MOB was deemed to be a variableinterest entity during the term of the master lease and was therefore consolidated in our financial statements through June 30, 2013 since we were the primarybeneficiary through that date. Effective July 1, 2013, this LLC was no longer deemed a variable interest entity and is accounted for in our financialstatements on an unconsolidated basis pursuant to the equity method from July 1, 2013 through December 31, 2013. Effective January 1, 2014, we purchased the third-party minority ownership interests in two LLCs (Palmdale Medical Properties and Sparks MedicalProperties) in which we formerly held non-controlling majority ownership interest. As a result of our purchase of the minority ownership interests, we nowhold 100% of the ownership interests in these LLCs (which own MOBs) and began accounting for them on a consolidated basis. We have funded $2.6 million in equity as of December 31, 2014, and are committed to fund an additional $400,000, in exchange for a 95% non-controlling equity interest in an LLC (Texoma Medical Properties) that developed, constructed, owns and operates the Texoma Medical Plaza located inDenison, Texas, which was completed and opened during the first quarter of 2010. This MOB is located on the campus of a UHS acute care hospital which isowned and operated by UHS of Texoma, Inc. (“Texoma Hospital”), a wholly-owned subsidiary of UHS. This MOB has tenants that include subsidiaries ofUHS. This LLC has a third-party term loan of $14.9 million, which is non-recourse to us, outstanding as of December 31, 2014. As this LLC is not consideredto be a variable interest entity and does not meet the other criteria requiring consolidation of an investment, it is accounted for pursuant to the equity method. Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an Advisory Agreement(the “Advisory Agreement”) dated December 24, 1986. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us,to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), toprovide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who areunaffiliated with UHS (the 73Table of Contents“Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, includingaccounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be terminated for any reason uponsixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees,that the Advisor’s performance has been satisfactory. Our advisory fee was 0.70% during each of 2014 and 2013, and 0.65% during 2012, of our averageinvested real estate assets, as derived from our consolidated balance sheet. In December of 2014, based upon a review of our advisory fee and other generaland administrative expenses, as compared to an industry peer group, the Advisory Agreement was renewed for 2015 pursuant to the same terms as theAdvisory Agreement in place during 2014 and 2013. The average real estate assets for advisory fee calculation purposes exclude certain items from our consolidated balance sheet such as, among otherthings, accumulated depreciation, cash and cash equivalents, base and bonus rent receivables, deferred charges and other assets. The advisory fee is payablequarterly, subject to adjustment at year-end based upon our audited financial statements. In addition, the Advisor is entitled to an annual incentive fee equalto 20% of the amount by which cash available for distribution to shareholders for each year, as defined in the Advisory Agreement, exceeds 15% of ourequity as shown on our consolidated balance sheet, determined in accordance with generally accepted accounting principles without reduction for return ofcapital dividends. The Advisory Agreement defines cash available for distribution to shareholders as net cash flow from operations less deductions for,among other things, amounts required to discharge our debt and liabilities and reserves for replacement and capital improvements to our properties andinvestments. No incentive fees were paid during 2014, 2013 or 2012 since the incentive fee requirements were not achieved. Advisory fees incurred and paid(or payable) to UHS amounted to $2.5 million during 2014, $2.4 million during 2013 and $2.1 million during 2012 and were based upon average investedreal estate assets of $363 million, $338 million and $326 million during 2014, 2013 and 2012, respectively. Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of December 31, 2014 we had nosalaried employees, our officers do typically receive annual stock-based compensation awards in the form of restricted stock. In special circumstances, ifwarranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may also receive one-time compensation awards inthe form of restricted stock and/or cash bonuses. Share Ownership: As of December 31, 2014 and 2013, UHS owned 5.9% and 6.1%, respectively, of our outstanding shares of beneficial interest. SEC reporting requirements of UHS: UHS is subject to the reporting requirements of the Securities and Exchange Commission (“SEC”) and isrequired to file annual reports containing audited financial information and quarterly reports containing unaudited financial information. Since the leases onthe hospital facilities leased to wholly-owned subsidiaries of UHS comprised approximately 28% of our consolidated revenues for the year endedDecember 31, 2014 and 30% of our consolidated revenues for each of the years ended December 31, 2013 and 2012, and since a subsidiary of UHS is ourAdvisor, you are encouraged to obtain the publicly available filings for Universal Health Services, Inc. from the SEC’s website at www.sec.gov. These filingsare the sole responsibility of UHS and are not incorporated by reference herein. (3) ACQUISITIONS AND DISPOSITIONS 2015: Acquisitions: In February, 2015, we purchased the Haas Medical Office Park, a single-tenant, two single story buildings having an aggregate of approximately16,000 rentable square feet, located in Ottumwa, Iowa, for approximately $4.1 million. 74Table of ContentsIn January and February of 2015, we purchased, from UHS, the real property of two newly-constructed and recently opened free-standing emergencydepartments (“FEDs”) located in Weslaco and Mission, Texas. Each FED consists of approximately 13,600 square feet and will be operated by wholly-ownedsubsidiaries of UHS. In connection with these acquisitions, ten-year lease agreements with six 5-year renewal terms have been executed with UHS for eachFED. The aggregate acquisition cost of these facilities was approximately $12.8 million, and the aggregate rental revenues earned by us at thecommencement of the leases will be approximately $900,000 annually. 2014: Acquisitions: During 2014, we spent $15.6 million to acquire the following clinics and MOB: • spent $8.6 million to acquire the Hanover Emergency Center, a 22,000 rentable square feet, free-standing, full service emergency and imagingcenter, located in Mechanicsville, VA, in August, 2014. The single-tenant property is occupied pursuant to the terms of a 10-year lease with HCAHealth Services of Virginia, Inc., and; • spent $7.2 million, including a $150,000 deposit made in 2013, to purchase the following in a single transaction in January, 2014: • The Children’s Clinic at Springdale – a 9,800 square foot, single-tenant medical office building located in Springdale, Arkansas, and; • The Northwest Medical Center at Sugar Creek – a 13,700 square foot, multi-tenant medical office building located in Bentonville,Arkansas. The aggregate purchase price for these clinics and MOB was allocated to the assets and liabilities acquired consisting of tangible property andidentified intangible assets, based on their respective fair values at acquisition as detailed in the table below. Substantially all of the intangible assets includethe value of the in-place leases at the clinics and MOB at the time of acquisition which will be amortized over the average remaining lease term ofapproximately 9.8 years at the time of acquisition (aggregate weighted average of 9.5 years at December 31, 