Universal Health Realty Income Trust
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 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) Maryland23-6858580(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)Universal Corporate Center367 South Gulph RoadP.O. Box 61558King of Prussia, Pennsylvania19406-0958(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 valueName 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 ☐ 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 ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-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 the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☒Accelerated filer ☐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 ☒ Aggregate market value of voting shares and non-voting shares held by non-affiliates as of June 30, 2016: $721,622,979 (For the purpose of this calculation only, all members of theBoard of Trustees are deemed to be affiliates). Number of shares of beneficial interest outstanding of registrant as of January 31, 2017: 13,599,104 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for our 2016 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 daysafter December 31, 2016 (incorporated by reference under Part III). UNIVERSAL HEALTH REALTY INCOME TRUST2016 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS PART IItem 1Business1Item 1ARisk Factors8Item 1BUnresolved Staff Comments17Item 2Properties18Item 3Legal Proceedings25Item 4Mine Safety Disclosures25 PART IIItem 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities25Item 6Selected Financial Data27Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations29Item 7AQuantitative and Qualitative Disclosures About Market Risk44Item 8Financial Statements and Supplementary Data45Item 9Changes in and Disagreements With Accountants on Accounting and Financial Disclosure45Item 9AControls and Procedures45Item 9BOther Information49 PART IIIItem 10Directors, Executive Officers and Corporate Governance49Item 11Executive Compensation49Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters49Item 13Certain Relationships and Related Transactions, and Director Independence49Item 14Principal Accountant Fees and Services49 PART IVItem 15Exhibits and Financial Statement Schedules50 SIGNATURES52 Index to Financial Statements and Schedule53 Exhibit Index83Exhibit 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 This Annual Report on Form 10-K is for the year ended December 31, 2016. 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 and seventeenmedical office buildings or free-standing emergency departments, that are either wholly or jointly-owned by us, have leases with subsidiaries of UHS and/orinclude tenants which are subsidiaries of UHS. Any reference to “UHS” or “UHS facilities” in this report is referring to Universal Health Services, Inc.’ssubsidiaries, including UHS of Delaware, Inc.In this Annual Report, the term “revenues” does not include the revenues of the unconsolidated limited liability companies in which we have variousnon-controlling equity interests ranging from 33% to 95%. We currently account for our share of the income/loss from these investments by the equitymethod (see Note 8 to the Consolidated Financial Statements included herein). PART IITEM 1.BusinessGeneralWe 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, 2017, we have sixty-seven real estate investments located in twenty states in the United Statesconsisting of: (i) six hospital facilities including three acute care, one rehabilitation and two sub-acute; (ii) fifty-four MOBs; (iii) three free-standingemergency departments (“FEDs”), and; (iv) four preschool and childcare centers.Available InformationWe 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 2016. 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. 1Overview of FacilitiesAs of February 28, 2017, we have investments in sixty-seven facilities, located in twenty states and consisting of the following: Facility Name Location Type of Facility Ownership Guarantor Southwest 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 Corporation Family Doctor’s Medical Office Bldg.(B) Shreveport, LA MOB 100% Christus Health Northern Louisiana Kelsey-Seybold Clinic at Kings Crossing(B) Kingwood, TX MOB 100% Kelsey-SeyboldMedical Group, PLLC Professional Buildings at Kings Crossing(B) Building A Kingwood, TX MOB 100% — Building B Kingwood, TX MOB 100% — Chesterbrook Academy(B) Audubon, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs. Chesterbrook Academy(B) New Britain, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs. Chesterbrook Academy(B) Newtown, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs. Chesterbrook Academy(B) Uwchlan, PA Preschool & Childcare 100% Nobel Learning Comm. & Subs. Southern Crescent Center I(B) Riverdale, GA MOB 100% — Southern Crescent Center, II(D) Riverdale, GA MOB 100% — St, Matthews 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% — 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 85% — Apache Junction Medical Plaza(E) Apache Junction, AZ MOB 100% — Spring Valley Medical Office Building(D) 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% — 3811 E. Bell(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(C) 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 FED 100% — Weslaco Free-standing Emergency Department(A)(L) Weslaco, TX FED 100% — Mission Free-standing Emergency Department(A)(L) Mission, TX FED 100% — Haas Medical Office Park(E) Ottumwa, IA MOB 100% Regional Hospital Partners Piedmont - Roswell Physician Center (E)(M) Sandy Springs, GA MOB 100% — Piedmont - Vinings Physician Center (E)M) Vinings, GA MOB 100% — Madison Professional Office Building (E)(I) Madison, AL MOB 100% — Chandler Corporate Center III (E)(N) Chandler, AZ MOB 100% — 2Frederick Crestwood MOB (E)(O) Frederick, MD MOB 100% — 2704 North Tenaya Way (E)(P) Las Vegas, NV MOB 100% — Henderson Medical Plaza (D)(J) Henderson, NV MOB 100% — (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”) or a limited partnership (“LP”) in which we have a noncontrolling ownership interests 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.(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 or an LP in which we have a noncontrolling ownership interest and include tenants who are 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 2016.(J)This newly constructed MOB, located on the campus of Henderson Hospital, which is owned and operated by a subsidiary of UHS, is scheduled to be completed and opened during the first quarter of2017.(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.(M)These MOBs were acquired during the second quarter of 2015 as part of a property exchange transaction and have 15-year initial term master lease agreements with Piedmont Healthcare, Inc.(N)This MOB was acquired during the second quarter of 2016.(O)This MOB was acquired during the third quarter of 2016.(P)This MOB was acquired during the fourth quarter of 2016.Other InformationIncluded in our portfolio at December 31, 2016 and 2015 are six hospital facilities with an aggregate investment of $130.4 million. The leases withrespect to the six hospital facilities comprised approximately 28% and 29% of our consolidated revenues in 2016 and 2015, respectively. The leases withrespect to those six hospital facilities, plus The Bridgeway, a behavioral health facility which was sold on December 31, 2014, as discussed below, comprisedapproximately 33% of our consolidated revenues in 2014.As of January 1, 2017, the leases on our six hospital facilities have fixed terms with an average of 4.1 years remaining and include renewal optionsranging from zero 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 The Bridgeway for 2014, which was sold on December 31, 2014,as discussed herein), the combined weighted average Coverage Ratio was approximately 8.3 (ranging from 0.6 to 18.1) during 2016, 8.1 (ranging from 1.1 to19.3) during 2015 and 8.0 (ranging from 2.7 to 18.3) during 2014. The Coverage Ratio for individual facilities varies. See “Relationship with UniversalHealth 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, some single-tenant MOBs and the preschool andchildcare centers, each lessee, including subsidiaries of UHS, is responsible for building operations, maintenance, renovations and property insurance. We, orthe LLCs in which we have invested, are responsible for the building operations, maintenance and renovations of the remaining MOBs, however, a portion, orin some cases all, of the expenses associated with the MOBs are passed on directly to the tenants. Cash reserves have been established to fund requiredbuilding maintenance and renovations at the multi-tenant MOBs. Lessees are required to maintain all risk, replacement cost and commercial propertyinsurance policies on the leased properties and we, or the LLC in which we have invested, are also named insureds on these policies. In addition, we, UHS orthe LLCs in which we have invested, maintain property insurance on all properties. For additional information on the terms of our leases, see “Relationshipwith 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.Relationship 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 backto the respective subsidiaries. Most of the leases were entered into at the time we commenced operations 3and provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. The current base rentals and lease and renewal terms for each ofour three hospital facilities leased to subsidiaries of UHS are provided below. The base rents are paid monthly and each lease also provides for additional orbonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to a corresponding quarter inthe base year. The three hospital leases with subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another.The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 27% of our total revenue for the fiveyears ended December 31, 2016 (approximately 24%, 25% and 28% for the years ended December 31, 2016, 2015 and 2014, respectively). The decreaseduring 2016 and 2015 as compared to 2014 is due primarily to the 2016 and 2015 acquisitions, which are unrelated to UHS, as well as the divestiture of TheBridgeway which, as discussed below, occurred on December 31, 2014. Including 100% of the revenues generated at the unconsolidated LLCs in which wehave various non-controlling equity interests ranging from 33% to 95%, the leases on the UHS hospital facilities accounted for approximately 21% of thecombined consolidated and unconsolidated revenue for the five years ended December 31, 2016 (approximately 19%, 20% and 22% for each of the yearsended December 31, 2016, 2015 and 2014, respectively). In addition, we have seventeen MOBs or free-standing emergency departments (“FEDs”), that areeither wholly or jointly-owned by us, that 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. UHS also has the right to purchase the respective leased facilities at the end ofthe lease terms or any renewal terms at the appraised fair market value. In addition, the Master Lease, as amended during 2006, includes a change of controlprovision whereby UHS has the right, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the three leasedhospital properties listed below at their appraised fair market value. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilitiesduring and for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leasedfacility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer. The leases related to the hospitalfacilities of UHS are guaranteed by UHS and cross-defaulted with one another.In June, 2016, three wholly-owned subsidiaries of UHS provided the required notice to us, exercising the 5-year renewal options on the leasesrelated to our acute care hospitals noted in the table below. The renewals extended the lease terms on these facilities, at existing lease rates, to December,2021. The table below details the existing lease terms and renewal options for our three acute care hospitals operated by wholly-owned subsidiaries ofUHS: Hospital Name AnnualMinimumRent End ofLease Term RenewalTerm(years) McAllen Medical Center $5,485,000 December, 2021 10 (a)Wellington Regional Medical Center $3,030,000 December, 2021 10 (b)Southwest Healthcare System, Inland Valley Campus $2,648,000 December, 2021 10 (b) (a)UHS has two 5-year renewal options at existing lease rates (through 2031).