2014) for the Hanover Emergency Center andapproximately 9.7 years at the time of acquisition (aggregate weighted average of 8.7 years at December 31, 2014) for the Arkansas facilities. Land $3,010 Buildings and improvements 10,664 Intangible assets 2,076 Deposit paid in 2013 (150)Net cash paid $15,600 75Table of ContentsAdditionally, during 2014, we spent an aggregate of $7.0 million, including $4.7 million in cash plus an additional $2.3 million in the form of a notepayable to the previous third-party member (which was fully repaid in January, 2015 and is reflected in “Accrued expenses and other liabilities” on ourConsolidated Balance Sheet at December 31, 2014) to purchase the minority ownership interests held by third party members in eight LLCs (as noted in thetable below) in which we previously held various non-controlling majority ownership interests ranging from 85% to 95%. Name of LLC/LP Ownershipprior tominorityinterestpurchase Property Owned by LLC Effective Date Palmdale Medical Properties 95% Palmdale Medical Plaza January 1, 2014 Sparks Medical Properties… 95% Vista Medical Terrace & Sparks MOB January 1, 2014 DVMC Properties 90% Desert Valley Medical Center August 1, 2014 Santa Fe Scottsdale 90% Santa Fe Professional Plaza August 1, 2014 PCH Medical Properties 85% Rosenberg Children’s Medical Plaza August 1, 2014 Sierra Medical Properties 95% Sierra San Antonio Medical Plaza August 1, 2014 PCH Southern Properties 95% Phoenix Children’s East Valley Care Center August 1, 2014 3811 Bell Medical Properties 95% North Valley Medical Plaza August 1, 2014 As a result of these minority ownership purchases, we now own 100% of each of these LLCs, which own medical office buildings, and beganaccounting for each on a consolidated basis at the effective date as noted in the table above. Pursuant to current accounting standards, at the effective date,we were required to record each property’s assets and liabilities at their fair values which resulted in the recording of a $25.4 million non-cash gain, which isincluded in our Consolidated Statement of Income for the twelve months ended December 31, 2014, representing the difference between the fair values andthe equity method carrying value of each investment. The calculated fair value, categorized in level 3 of the fair value hierarchy and utilizing the incomecapitalization approach, is based upon the basis of capitalization of the net estimated earnings expectancy of the property, assuming continued use similar tothe existing use of the acquired property. Each property’s continued cash flow analysis were also utilized in estimating the fair value of the property, wherebycash flows from the various tenants are calculated based upon lease commencement and termination dates. The capitalization rate and discount rate rangedfrom 7%-8.75% and 8%-9.75%, respectively. The aggregate purchase price for these MOBs was allocated to net tangible property ($84.0 million), identified intangible assets ($6.5 million), andlong term debt ($29.8 million). Substantially all of the intangible assets include the value of the in-place leases at these MOBs at the time of acquisitionwhich will be amortized over the combined average remaining lease term of approximately 4.7 years at the time of acquisition (aggregate weighted averageof 4.3 years at December 31, 2014) for the August, 2014 transactions and 5.3 years at the time of acquisition (aggregate weighted average of 5.5 years atDecember 31, 2014) for the January, 2014 transactions. Other than the increased depreciation and amortization expense resulting from the amortization of theintangible assets recorded in connection with these transactions, there was no material impact on our net income as a result of the consolidation of theseLLCs. Divestitures: In December, 2014, upon expiration of The Bridgeway’s lease term, a wholly-owned subsidiary of UHS exercised its option to purchase the realproperty of the facility. The sale of The Bridgeway, a 103-bed behavioral health facility located in North Little Rock, Arkansas, generated $17.3 million ofsale proceeds. Pursuant to the terms of the lease, we and the wholly-owned subsidiary of UHS were both required to obtain independent appraisals of theproperty to determine its fair market value of $17.3 million. Our revenues, net cash provided by operating activities and funds from operations have includedapproximately $1.1 million earned annually in connection with this lease. A $13.0 gain is included in our Consolidated Statement of Income for the twelvemonths ended December 31, 2014, representing the difference between the fair market value and the book value of this property. 76Table of Contents2013: Acquisition: In August, 2013, we purchased the Ward Eagle Office Village located in Farmington Hills, Michigan. This multi-tenant MOB, which was purchased forapproximately $4.1 million, consists of approximately 16,300 rentable square feet. In June, 2013, we purchased the 5004 Poole Road MOB, located in Denison, Texas, on the campus of Texoma Medical Center, a wholly-ownedsubsidiary of UHS. This single-tenant MOB, which was purchased for approximately $625,000, consists of approximately 4,400 rentable square feet and islocated adjacent to our Texoma Medical Plaza MOB. The aggregate purchase price of approximately $4.7 million for these MOBs was allocated to the assets and liabilities acquired consisting of tangibleproperty and identifiable intangible assets, based on their respective fair values at acquisition, as detailed in the table below. Substantially all of theintangible assets include the value of the in-place leases at Ward Eagle Office Village at the time of acquisition which are being amortized over the thenaverage remaining lease term of approximately 9.8 years (aggregate weighted average of 8.4 years at December 31, 2014). Land $316 Buildings and improvements 3,749 Intangible assets 610 Other assets 21 Liabilities (real property and operating) (11) Net cash paid $4,685 The Ward Eagle Office Village acquisition was valued utilizing the income capitalization approach. The calculated fair value, utilizing the incomecapitalization approach, is based upon the basis of capitalization of the net estimated earnings expectancy of the property, assuming continued use similar tothe existing use of the acquired property’s continued cash flow analysis were also utilized in estimating the fair value of the property, whereby cash flowsfrom the various tenants are calculated based upon lease commencement and termination dates. New Construction: The newly constructed Forney Medical Plaza II located in Forney, Texas was completed and opened in April, 2013. This multi-tenant medical officebuilding, consisting of 30,000 rentable square feet, is owned by a limited partnership in which we hold a 95% non-controlling ownership interest. As thisLLC is not considered to be a variable interest entity, it is accounted for pursuant to the equity method. Divestitures: There were no divestitures during 2013. 