(b)UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031).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 or FED facilities upon expiration of the lease terms, ourfuture revenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currentlyearned pursuant to these leases. 4During the first quarter of 2016, we committed to invest up to $21.1 million in the development and construction of the Henderson Medical Plaza, anMOB located on the campus of the Henderson Hospital. Henderson Hospital, which is owned and operated by a subsidiary of UHS, is a newly constructed,130-bed acute care hospital that was completed and opened during the fourth quarter of 2016. Henderson Medical Plaza, which contains approximately78,800 rentable square feet, is scheduled to be completed and opened during the first quarter of 2017. A ground lease has been executed between the limitedliability company that owns the MOB and a subsidiary of UHS, the terms of which include a seventy-five year lease term with two, ten-year renewal optionsat the lessee’s option at an adjusting lease rate. We have invested $9.5 million on the development and construction of this MOB as of December 31, 2016. During the first quarter of 2015, we purchased from wholly-owned subsidiaries of UHS, the real property of two newly-constructed and recentlyopened FEDs located in Weslaco and Mission, Texas. Each FED consists of approximately 13,600 square feet and is operated by wholly-owned subsidiariesof UHS. In connection with these acquisitions, ten-year lease agreements with six, 5-year renewal terms were 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 a cumulative and compounded basis, and thelast two, 5-year renewal terms (covering the years 2045 through 2054) will be at the then fair market value lease rates. These leases are cross-defaulted withone another. UHS has the option to purchase the leased properties upon the expiration of the fixed term and each five-year extended term at the fair marketvalue at that time. The aggregate acquisition cost of these facilities was approximately $12.8 million, and the aggregate rental revenue earned by us at thecommencement of the leases is approximately $900,000 annually.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. Pursuant to the terms of the lease, we and thewholly-owned subsidiary of UHS were both required to obtain independent appraisals of the property to determine its fair market value. On December 31,2014, The Bridgeway, a 103-bed behavioral health facility located in North Little Rock, Arkansas, was sold to UHS for $17.3 million. A gain on divestitureof real property of approximately $13.0 million is included in our results of operations for the twelve-month period ended December 31, 2014. Prior to itsdivestiture in 2014, our revenues, net cash provided by operating activities and funds from operations included approximately $1.1 million earned annuallyin connection with The Bridgeway’s lease.Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an AdvisoryAgreement (the “Advisory Agreement”) dated December 24, 1986. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investmentprogram to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investmentopportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved bythe Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilizeindependent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The AdvisoryAgreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of eachyear; however, it is renewable by us, subject to a determination by the Independent Trustees, that the Advisor’s performance has been satisfactory. Ouradvisory fee was 0.70% during each of 2016, 2015 and 2014 of our average invested real estate assets, as derived from our consolidated balance sheet. InDecember of 2016, based upon a review of our advisory fee and other general and administrative expenses as compared to an industry peer group, theAdvisory Agreement was renewed for 2017 pursuant to the same terms as the Advisory Agreement in place during the last three years.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 2016, 2015 or 2014 since the incentive fee requirements were not achieved. Advisory fees incurred and paid(or payable) to UHS amounted to $3.3 million during 2016, $2.8 million during 2015 and $2.5 million during 2014 and were based upon average investedreal estate assets of $466 million, $401 million and $363 million during 2015, 2014 and 2013, respectively.Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of December 31, 2016 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. 5Share Ownership: As of December 31, 2016 and 2015, UHS owned 5.8% and 5.9%, 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 UHScomprised approximately 33%, 33% and 35% of our consolidated revenues for the years ended December 31, 2016, 2015 and 2014, respectively, and since asubsidiary of UHS is our Advisor, you are encouraged to obtain the publicly available filings for Universal Health Services, Inc. from the SEC’s website.These filings are the sole responsibility of UHS and are not incorporated by reference herein.TaxationWe 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.CompetitionWe 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.In addition, some competing facilities are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported byendowments and charitable contributions and exempt from property, sales and income taxes. Such exemptions and support are not available to certainoperators of our facilities, including UHS. In some markets, certain competing facilities may have greater financial resources, be better equipped and offer abroader range of services than those available at our facilities. Certain hospitals that are located in the areas served by our facilities are specialty hospitalsthat provide medical, surgical and behavioral health services that may not be provided by the operators of our hospitals. The increase in outpatient treatmentand diagnostic facilities, ambulatory surgical centers and freestanding emergency departments 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 FactorsDuring 2016, 2015 and 2014, 24%, 25% and 25%, 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). 6Our hospital facilities derive a significant portion of their revenue from third-party payors, including the Medicare and Medicaid programs. Changesin these government programs in recent years have resulted in limitations on reimbursement and, in some cases, reduced levels of reimbursement forhealthcare services. Payments from federal and state government programs are subject to statutory and regulatory changes, administrative rulings,interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase ordecrease program payments, as well as affect the cost of providing service to patients and the timing of payments to facilities. Neither we nor the operators ofour hospital facilities are able to predict the effect of recent and future policy changes on our respective results of operations. In addition, the uncertainty andfiscal pressures 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 (the “PPACA”), may affect the availability of taxpayer funds for Medicare and Medicaid programs. In addition, possiblerepeal or replacement of the PPACA may have significant impact on the reimbursement for healthcare services. If the rates paid or the scope of servicescovered by government payors are reduced, there could be a material adverse effect on the business, financial position and results of operations of theoperators 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.These 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. 7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.Our three 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 at various times during the last few years and which could adversely affect future levels of Medicaid reimbursement receivedby certain operators of our facilities, including the operators of our hospital facilities. We can provide no assurance that reductions to Medicaid revenuesearned by operators of certain of our facilities, particularly our hospital operators in the above-mentioned states, will not have a material adverse effect on thefuture operating results of those operators which, in turn, could have a material adverse effect on us.Executive Officers of the Registrant Name Age PositionAlan B. Miller 79 Chairman of the Board, Chief Executive Officer and PresidentCharles F. Boyle 57 Vice President and Chief Financial OfficerCheryl K. Ramagano 54 Vice President, Treasurer and SecretaryTimothy J. Fowler 61 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 our Vice President and Chief Financial Officer in 2003 and had served as our Vice President and Controller since1991. Mr. Boyle has held various positions at UHS since 1983. He was appointed Senior Vice President of UHS in 2017 and continues to serve as itsController. He had served as Vice President and Controller of UHS since 2003 and as its Assistant Vice President-Corporate Accounting since 1994.Ms. Cheryl K. Ramagano was appointed Secretary of the Trust in 2003 and has served as our Vice President and Treasurer since 1992. Ms. Ramaganohas held various positions at UHS since 1983. She was appointed Senior Vice President of UHS in 2017 and continues to serve as its Treasurer. She hadserved as Vice President and Treasurer of UHS since 2003 and 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 FactorsWe 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 increase or decrease program payments, as well as affect the cost of providing service to patients and the timing of payments tofacilities. Our tenants are unable to predict the effect of recent and future policy changes on their operations. 8Our three 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 at various times during the last few years and which could adversely affect future levels of Medicaid reimbursement receivedby certain operators of our facilities, including the operators of our hospital facilities. We can provide no assurance that reductions to Medicaid revenuesearned by operators of certain of our facilities, particularly our hospital operators in the above-mentioned states, will not have a material adverse effect on thefuture operating results of those operators which, in turn, could have a material adverse effect on us. In addition, the uncertainty and fiscal pressures placedupon federal and state governments as a result of, among other things, the funding requirements and other provisions of the Patient Protection and AffordableCare Act, 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, the American Taxpayer Relief Act of 2012 (the “2012 Act”) was signed into law. The 2012 Act postponed for two monthssequestration cuts mandated under the Budget Control Act of 2011. The postponed sequestration cuts include a 2% annual reduction over ten years inMedicare spending to providers. Medicaid is exempt from sequestration. In order to offset the cost of the legislation, the 2012 Act reduces payments to otherproviders totaling almost $26 billion over ten years. Approximately half of those funds will come from reductions in Medicare reimbursement to hospitals.Although the Bipartisan Budget Act of 2013 has reduced certain sequestration-related budgetary cuts, spending reductions related to the Medicare programremain in place. On December 26, 2013, H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes the Pathway for SGR Reform Act of 2013 (“theAct”), was signed into law. In addition, on February 15, 2014, Public Law 113-082 was enacted. The Act and subsequent federal legislation achieves newsavings 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.The 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.On March 23, 2010, the Patient Protection and Affordable Care Act (the “PPACA”) was signed into law. The Healthcare and Education ReconciliationAct of 2010 (the “Reconciliation Act”), which contains a number of amendments