2012: Acquisitions and New Construction: In January and December, 2012, we purchased the: • PeaceHealth Medical Clinic, a 99,000 square foot, single tenant medical office building located in Bellingham, Washington, which was acquiredin January, 2012 for $30.4 million; the weighted average remaining lease term on the date of acquisition was approximately ten years, and; 77Table of Contents • Northwest Texas Professional Office Tower – a 72,000 square foot, multi-tenant medical office building located in Amarillo, Texas, which wasacquired in December, 2012 for $9.6 million; the weighted average remaining lease term at the date of acquisition was 5.1 years. The aggregate purchase price of $40.0 million for these MOBs was allocated to the assets and liabilities acquired consisting of tangible property andidentified intangible assets, based on their respective fair values at acquisition, as detailed in the table below. Substantially all of the intangible assetsinclude the value of the in-place leases at the time of acquisition which are being amortized over the then average remaining lease term of approximately 7.0years (aggregate weighted average of 5.0 years at December 31, 2014). Land $1,900 Buildings and improvements 32,090 Intangible assets 6,020 Other assets 799 Liabilities (real property and operating) (144) Deposit paid in 2011 (534) Debt (including fair value adjustment of $799) (23,240) Net cash paid $16,891 The 2012 acquisitions were both valued utilizing the income capitalization approach as well as the sales comparison approach for valuing the land atthe PeaceHealth Medical Clinic. The calculated fair values, utilizing the income capitalization approach, are based upon the basis of capitalization of the netestimated earnings expectancy of the properties, assuming continued use similar to the existing use of the acquired property’s continued cash flow analysiswere also utilized in estimating the fair values of the properties, whereby cash flows from the various tenants are calculated based upon lease commencementand termination dates. The following table summarizes significant unobservable quantitative inputs and assumptions used for the 2012 acquired properties categorized inLevel 3 of the fair value hierarchy: Assets Fair Value atDecember 31, 2012 Valuation Technique Unobservable inputs Range PeaceHealth Medical Clinic (a.)(b.) $30,400,000 Income Capitalization Approach Capitalization Rate 7.50% Discount Rate 8.50% Northwest Texas Professional Office Tower $9,600,000 Income Capitalization Approach Capitalization Rate 8.60% Discount Rate 9.50% (a.)The fair value of the land was estimated based upon the sales comparison approach.(b.)Debt is recorded at its current estimated fair value based upon significant inputs including outstanding loan balance, term, stated interest rate andcurrent market rate of the mortgage. For these MOBs acquired during 2012, we recorded aggregate revenue of $2.7 million and net income of approximately $232,000 (excludingtransaction expenses of $680,000) during 2012. Divestiture: In February, 2012, Canyon Healthcare Properties, a limited liability company (“LLC”) in which we owned a 95% noncontrolling ownership interest,completed the divestiture of the Canyon Springs Medical Plaza. As partial consideration for the transaction, the buyer assumed an existing third-partymortgage related to this property. The divestiture by this LLC generated approximately $8.1 million of cash proceeds to us, net of closing 78Table of Contentscosts and the minority members’ share of the proceeds. This divestiture resulted in a gain of approximately $7.4 million which is included in ourconsolidated statement of income for the year ended December 31, 2012. In October, 2012, 575 Hardy Investors, a LLC in which we owned a 90% non-controlling ownership interest, completed the divestiture of the CentinelaMedical Building Complex. Including the repayment to us of a previously provided $8.0 million member loan, the divestiture by this LLC generatedapproximately $12.2 million of cash proceeds to us, net of closing costs and minority members’ share of the proceeds. This divestiture resulted in a gain ofapproximately $1.1 million, which is included in our consolidated statement of income for the year ended December 31, 2012. Assuming the 2012 acquisitions and divestitures occurred on January 1, 2012, our pro forma net revenues and net income for the year endedDecember 31, 2012 would have been approximately $55.4 million and $11.6 million, or $.92 per diluted share, respectively, without giving effect to thegains and transaction costs recorded during 2012. As of December 31, 2014, our net intangible assets total $23.1 million (net of $19.7 million accumulated amortization) and substantially all of theamount is related to acquired, in-place leases which have a weighted average remaining amortization period of 4.4 years. (4) LEASES All of our leases are classified as operating leases with initial terms typically ranging from 3 to 15 years with up to five additional, five-year renewaloptions. 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(see Note 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 andpaid on 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, bonus rents and the impact of straight line rent, are as follows (amounts in thousands): 2015 $49,207 2016 46,051 2017 30,330 2018 25,799 2019 21,127 Thereafter 57,916 Total minimum base rents $230,430 Some of the leases contain gross terms where operating expenses are included in the base rent amounts. Other leases contain net terms where theoperating expenses are assessed separately from the base rentals. The table above contains a mixture of both gross and net leases, and does not include anyseparately calculated operating expense reimbursements. Under the terms of the hospital leases, the lessees are required to pay all operating costs of theproperties including property insurance and real estate taxes. Tenants of the medical office buildings generally are required to pay their pro-rata share of theproperty’s operating costs. (5) DEBT AND FINANCIAL INSTRUMENTS Debt: In July, 2011, we entered into a $150 million revolving credit agreement (“Credit Agreement”) which is scheduled to expire on July 24, 2015. We arein the process of renegotiating our Credit Agreement and, although we can provide no assurance we will do so, we expect to complete a replacement creditfacility by March 31, 79Table of Contents2015. The Credit Agreement includes a $50 million sub limit for letters of credit and a $20 million sub limit for swingline/short-term loans. The CreditAgreement also provides an option to increase the total facility borrowing capacity by an additional $50 million, subject to lender agreement. Borrowingsmade pursuant to the Credit Agreement will bear interest, at our option, at one, two, three, or six month LIBOR plus an applicable margin ranging from 1.75%to 2.50% or at the Base Rate plus an applicable margin ranging from 0.75% to 1.50%. The Credit Agreement defines “Base Rate” as the greatest of: (a) theadministrative agent’s prime rate; (b) the federal funds effective rate plus 0.50%, and; (c) one month LIBOR plus 1%. A fee of 0.30% to 0.50% will be chargedon the unused portion of the commitment. The margins over LIBOR, Base Rate and the commitment fee are based upon our ratio of debt to total capital. AtDecember 31, 2014, the applicable margin over the LIBOR rate was 2.00%, the margin over the Base Rate was 1.00%, and the commitment fee was 0.35%. At December 31, 2014, we had $89.8 million of outstanding borrowings and $6.3 million of letters of credit outstanding against our revolving creditagreement. We had $54.0 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31,2014. There are no compensating balance requirements. The average amounts outstanding under our revolving credit agreement were $104.6 million in2014, $86.3 million in 2013 and $75.4 million in 2012 with corresponding effective interest rates, including commitment fees, of 2.4% in 2014, 2.2% in2013 and 2.4% in 2012. The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was $89.8 million at December 31,2014. On February 10, 2015, we borrowed an additional $4.9 million under our revolving credit agreement, which was utilized to repay the outstandingmortgage balance on the Spring Valley Medical Office Building. The mortgage loan on this property matured on February 10, 2015. On July 1, 2014, we borrowed an additional $9.1 million under our revolving credit agreement, which was utilized to repay the outstanding mortgagebalance on the Summerlin Hospital Medical Office Building I. The mortgage loan on this property matured on July 1, 2014. 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 of 1986 and related regulationsgoverning real estate investment trusts. We are in compliance with all of the covenants at December 31, 2014. We also believe that we would remain incompliance if the full amount of our commitment was borrowed. The following table includes a summary of the required compliance ratios, giving effect to the covenants contained in the Credit Agreement (dollaramounts in thousands): Covenant December 31,2014 Tangible net worth $125,000 $181,458 Debt to total capital < 55% 30.0% Debt service coverage ratio > 3.00x 25.4x Debt to cash flow ratio < 3.50x 1.29x 80Table of ContentsWe have sixteen mortgages, all of which are non-recourse to us, included on our consolidated balance sheet as of December 31, 2014, with a combinedoutstanding balance of $122.9 million (excluding net debt premium of $523,000 at December 31, 2014). The following table summarizes our outstandingmortgages at December 31, 2014 (amounts in thousands): Facility Name OutstandingBalance(in thousands) (a) InterestRate MaturityDateSpring Valley Medical Office Building fixed rate mortgage loan (b.) $4,920 5.50% February, 2015Desert Valley Medical Center floating rate mortgage loan (c.) 3,861 3.41% October, 2015Palmdale Medical Plaza fixed rate mortgage loan (c.) 6,008 3.69% October, 2015Summerlin Hospital Medical Office Building III floating rate mortgage loan 11,025 3.41% December, 2016Peace Health fixed rate mortgage loan 21,248 5.64% April, 2017Auburn Medical II floating rate mortgage loan 7,183 2.90% April, 2017Medical Center of Western Connecticut fixed rate mortgage loan 4,785 6.00% June, 2017Summerlin Hospital Medical Office Building II fixed rate mortgage loan 11,729 5.50% October, 2017Phoenix Children’s East Valley Care Center fixed rate mortgage loan 6,485 5.88% December, 2017Centennial Hills Medical Office Building floating rate mortgage loan 10,642 3.41% January, 2018Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan 4,479 3.41% February, 2018Rosenberg Children’s Medical Plaza fixed rate mortgage loan 8,479 4.85% May, 2018Vibra Hospital of Corpus Christi fixed rate mortgage loan 2,902 6.50% July, 2019700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 6,601 4.54% June, 2022BRB Medical Office Building fixed rate mortgage loan 6,673 4.27% December, 2022Tuscan Professional Building fixed rate mortgage loan 5,862 5.56% June, 2025Total $122,882 (a.)Amortized principal payments are made on a monthly basis.(b.)This loan was repaid in full on February 10, 2015, utilizing funds borrowed under our revolving credit facility.(c.)We expect these loans, which have a maturity date in October, 2015, to be refinanced at the then current market interest rates or repaid utilizing fundsborrowed under our revolving credit facility. The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages have a combined fair value ofapproximately $124.7 million as of December 31, 2014. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact oninterest incurred or cash flow. As of December 31, 2014, our aggregate consolidated scheduled debt repayments (including mortgages) are as follows (amounts in thousands): 2015(a) $107,646 2016 13,600 2017 50,399 2018 22,658 2019 3,463 Later 14,866 Total $212,632 81Table of Contents (a)Includes repayment of $89.8 million of outstanding borrowings under the terms of our $150 million revolving credit agreement. Financial Instruments: During the third quarter of 2013, we entered into an interest rate cap on a total notional amount of $10 million whereby we paid a premium of$136,000. During the first quarter of 2014, we entered into two additional interest rate cap agreements on a total notional amount of $20 million whereby wepaid premiums of $134,500. In exchange for the premium payments, the counterparties agreed to pay us the difference between 1.50% and one-month LIBORif one-month LIBOR rises above 1.50% during the term of the cap. From inception through December 31, 2014, no payments have been made to us by thecounterparties pursuant to the terms of these caps which expire on January 13, 2017. (6) DIVIDENDS AND EQUITY ISSUANCE PROGRAM Dividends: During each of the last three years, dividends were declared and paid by us as follows: • 2014: $2.52 per share of which $1.478 per share was ordinary income and $1.042 per share was total capital gain (total capital gain amountincludes Unrecaptured Section 1250 gain of $.305 per share). • 2013: $2.495 per share of which $1.96 per share was ordinary income and $.535 per share was a return of capital distribution. • 2012: $2.46 per share of which $1.294 per share was ordinary income and $1.166 per share was total capital gain (total capital gain includesUnrecaptured Section 1250 gain of $.281 per share). Equity Issuance Program: During the fourth quarter of 2013, we commenced an at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we may sell, fromtime-to-time, common shares of our beneficial interest up to an aggregate sales price of $50 million to or through Merrill Lynch, Pierce, Fenner and Smith,Incorporated (“Merrill Lynch”), as sales agent and/or principal. Since inception of this program, we have issued 580,900 shares at an average price of $45.97 per share, which generated approximately $25.6 millionof net cash proceeds or receivables (net of approximately$1.1 million, consisting of compensation of $667,000 to Merrill Lynch, as well as $391,000 of othervarious fees and expenses), as follows: • 2014: We issued 426,187 shares at an average price of $47.51 per share which generated approximately $19.5 million of net cash proceeds orreceivables (net of approximately $701,000, consisting of compensation of $506,000 to Merrill Lynch, as well as $195,000 of other various feesand expenses), and; • 2013: We issued 154,713 shares at an average price of $41.71 per share which generated approximately $6.1 million of net cash proceeds orreceivables (net of $357,000, consisting of compensation of $161,000 to Merrill Lynch, as well as $196,000 of other various fees and expenses). In connection with this ATM program, our consolidated balance sheet includes approximately $1.1 million at December 31, 2014, and $600,000 atDecember 31, 2013, of net proceeds due to us in connection with shares issued in late December 2014 and 2013. The payment related to these shares wasreceived by us in early January 2015, and early January, 2014, respectively. The net proceeds receivable were non-cash items, as presented on theConsolidated Statements of Cash Flows at December 31, 2014 and 2013. 82Table of Contents(7) INCENTIVE PLANS 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 and a total of57,825 shares, net of cancellations, have been issued pursuant to the terms of this plan, 39,245 of which have vested as of December 31, 2014. AtDecember 31, 2014 there are 17,175 shares remaining for issuance under the terms of the 2007 Plan. During 2014, there were 9,850 restricted Shares of Beneficial Interest, net of cancellations, issued to the Trustees and officers of the Trust pursuant tothe 2007 Plan at a weighted average grant price of $43.21 per share ($425,619 in the aggregate). These restricted shares are scheduled to vest in June of 2016(the second anniversary of the date of grant). During 2013, there were 8,730 restricted Shares of Beneficial Interest, net of cancellations, issued to the Trustees and officers of the Trust pursuant tothe 2007 Plan at a weighted average grant price of $43.54 per share ($380,104 in the aggregate). These restricted shares are scheduled to vest in June of 2015(the second anniversary of the date of grant). During 2012, there were 10,375 restricted Shares of Beneficial Interest, net of cancellations, issued to the Trustees and officers of the Trust pursuant tothe 2007 Plan at a weighted average grant price of $39.05 per share ($405,144 in the aggregate). These restricted shares vested in June of 2014 (the secondanniversary of the date of grant). Included the restricted stock issuances during 2012 were one-time special compensation awards made to our executiveofficers in recognition of their efforts and contributions in connection with various acquisitions, divestitures and purchases of third-party minority interests incertain majority-owned LLCs as completed at various times during 2011 and the first quarter of 2012. We expense the grant-date fair value restricted stock awards under the straight-line method over the stated vesting period of the award. In connectionwith these grants, we recorded compensation expense of approximately $399,000, $375,000 and $329,000 and during 2014, 2013 and 2012, respectively.The remaining expenses associated with these grants is approximately $381,000 and will be recorded over the remaining weighted average vesting period foroutstanding restricted Shares of Beneficial Interest of approximately one year at December 31, 2014. 