to the PPACA, was signed into law on March 30, 2010. Two primary goalsof the PPACA, combined with the Reconciliation Act (collectively referred to as the “Legislation”), are to provide for increased access to coverage forhealthcare and to reduce healthcare-related expenses.Although the Legislation resulted in a reduction in uninsured patients in the U.S., the Legislation made a number of other changes to Medicare andMedicaid which we believe may have an adverse impact on the operators of our facilities. It has been projected that the Legislation will result in a netreduction in Medicare and Medicaid payments to hospitals totaling $155 billion over 10 years. The Legislation revises reimbursement under the Medicareand Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and penalties under these programs toachieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivityoffset to the market basket update beginning October 1, 2011 for Medicare Part B reimbursable items and services and beginning October 1, 2012 forMedicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments.The Medicare DSH reductions began in October, 2013 while Medicaid DSH reimbursements were not adversely impacted until 2016. The Legislationimplements a value-based purchasing program, which will reward the delivery of 9efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those withexcessive readmission or hospital-acquired condition rates.A 2012 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding unconstitutional sectionsof the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision,the federal government may not penalize states that choose not to participate in the Medicaid expansion program by reducing their existing Medicaidfunding. Therefore, states can choose to accept or not to participate without risking the loss of federal Medicaid funding. As a result, many states, includingTexas, have not expanded their Medicaid programs without the threat of loss of federal funding.In addition, in King vs. Burwell, the Supreme Court decided in favor of the federal government’s ability to subsidize premiums paid by certain eligibleindividuals that obtain health insurance policies through federally facilitated exchanges. A number of our properties operate in states that utilize federallyfacilitated exchanges. The Supreme Court’s decision in this case ultimately preserved the viability of federally facilitated exchanges. A different decision bythe Supreme Court could have resulted in an increased number of uninsured patients generally, including an increase of uninsured patients treated at ourhospitals located in these states.The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement are scheduled to take effect over anumber of years. The impact of the Legislation on healthcare providers will be subject to implementing regulations, interpretive guidance and possible futurelegislation or legal challenges. Certain Legislation provisions, such as those creating the Medicare Shared Savings Program and the Independent PaymentAdvisory Board, create uncertainty in how healthcare may be reimbursed by federal programs in the future. Thus, at this time, we cannot predict the impact ofthe Legislation on the future reimbursement of our hospital operators and we can provide no assurance that the Legislation will not have a material adverseeffect on the future results of operations of the tenants/operators of our properties and, thus, our business.The Legislation also contained provisions aimed at reducing fraud and abuse in healthcare. The Legislation amends several existing laws, includingthe federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits broughtagainst healthcare providers. While Congress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is notrequired to “have actual knowledge or specific intent to commit a violation of” the Anti-Kickback Statute in order to be found in violation of such law, theLegislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of thefederal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federalcivil False Claims Act, although final regulations implementing this statutory requirement remain pending. The Legislation also expands the Recovery AuditContractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violateapplicable laws and regulations.The impact of the Legislation on hospitals may vary. Because Legislation provisions are effective at various times over the next several years, weanticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives to repeal the Legislation, in whole or in part, to delayelements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent and may increase as a result ofthe 2016 election. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are unknown. Results of recent Congressional elections and the change of Presidential administrations beginning in 2017 could create a political environment in whichsubstantial portions of the Legislation are repealed or revised. Specifically, President Donald Trump’s 100 Day Action Plan called for full repeal of theLegislation and its replacement with health savings accounts, cross-states sales of health insurance, and modifications to state-managed Medicaid programs. Nevertheless, prospects for rapid enactment of radical change in the health care regulatory landscape are not clear, and President Donald Trump has alreadyindicated that popular provisions of the Legislation should be preserved. It remains unclear what portions of the Legislation may remain, or what anyreplacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on thereimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by the operators of ourhospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negativefinancial impact on the operators of our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation,or for the operators of our hospitals to receive payment for services. The trend toward value-based purchasing may negatively impact the revenues of our hospital operators. We believe that value-based purchasing initiatives of both governmental and private payers tying financial