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 vested ratably at 25% per year beginning one year after the date of grant, andexpire in ten years. DERs on outstanding awards are earned in amounts equal to the cash or stock dividends declared subsequent to the date of grant. As ofDecember 31, 2014, there were 36,000 options outstanding and exercisable under the 1997 Plan with an average exercise price of $35.94 per share and aremaining weighted average life of 1.6 years. The net expense recorded in connection with the DERs did not have a material impact on our consolidatedfinancial statements during each of the years ended December 31, 2014, 2013 and 2012. 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 tiedto the date the options were exercised or expire. In order to meet certain 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. DERs withrespect to 36,000 shares, 40,000 shares 83Table of Contentsand 43,000 shares were outstanding at December 31, 2014, 2013 and 2012, respectively. In December of 2014, 2013 and 2012, DERs which were vested andaccrued as of each respective date, were paid to officers and Trustees of the Trust amounting to $94,000, $106,000 and $116,000, respectively. 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, 2012 51,000 $33.89 $36.53/$26.09 Exercised (8,000) 26.76 $27.65/$26.09 Balance, January 1, 2013 43,000 $35.22 $36.53/$29.44 Exercised (3,000) 29.44 $29.44/$29.44 Balance, January 1, 2014 40,000 $35.65 $36.53/$30.06 Exercised (4,000) 33.07 $30.06/$34.07 Outstanding options vested and exercisable as of December 31, 2014 36,000 $35.94 $34.90/$36.53 During 2014, there were 4,000 stock options exercised with a total in-the-money value of $44,160. During 2013, there were 3,000 stock optionsexercised with a total in-the-money value of $46,290. During 2012, there were 8,000 stock options exercised with a total in-the-money value of $148,930. There were no unvested options as of December 31, 2014. The following table provides information about options outstanding and exercisable optionsat December 31, 2014: OptionsOutstandingand Exercisable Number 36,000 Weighted average exercise price $35.94 Aggregate intrinsic value $438,430 Weighted average remaining contractual life 1.6 The weighted average remaining contractual life and weighted average exercise price for options outstanding and the weighted average exercise pricesper share for exercisable options at December 31, 2014 were as follows: Options Outstanding andExercisable Exercise Price Shares WeightedAverageExercisePrice PerShare WeightedAverageRemainingContractualLife (inYears) $34.90 -$34.90 13,000 34.90 0.7 $36.53 -$36.53 23,000 36.53 2.2 Total 36,000 $35.94 1.6 84Table of Contents(8) SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES 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 or were the primary beneficiary. In accordance with the Financial Accounting Standards Board’s (“FASB”) standards andguidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs which we do not controlusing the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limitedto: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controllingownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributionsfrom, the investments. Pursuant to certain agreements, allocations of sales proceeds and 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. At December 31, 2014, we have non-controlling equity investments or commitments in five jointly-owned LLCs which own MOBs. As ofDecember 31, 2014, we accounted for these LLCs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities. Themajority of these LLCs are joint-ventures between us and non-related parties that manage and hold minority ownership interests in the entities. Each LLC isgenerally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they arecash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leaseholdimprovements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash fundings are typicallyadvanced as equity or member loans. These LLCs maintain property insurance on the properties. Effective August 1, 2014, we purchased the minority ownership interests, ranging from 5% to 15%, held by third-party members in six LLCs in whichwe previously held noncontrolling majority ownership interests, as noted in the table below. As a result of these minority ownership purchases, we now own100% of each of these LLCs and began to account for them on a consolidated basis effective August 1, 2014. Prior to August 1, 2014, these LLCs wereaccounted for on an unconsolidated basis pursuant to the equity method. Effective January 1, 2014, we purchased the 5% minority ownership interests held by third-party members in two LLCs in which we previously heldnoncontrolling majority ownership interests, as noted in the table below. As a result of these minority ownership purchases, we now own 100% of each ofthese LLCs and account for them on a consolidated basis. Prior to January 1, 2014, these LLCs were accounted for on an unconsolidated basis pursuant to theequity method. Previously, Palmdale Medical Properties (“Palmdale”) was included in our financial statements on a consolidated basis through June 30,2013 as a result of a master lease arrangement with a wholly-owned subsidiary of UHS, which expired on July 1, 2013. Name of LLC/LP Ownershipprior tominorityinterestpurchase Property Owned by LLC Effective Date Palmdale Medical Properties 95% Palmdale Medical Plaza January 1, 2014 Sparks Medical Properties 95% Vista Medical Terrace & Sparks MOB January 1, 2014 DVMC Properties 90% Desert Valley Medical Center August 1, 2014 Santa Fe Scottsdale 90% Santa Fe Professional Plaza August 1, 2014 PCH Medical Properties 85% Rosenberg Children’s Medical Plaza August 1, 2014 Sierra Medical Properties 95% Sierra San Antonio Medical Plaza August 1, 2014 PCH Southern Properties 95% Phoenix Children’s East Valley Care Center August 1, 2014 3811 Bell Medical Properties 95% North Valley Medical Plaza August 1, 2014 85Table of ContentsThe following property table represents the five LLCs in which we own a noncontrolling interest and were accounted for under the equity method as ofDecember 31, 2014: Name of LLC/LP Ownership Property Owned by LLCSuburban Properties 33% Suburban Medical Plaza IIBrunswick Associates (a.) 74% Mid Coast Hospital MOBArlington Medical Properties (b.) 75% Saint Mary’s ProfessionalOffice BuildingGrayson Properties (c.) 95% Texoma Medical PlazaFTX MOB Phase II (d.) 95% Forney Medical Plaza II (a.)This LLC has a third-party term loan of $9.0 million, which is non-recourse to us, outstanding as of December 31, 2014.(b.)We have funded $5.2 million in equity as of December 31, 2014 and are committed to invest an additional $1.1 million. This LLC has a third-partyterm loan of $23.3 million, which is non-recourse to us, outstanding as of December 31, 2014.