incentives to quality and efficiency ofcare will increasingly affect the results of operations of our hospitals and other healthcare facilities and may negatively impact their revenues if they areunable to meet expected quality standards. The Affordable Care Act contains a number of provisions intended to promote value-based purchasing in federalhealthcare programs. Medicare now requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient andoutpatient procedures that were previously awarded automatically. In addition, hospitals that meet or exceed certain quality performance standards willreceive increased 10reimbursement payments, and hospitals that have “excess readmissions” for specified conditions will receive reduced reimbursement. Furthermore, Medicareno longer pays hospitals additional amounts for the treatment of certain hospital-acquired conditions unless the conditions were present at admission.Beginning in Federal Fiscal Year (FFY) 2015, hospitals that rank in the worst 25% of all hospitals nationally for hospital acquired conditions in the previousyear will receive reduced Medicare reimbursements. The ACA also prohibits the use of federal funds under the Medicaid program to reimburse providers fortreating certain provider-preventable conditions. There is a trend among private payers toward value-based purchasing of healthcare services, as well. Many large commercial payers require hospitalsto report quality data, and several of these payers will not reimburse hospitals for certain preventable adverse events. We expect value-based purchasingprograms, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage ofreimbursement amounts. We are unable at this time to predict how this trend will affect the results of operations of the operators of our hospitals, but it couldnegatively impact their revenues if they are unable to meet quality standards established by both governmental and private payers. 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 370-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 admission decisions and for directing the course of patient treatment. Since the operators of ourfacilities also compete with other health care providers, they may experience difficulties in recruiting and retaining qualified hospital management, nursesand 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. 11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 insurance, which to a large extent is dependent on the employment status of individuals in certain markets. A worsening of economicconditions may result in a higher unemployment rate which will likely increase the number of individuals without health insurance. As a result, the operatorsof our facilities may experience a decrease in patient volumes. Should that occur, it may result in decreased occupancy rates at our medical office buildings aswell as a reduction in the revenues earned by the operators of our hospital facilities which would unfavorably impact our future bonus rentals (on the UHShospital facilities) and may 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. 12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, 2016, lease payments from UHS comprised approximately 33% of our consolidated revenues. In addition, as ofDecember 31, 2016, subsidiaries of UHS leased three of the six hospital facilities owned by us with terms expiring in 2021. We cannot assure you that UHSwill continue to satisfy its obligations to us or renew existing leases upon their scheduled maturity. In addition, if subsidiaries of UHS exercise their optionsto purchase the respective three leased hospitals, or two leased FEDs, upon expiration of the lease terms, our future revenues could decrease if we were unableto earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currently earned pursuant to the leases on the facilities. Thefailure or inability of UHS to satisfy its obligations to us, or should UHS elect not to renew the leases on the three acute care hospitals or two FEDs, ourrevenues and net income could be materially reduced, which could in turn reduce the amount of dividends we pay and cause our stock price to decline.Our relationship with UHS may create conflicts of interest.In addition to being dependent upon UHS for a substantial portion of our revenues and leases, since 1986, UHS of Delaware, Inc. (the “Advisor”), awholly-owned subsidiary of UHS, has served as our Advisor. Pursuant to our Advisory Agreement, the Advisor is obligated to present an investment programto us, to use its best 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, 2016, 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. Because of our historical and continuing relationship withUHS 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 whomwe do not have such a relationship. Disputes may arise between us and UHS that we are unable to resolve or the resolution of these disputes may not be asfavorable to us as a resolution we might achieve with a third party.UHS and its subsidiaries, are subject to pending legal actions, purported stockholder class actions, governmental investigations and regulatoryactions.UHS and its subsidiaries are subject to pending legal actions, purported shareholder class actions, governmental investigations and regulatory actions.Since UHS comprised approximately 33%, 33% and 35% of our consolidated revenues for the years ended December 31, 2016, 2015 and 2014, respectively,and since a subsidiary of UHS is our Advisor, you are encouraged to obtain and review the disclosures contained in the Legal Proceedings section ofUniversal Health Services, Inc.’s Forms 10-K and 10-Q, as publicly filed with the Securities and Exchange Commission. These filings are the soleresponsibility of UHS and are not incorporated by reference hereinDefending itself against the allegations in the lawsuits and governmental investigations, or similar matters and any related publicity, could potentiallyentail significant costs and could require significant attention from UHS management. UHS has stated that it is unable to predict the outcome of these mattersor to