(c.)We have funded $2.6 million in equity as of December 31, 2014, and are committed to fund an additional $400,000. This building is on the campus ofa UHS hospital and has tenants that include subsidiaries of UHS. This LLC has a third-party term loan of $14.9 million, which is non-recourse to us,outstanding as of December 31, 2014(d.)We have committed to invest up to $2.5 million in equity and debt financing, of which $1.4 million has been funded as of December 31, 2014. ThisLLC has a third-party term loan of $5.5 million, which is non-recourse to us, outstanding as of December 31, 2014. Below are the combined statements of income for the LLCs accounted for under the equity method at December 31, 2014, 2013 and 2012. The data forthe year ended December 31, 2014 includes the financial results for the six above-mentioned LLCs in which we purchased the minority ownership interests inAugust, 2014 for the period of January through July of 2014 (during which they were accounted for under the equity method). The data for the year endedDecember 31, 2012 includes the prorated amounts, through the date of their divestitures, for two LLCs that were divested during the year (Canyon HealthcareProperties, 95% ownership interest, divested in February, 2012 and 575 Hardy Investors, 90% ownership interest, divested in October, 2012). For the Year Ended December 31, 2014(b.) 2013(c.) 2012(c.) (d.) (amounts in thousands) Revenues $17,292 $21,001 $21,448 Operating expenses 6,769 8,705 8,974 Depreciation and amortization 2,968 4,039 4,140 Interest, net 4,261 6,353 6,056 Net income before gains on divestitures $3,294 $1,904 $2,278 Our share of net income before gains on divestitures (a.) $2,428 $2,095 $2,365 Our share of gains on divestitures $— $— $8,520 (a.)Our share of net income during 2014, 2013 and 2012, includes interest income earned by us on various advances made to LLCs of approximately$834,000, $1.9 million and $1.5 million, respectively.(b.)As mentioned above, we began to account for six LLCs (Desert Valley Medical Center, Santa Fe Professional Plaza, Rosenberg Children’s MedicalPlaza, Sierra San Antonio Medical Plaza, Phoenix Children’s East Valley Care Center and 3811 E. Bell Medical Building Medical Plaza) on aconsolidated basis as of August 1, 2014. Prior to August 1, 2014, the financial results of these entities were accounted for under the equity method onan unconsolidated basis. The year ended December 31, 2014, include the financial results of the six mentioned LLCs for seven months ended July 31,2014. 86Table of Contents(c.)As mentioned above, we began to account for Sparks Medical Properties on a consolidated basis as of January 1, 2014. Prior to January 1, 2014, thefinancial results of this entity were accounted for under the equity method on an unconsolidated basis. These amounts include the financial results forSparks Medical Properties for the years ended December 31, 2013 and 2012. In addition, we purchased the minority ownership interests in six LLCseffective August 1, 2014 (as mentioned in (b.) above) and began to account for the LLCs a consolidated basis as of that date. These amounts includethe financial results for these six LLCs for the years ended December 31, 2013 and 2012. As also mentioned above, we began to account for PalmdaleMedical Properties on a consolidated basis as of January 1, 2014. Prior thereto, as a result of a master lease commitment with a wholly-ownedsubsidiary of UHS which expired effective as of July 1, 2013, the financial results of Palmdale Medical Properties was accounted for on a consolidatedbasis through the six-month period ended June 30, 2013 and then on an unconsolidated basis for the six-month period of July 1, 2013 throughDecember 31, 2013. Therefore the financial results of this entity are reflected in the table above for the six-month period of July 1, 2013 throughDecember 31, 2013.(d.)As mentioned above, during the first quarter of 2012 and the fourth quarter of 2012, two LLCs in which we previously owned various noncontrolling,majority ownership interests (Canyon Healthcare Properties and 575 Hardy Investors), completed divestitures of medical office buildings and relatedreal property. Our share of the financial results of the divested entities were previously accounted for on an unconsolidated basis under the equitymethod. Below are the combined balance sheets for the LLCs that were accounted for under the equity method as of December 31, 2014 and 2013: December 31, 2014(a.) 2013(a.)(b.) (amounts in thousands) Net property, including CIP $62,450 $119,547 Other assets 7,367 9,479 Total assets $69,817 $129,026 Liabilities $3,348 $5,336 Mortgage notes payable, non-recourse to us 52,728 80,112 Advances payable to us — 22,911 Equity 13,741 20,667 Total liabilities and equity $69,817 $129,026 Our share of equity and advances to LLCs $8,605 $39,201 (a.)The amounts presented include the balance sheet amounts for each of the five entities that are accounted for on an unconsolidated basis as ofDecember 31, 2014.(b.)As mentioned above, we began to account for Palmdale Medical Properties and Sparks Medical Properties on a consolidated basis effective January 1,2014. As also mentioned above, we began to account for six LLCs (Desert Valley Medical Center, Santa Fe Professional Plaza, Rosenberg Children’sMedical Plaza, Sierra San Antonio Medical Plaza, Phoenix Children’s East Valley Care Center and 3811 E. Bell Medical Building Medical Plaza) on aconsolidated basis as of August 1, 2014. The amounts reflected for December 31, 2013, include the balance sheet amounts for each of these entitiessince they were accounted for on an unconsolidated basis pursuant to the equity method as of December 31, 2013. 87Table of ContentsAs of December 31, 2014, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs, which are accounted for under theequity method and are non-recourse to us, are as follows (amounts in thousands): 2015 $23,832 2016 530 2017 5,727 2018 445 2019 466 2020 and After 21,728 Total $52,728 Name of LLC MortgageLoanBalance (a.) Maturity Date Arlington Medical Properties (b.) 23,287 October, 2015 FTX MOB Phase II (c.) 5,548 August, 2017 Grayson Properties (d.) 14,893 September, 2021 Brunswick Associates (e.) 9,000 December, 2024 $52,728 (a.)All mortgage loans require monthly principal payments through maturity and include a balloon principal payment upon maturity.(b.)We believe the terms of this loan are within current market underwriting criteria. At this time, we expect to refinance this loan during 2015 for three toten year terms at the then current market interest rates. In the unexpected event that we are unable to refinance this loan on reasonable terms, we willexplore other financing alternatives, including, among other things, increasing our equity investment in the property utilizing funds borrowed underour revolving credit agreement.(c.)This loan was converted from a construction loan to a term loan in August, 2014, pursuant to the terms of the loan agreement.(d.)This loan was refinanced in September, 2014, for a seven year term, at a fixed rate of 5.034%. This loan includes two one-year extension options.(e.)This loan was refinanced in December, 2014, for a ten year term, at a fixed rate of 1.50% for the initial six months, and fixed rate of 3.64% commencingJuly 1, 2015 through December 31, 2024. Pursuant to the operating and/or partnership agreements of most of the five LLCs in which we continue to hold non-controlling majority ownershipinterests, the third-party member and the Trust, at any time, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-OfferingMember”) 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 asdetermined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at theequivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchase the entire ownership interest of the OfferingMember at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing ofthe transfer must occur within 60 to 90 days of the acceptance by the Non-Offering Member (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. We actively manage our portfolio of healthcare and human service facilities and may from time to time makedecisions to sell lower 88Table of Contentsperforming properties not meeting our long-term investment objectives. The proceeds of sales are typically reinvested in new developments or acquisitions,which we believe will meet our planned rate of return. It is our intent that all healthcare and human service facilities will be owned or developed forinvestment 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 withregard to both the nature and economics of the facilities, tenants and operational processes, as well as long-term average financial performance. (10) QUARTERLY RESULTS (unaudited) 2014 (a.) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts) Revenues $14,288 $14,317 $15,258 $15,923 $59,786 Net income before gains $3,458 $3,408 $3,048 $3,185 $13,099 Gain on fair value recognition resulting from the purchase of minority interests inmajority-owned LLCs 316 — 25,093 — 25,409 Gain on divestiture of real property — — — 13,043 13,043 Net income $3,774 $3,408 $28,141 $16,228 $51,551 Total basic earnings per share $0.29 $0.26 $2.18 $1.24 $3.99 Total diluted earnings per share $0.29 $0.26 $2.18 $1.24 $3.99 (a.)We began to account for Palmdale Medical Properties and Sparks Medical Properties on a consolidated basis effective January 1, 2014. Additionally,we began to account for six LLCs (Desert Valley Medical Center, Santa Fe Professional Plaza, Rosenberg Children’s Medical Plaza, Sierra San AntonioMedical Plaza, Phoenix Children’s East Valley Care Center and 3811 E. Bell Medical Building Medical Plaza) on a consolidated basis as of August 1,2014. 2013 (a.) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts) Revenues $13,885 $13,502 $13,448 $13,445 $54,280 Net income $3,427 $2,941 $3,303 $3,498 $13,169 Total basic earnings per share $0.27 $0.23 $0.26 $0.27 $1.04 Total diluted earnings per share $0.27 $0.23 $0.26 $0.27 $1.04 (a.)We began reflecting the operating results for Palmdale Medical Plaza on an unconsolidated basis pursuant to the equity method as of July 1, 2013.Prior to July 1, 2013, the financial results of this entity were recorded on a consolidated basis. The revenues for the first and second quarters of 2013, asreflected above, include the revenue for Palmdale Medical Plaza. There was no material impact to our net income as a result of the deconsolidation ofthis property. 89Table of ContentsSchedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2014(amounts in thousands) Description Initial Cost Gross amount atwhich carriedat end of period AccumulatedDepreciationas of Dec.31,2014 Date ofCompletion ofConstruction,Acquisitionor Significantimprovement DateAcquired AverageDepreciableLife Encumbrance(e.) Land Building&Improv. Adjustmentsto Basis (a.) Land Building &Improvements CIP Total Inland Valley Regional Medical CenterWildomar, California — $2,050 $10,701 $14,596 $2,050 $25,297 $27,347 $11,175 2007 1986 43 Years McAllen Medical CenterMcAllen, Texas — 4,720 31,442 10,189 6,281 40,070 46,351 24,385 1994 1986 42 Years Wellington Regional Medical CenterWest Palm Beach, Florida — 1,190 14,652 17,370 1,663 31,549 33,212 16,258 2006 1986 42 Years HealthSouth Deaconess Rehabilitation HospitalEvansville, Indiana — 500 6,945 1,062 500 8,007 8,507 5,069 1993 1989 40 Years Kindred Hospital ChicagoCentral Chicago, Illinois — 158 6,404 1,838 158 8,242 8,400 8,242 1993 1986 25 Years Family Doctor’s Medical Office BuildingShreveport, Louisiana — 54 1,526 494 54 2,020 2,074 902 1991 1995 45 Years Kelsey-Seybold Clinic at King’s Crossing — 439 1,618 870 439 2,488 2,927 1,091 1995 1995 45 Years Professional Buildings at King’s CrossingKingwood, Texas — 439 1,837 185 439 2,022 3 2,464 889 1995 1995 45 Years Chesterbrook AcademyAudubon, Pennsylvania — 307 996 — 307 996 1,303 413 1996 1996 45 Years Chesterbrook AcademyNew Britain, Pennsylvania — 250 744 — 250 744 994 309 1991 1996 45 Years Chesterbrook AcademyUwchlan, Pennsylvania — 180 815 — 180 815 995 338 1992 1996 45 Years Chesterbrook AcademyNewtown, Pennsylvania — 195 749 — 195 749 944 311 1992 1996 45 Years The Southern Crescent Center I (b.) — 1,130 5,092 (2,271) 1,130 2,821 3,951 2,269 1994 1996 45 Years The Southern Crescent Center II (b.)Riverdale, Georgia — — — 5,015 806 4,209 5,015 1,943 2000 1998 35 Years The Cypresswood Professional CenterSpring, Texas — 573 3,842 585 573 4,427 53 5,053 2,398 1997 1997 35 Years 701 South Tonopah BuildingLas Vegas, Nevada — — 1,579 68 — 1,647 1,647 931 1999 1999 25 Years Sheffield Medical Building (c.)Atlanta, Georgia — 1,760 9,766 (7,327) 736 3,463 1 4,200 1,348 1999 1999 25 Years Medical Center of Western ConnecticutDanbury, Connecticut 4,785 1,151 5,176 544 1,151 5,720 6,871 2,899 2000 2000 30 Years Vibra Hospital of Corpus ChristiCorpus Christi, Texas 2,902 1,104 5,508 — 1,104 5,508 6,612 1,085 2008 2008 35 Years Apache Junction Medical Plaza (d.)Apache Junction, AZ — 240 3,590 621 240 4,211 1 4,452 479 2004 2004 30 Years Auburn Medical Office Building II (d.)Auburn, WA 7,183 — 10,200 176 — 10,376 10,376 1,034 2009 2009 36 Years BRB Medical Office Building (d.)Kingwood, Texas 6,673 430 8,970 24 430 8,994 4 9,428 885 2010 2010 37 Years Centennial Hills Medical Office Building (d.)Las Vegas, NV 10,642 — 19,890 804 — 20,694 116 20,810 2,154 2006 2006 34 Years Desert Springs Medical Plaza (d.)Las Vegas, NV — 1,200 9,560 443 1,200 10,003 144 11,347 1,212 1998 1998 30 Years 700 Shadow Lane & Goldring MOBs (d.)Las Vegas, NV 6,601 400 11,300 1,141 400 12,441 155 12,996 1,430 2003 2003 30 Years Spring Valley Hospital MOB I (d.)Las Vegas, NV 4,920 — 9,500 338 — 9,838 36 9,874 1,029 2004 2004 35 Years 90Table of ContentsSchedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2014 — (Continued)(amounts in thousands) Description Initial Cost Gross amount atwhich carriedat end of period AccumulatedDepreciationas of Dec.31,2014 Date ofCompletion ofConstruction,Acquisitionor Significantimprovement DateAcquired AverageDepreciableLife Encumbrance(e.) Land Building&Improv. Adjustmentsto Basis (a.) Land Building &Improvements CIP Total Spring Valley Hospital MOB II (d.)Las Vegas, NV — — 9,800 8 — 9,808 202 10,010 1,031 2006 2006 34 Years Summerlin Hospital MOB I (d.)Las Vegas, NV — 460 15,440 512 460 15,952 43 16,455 1,889 1999 1999 30 Years Summerlin Hospital MOB II (d.)Las Vegas, NV 11,729 370 16,830 851 370 17,681 43 18,094 2,040 2000 2000 30 Years Summerlin Hospital MOB III (d.)Las Vegas, NV 11,025 — 14,900 1,459 — 16,359 32 16,391 1,581 2009 2009 36 Years Emory at Dunwoody BuildingDunwoody, GA — 782 3,455 — 782 3,455 4,237 395 2011 2011 35 Years Forney Medical Plaza Forney, TX — 910 11,960 31 910 11,991 12,901 1,621 2011 2011 35 Years Lake Pointe Medical Arts BuildingRowlett, TX — 1,100 9,000 31 1,100 9,031 10,131 1,077 2011 2011 35 Years Tuscan Professional BuildingIrving, TX 5,862 1,100 12,525 73 1,100 12,598 13,698 1,299 2011 2011 35 Years Peace Health Medical ClinicBellingham, WA 21,248 1,900 24,910 — 1,900 24,910 26,810 2,554 2012 2012 35 Years Northwest Texas Professional OfficeTowerAmarillo, TX — — 7,180 — — 7,180 7,180 485 2012 2012 35 Years Ward Eagle Office Village FarmingtonHills, MI — 220 3,220 — 220 3,220 3,440 165 2013 2013 35 Years 5004 Poole Road MOB Denison, TX — 96 529 — 96 529 625 28 2013 2013 35 Years Desert Valley Medical Center (f.)Phoenix, AZ 3,861 2,280 4,624 — 2,280 4,624 26 6,930 74 1996 1996 30 Years Hanover Emergency CenterMechanicsville, VA — 1,300 6,224 — 1,300 6,224 7,524 72 2014 2014 35 Years North Valley Medical Plaza (f.)Phoenix, AZ — 930 6,929 — 930 6,929 7,859 111 2010 2010 30 Years Northwest Medical Center at Sugar CreekBentonville, AR — 1,100 2,870 — 1,100 2,870 3,970 78 2014 2014 35 Years The Children’s Clinic at SpringdaleSpringdale, AR — 610 1,570 — 610 1,570 2,180 66 2014 2014 35 Years Rosenberg Children’s Medical Plaza (f.)Phoenix, AZ 8,479 0 23,302 — 0 23,302 23,302 327 2001 2001 35 Years Phoenix Children’s East Valley CareCenter (f.) Phoenix, AZ 6,485 1,050 10,900 — 1,050 10,900 11,950 152 2006 2006 35 Years Palmdale Medical Plaza (f.)Palmdale, CA 6,008 0 10,555 — 0 10,555 48 10,603 372 2008 2008 34 Years Santa Fe Professional Plaza (f.)Scottsdale, AZ — 1,090 1,960 — 1,090 1,960 109 3,159 31 1999 1999 30 Years Sierra San Antonio Medical Plaza (f.)Fontana, CA — 0 11,538 — 0 11,538 11,538 184 2006 2006 30 Years Vista Medical Terrace & Sparks MOB (f.)Sparks, NV 4,479 0 9,276 — 0 9,276 176 9,452 370 2008 2008 30 Years TOTALS $122,882 $33,768 $401,899 $49,730 $35,584 $449,813 $1,192 $486,589 $106,480 91Table of ContentsSchedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2014—(Continued)(amounts in thousands) a..Costs capitalized/divested subsequent to acquisition.b.