reasonably estimate the amount or range of any such loss; however, the outcome of these lawsuits, investigations and other actions could have amaterial adverse effect on their business, financial condition, results of operations and/or cash flows.UHS is and may become subject to other loss contingencies, both known and unknown, which may relate to past, present and future facts, events,circumstances and occurrences. Should an unfavorable outcome occur in some or all of the legal proceedings or other loss contingencies, or if successfulclaims and other actions are brought against UHS in the future, there could be a material adverse impact on their financial position, results of operations andliquidity, which in turn could have a material adverse effect on us.In particular, government investigations, as well as qui tam lawsuits, may lead to material fines, penalties, damages payments or other sanctions,including exclusion from government healthcare programs. Settlements of lawsuits involving Medicare and Medicaid issues routinely require both monetarypayments and corporate integrity agreements, each of which could have a material adverse effect on UHS’s business, financial condition, results of operationsand/or cash flows, which in turn could have a material adverse effect on us. 13We hold non-controlling equity ownership interests in various joint-ventures.For the year ended December 31, 2016, 19% of our consolidated and unconsolidated revenues were generated by five jointly-owned LLCs/LPs inwhich we hold non-controlling equity ownership interests ranging from 33% to 95%. Our level of investment and lack of control exposes us to potentiallosses of our investments and revenues. Although our ownership arrangements have been beneficial to us in the past, we cannot guarantee that they willcontinue to be beneficial in the future.Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold non-controlling ownership interests, thethird-party member and the Trust, at any time, potentially subject to certain conditions, have the right to make an offer (“Offering Member”) to the othermember(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member(“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member(“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchase the entire ownershipinterest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate TransferPrice. The closing of the 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 or the underlying property to each other or a third party. If we were to sell our interests or underlying property, we may notbe able to redeploy the proceeds into assets at the same or greater return as we currently receive. During any such time that we were not able to do so, ourability to increase or maintain our dividend at current levels could be adversely affected which could cause our stock price to decline.The 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 increasein the development of medical office condominiums in certain markets; •costs that may be incurred relating to maintenance and repair, and the need to make expenditures due to changes in governmental regulations,including the Americans with Disabilities Act; 14 •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 hospitals 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 or fair market value lease rates at the end of the lease terms in 2021. If the leases are not renewed, we may be required to findother operators for these hospitals and/or enter into leases with less favorable terms. The exercise of purchase options for our hospitals may result in a lessfavorable rate of return for us than the rental revenue currently earned on such facilities. Further, the purchase options and rights of first refusal granted to therespective lessees to purchase or lease the respective leased hospitals, after the expiration of the lease term, may adversely affect our ability to sell or lease ahospital, and may present a potential conflict of interest between us and UHS since the price and terms offered by a third-party are likely to be dependent, inpart, upon the financial performance of the facility during the final years of the lease term.Significant potential liabilities and rising insurance costs and availability may have an adverse effect on the operations of our operators, whichmay negatively impact their ability to meet their obligations to us.As is typical in the healthcare industry, in the ordinary course of business, our operators, including UHS, are subject to medical malpractice lawsuits,product liability lawsuits, 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. Our tenants and operators, includingUHS, may be unable to fulfill their insurance, indemnification and other obligations to us under their leases and mortgages and thereby potentially expose usto those risks. In addition, our tenants and operators may be unable to pay their lease or mortgage payments, which could potentially decrease our revenuesand increase our collection and litigation costs. Moreover, to the extent we are required to foreclose on the affected facilities, our revenues from thosefacilities could be reduced or eliminated for an extended period of time. In addition, we may in some circumstances be named as a defendant in litigationinvolving the actions of our operators. Although we have no involvement in the activities of our operators and our standard leases generally require ouroperators to carry insurance to cover us in certain cases, a significant judgment against us in such litigation could exceed our and our operators’ insurancecoverage, 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 of20% (subject to certain additional taxes for certain taxpayers). In contrast, since we are a REIT, our distributions to individual U.S. shareholders are noteligible for the 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 to certain additional taxes for certain taxpayers). 15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.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.The 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. 