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.c.During 2011, a $5.4 million provision for asset impairment was recorded in connection with the real estate assets of Sheffield Medical Building.d.During 2011, we purchased the third-party minority interests in these properties in which we previously held noncontrolling majority owned interests. Since that time, these properties are wholly-owned.e.Consists of outstanding balances as of December 31, 2014 on third-party debt that is non-recourse to us.f.During 2014, we purchased the third-party minority interests in these properties in which we previously held noncontrolling majority owned interests. Since that time, these properties are wholly-owned. 92Table of ContentsUNIVERSAL HEALTH REALTY INCOME TRUST NOTES TO SCHEDULE IIIDECEMBER 31, 2014(amounts in thousands) (1)RECONCILIATION OF REAL ESTATE PROPERTIES The following table reconciles the Real Estate Properties from January 1, 2012 to December 31, 2014: 2014 2013 2012 Balance at January 1, $395,669 $401,474 $363,498 Impact of deconsolidation of an LLC(a.) — (13,185) — Impact of consolidation of eight LLCs(b.) 84,064 — — Property additions 3,298 3,415 3,985 Acquisitions 13,674 4,065 33,991 Disposals (10,116) (100) — Balance at December 31, $486,589 $395,669 $401,474 (2)RECONCILIATION OF ACCUMULATED DEPRECIATION The following table reconciles the Accumulated Depreciation from January 1, 2012 to December 31, 2014: 2014 2013 2012 Balance at January 1, $97,921 $87,088 $74,865 Impact of deconsolidation of an LLC(a.) — (1,588) — Disposals (5,859) — — Current year depreciation expense 14,413 12,464 12,223 Other 5 (43) — Balance at December 31, $106,480 $97,921 $87,088 (a.)The master lease with a wholly-owned subsidiary of UHS related to Palmdale Medical Properties expired effective as of July 1, 2013 and, as of thatdate, we began accounting for Palmdale Medical Properties on an unconsolidated basis under the equity method.(b.)During 2014, the Trust purchased the minority ownership interests held by third-party members in eight LLCs (January and August, 2014) in which wepreviously held noncontrolling majority ownership interests. As a result of these minority ownership purchases, the Trust and our subsidiaries now own100% of each of these LLCs and the financial results are included in our consolidated financial statements. 93Table of ContentsExhibit Index Exhibit No. Exhibit 10.2 Agreement dated December 4, 2014, to renew Advisory Agreement dated as of December 24, 1986 between Universal Health RealtyIncome Trust and UHS of Delaware, Inc. 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. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 94Exhibit 10.2 December 4, 2014 Steve FiltonSenior Vice President & CFOUHS of Delaware, Inc.367 South Gulph RoadKing of Prussia, PA 19406 Dear Steve; The Board of Trustees of Universal Health Realty Income Trust, at today’s meeting, authorized the renewal of the current Advisory Agreement betweenUniversal Health Realty Income Trust and UHS of Delaware, Inc. (“Agreement”) upon the same terms and conditions. This letter constitutes Universal Health Realty Income Trust’s offer to renew the Agreement, through December 31, 2015, upon the same terms andconditions. Please acknowledge UHS of Delaware’s acceptance of this offer by signing in the space provided below and returning one copy of this letter tome. Thank you. Sincerely,/s/ Cheryl K. RamaganoCheryl K. RamaganoVice President and Treasurer Agreed and Accepted:UHS OF DELAWARE, INC.By: /s/ Steve FiltonSteve FiltonSenior Vice President and CFO CC: Charles BoyleExhibit 21 Subsidiaries of Registrant Jurisdiction 3811 Bell Medical Properties, LLC Delaware5004 Pool Road Properties, LP Texas73 Medical Building, LLC Connecticut653 Town Center Investments, LLC Arizona653 Town Center Phase II, LLC ArizonaApaMed Properties, LLC ArizonaArlington Medical Properties, LLC ArizonaAuburn Medical Properties II, LLC DelawareBanburry Medical Properties, LLC DelawareBRB/E Building One, LLC TexasBrunswick Associates, LLC New YorkCentennial Medical Properties, LLC DelawareCimarron Medical Properties, LLC TexasCobre Properties, LLC DelawareCypresswood Investments, L.P GeorgiaDeerval Properties, LLC ArizonaDesMed, LLC ArizonaDTX Medical Properties, LLC TexasDVMC Properties, LLC ArizonaEagle Medical Properties, LLC MichiganForney Deerval, LLC TexasForney Willetta, LLC TexasFTX Healthcare GP, LLC TexasFTX MOB Phase II, LLC TexasGold Shadow Properties, LLC ArizonaGrayson Properties, LP TexasGulph Investments MarylandHanover Medical Properties, LLC VirginiaNSHE TX Bay City, LLC TexasNSHE TX Cedar Park, LLC TexasNWTX Healthcare Properties, LLC TexasNWTX Medical Properties, LLC TexasOneida Medical Properties, LP TexasOsage Medical Properties, LLC ArkansasOttumwa Medical Properties, LLC IowaPalmdale Medical Properties, LLC DelawarePaseo Medical Properties II, LLC ArizonaPAX Medical Holdings, LLC DelawarePCH Medical Properties, LLC ArizonaPCH Southern Properties, LLC DelawareRiverdale Realty, LLC GeorgiaSanta Fe Scottsdale, LLC ArizonaSaratoga Hospital Properties, LP TexasSheffield Properties, LLC GeorgiaShiloh Medical Properties, LLC ArkansasSierra Medical Properties, LLC ArizonaSparks Medical Properties, LLC DelawareSpring Valley Medical Properties, LLC ArizonaSpring Valley Medical Properties II, LLC DelawareSuburban Properties, LLC KentuckyTuscan Medical Properties, LLC DelawareUHT TRS, LLC DelawareUHT/Ensemble Properties I, LLC DelawareWilletta Medical Properties, LLC ArizonaExhibit 23.1 Consent of Independent Registered Public Accounting Firm The 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 333-185092) on Form S-3 of Universal Health Realty Income Trust of our reports dated March 6, 2015, with respect to the consolidatedbalance sheets of Universal Health Realty Income Trust as of December 31, 2014 and 2013, and the related consolidated statements of income,comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the related financialstatement schedule III, real estate and accumulated depreciation, and the effectiveness of internal control over financial reporting as of December 31, 2014,which reports appear in the December 31, 2014 annual report on Form 10-K of Universal Health Realty Income Trust. (signed) KPMG LLP Philadelphia, PennsylvaniaMarch 6, 2015Exhibit 31.1 CERTIFICATION - Chief Executive Officer I, 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 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 principles; (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; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. 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 the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 6, 2015 /s/ Alan B. MillerPresident and ChiefExecutive OfficerExhibit 31.2 CERTIFICATION - Chief Financial Officer I, 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 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 principles; (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; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. 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 the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 6, 2015 /s/ Charles F. BoyleVice President andChief Financial OfficerEXHIBIT 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2014 as filedwith the 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 6, 2015 A 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 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2014, 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 6, 2015 A 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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