16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 newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with allpotentially applicable corporate regulations. For example, we cannot provide assurance that in the future our management will not find a material weaknessin connection with its annual review of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannotprovide assurance that we could correct any such weakness to allow our management to assess the effectiveness of our internal control over financialreporting as of the end of our fiscal year in time to enable our independent registered public accounting firm to state that we have maintained effectiveinternal control over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a range ofregulatory actions, fines or other sanctions or litigation. If we must disclose any material weakness in our internal control over financial reporting, our stockprice 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 CommentsNone. 17ITEM 2.PropertiesThe 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. Lease Term Number End of % of RSF of initial under available Average Occupancy(1) or Renewal lease with Range of Hospital Facility Name and Type of beds @ Minimum renewed term guaranteed guaranteed Location facility 12/31/2016 2016 2015 2014 2013 2012 rent(5) term (years) escalators escalation Southwest Healthcare System:Inland Valley Campus(2)(5)(8) Wildomar, California Acute Care 132 64% 63% 59% 58% 62% $2,648,000 2021 10 0% — McAllen Medical Center(3)(5)(8) McAllen, Texas Acute Care 370 47% 48% 44% 43% 43% 5,485,000 2021 10 0% — Wellington Regional Medical Center(4)(5)(8) West Palm Beach, Florida Acute Care 153 55% 56% 59% 58% 69% 3,030,000 2021 10 0% — HealthSouth Deaconess Rehab. Hospital(9) Evansville, Indiana Rehabilitation 85 75% 80% 80% 79% 79% 714,000 2019 5 0% — Vibra Hospital of Corpus Christi Corpus Christi, Texas Sub-Acute Care 74 51% 56% 58% 58% 53% 738,000 2019 25 100% 3%Kindred Hospital Chicago Central(10) Chicago, Illinois Sub-Acute Care 84 46% 52% 54% 51% 51% 1,494,000 2021 — 0% — Lease Term End of % of RSF initial under Type Average Occupancy(1) or Renewal lease with Range of of Minimum renewed term guaranteed guaranteedFacility Name and Location facility 2016 2015 2014 2013 2012 rent(5) term (years) escalators escalationSpring Valley MOB I(5) Las Vegas, Nevada MOB 72% 61% 60% 64% 68% $537,000 2017-2021 Various 92% 2%-3%Spring Valley MOB II(5) Las Vegas, Nevada MOB 85% 84% 77% 76% 76% 1,126,000 2018-2022 Various 42% 1%-3%Summerlin Hospital MOB I(5) Las Vegas, Nevada MOB 64% 62% 66% 77% 81% 1,109,000 2017-2021 Various 82% 2%-3%Summerlin Hospital MOB II(5) Las Vegas, Nevada MOB 78% 74% 78% 74% 82% 1,489,000 2017-2021 Various 80% 2%-3%Summerlin Hospital MOB III(5) Las Vegas, Nevada MOB 100% 100% 90% 81% 71% 1,926,000 2017-2024 Various 72% 2%-3%St. Mary’s Professional OfficeBuilding(7) Reno, Nevada MOB 100% 100% 100% 98% 99% 4,588,000 2017-2029 Various 35% 2%-3%Rosenberg Children’s Medical Plaza Phoenix, Arizona MOB 99% 99% 99% 99% 100% 2,064,000 2018-2026 Various 59% 3%Centennial Hills MOB(5) Las Vegas, Nevada MOB 73% 73% 71% 62% 62% 1,532,000 2017-2023 Various 61% 2%-3%PeaceHealth Medical Clinic Bellingham, Washington MOB 100% 100% 100% 100% 100% 2,568,000 2021 20 100% 1%Lake Pointe Medical Arts Building Rowlett, Texas MOB 100% 100% 100% 97% 96% 1,572,000 2017-2023 Various 24% 3%Chandler Corporate Center III(11) Chandler, Arizona MOB 92% - - - - 1,737,000 2022-2027 Various 100% 2%Frederick Crestwood MOB(11) Frederick, Maryland MOB 100% - - - - 1,696,000 2026-2030 Various 100% 3%2704 North Tenaya Way(11) Las Vegas, Nevada MOB 100% - - - - 1,128,000 2023 18 100% 2% (1)Average occupancy rate for the hospital facilities is based on the average number of available beds occupied during each of the five years ended December 31, 2016.Average available beds is the number of beds which are actually in service at any given time for immediate patient use with the necessary equipment and staff available forpatient care. A hospital may have appropriate licenses for more beds than are in service for a number of reasons, including lack of demand, incomplete construction andanticipation of future needs. The average occupancy rate of a hospital is affected by a number of factors, including the number of physicians using the hospital, changes inthe number of beds, the composition and size of the population of the community in which the hospital is located, general and local economic conditions, variations in localmedical and surgical practices and the degree of outpatient use of the hospital services. Average occupancy rate for the multi-tenant medical office buildings is based on theoccupied square footage of each building, including any applicable master leases. 18(2)In July, 2002, the operations of Inland Valley Regional Medical Center (“Inland Valley”) were merged with the operations of Rancho Springs Medical Center (“RanchoSprings”), 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 mergedinto Universal Health Services of Rancho Springs, Inc. The merged entity is now doing business as Southwest Healthcare System (“Southwest Healthcare”). As a result ofmerging the operations of the two facilities, the revenues of Southwest Healthcare include the revenues of both Inland Valley and Rancho Springs. Although we do not ownthe real estate assets of the Rancho Springs facility, Southwest Healthcare became the lessee on the lease relating to the real estate assets of the Inland Valley facility. Sincethe bonus rent calculation for the Inland Valley campus is based on net revenues and the financial results of the two facilities are no longer separable, the lease was amendedduring 2002 to exclude from the bonus rent calculation the estimated net revenues generated at the Rancho Springs campus (as calculated pursuant to a percentage basedallocation determined at the time of the merger). No assurance can be given as to the effect, if any, the merger of Inland Valley and Rancho Springs had on the underlyingvalue of Inland Valley. Base rental commitments and the guarantee by UHS under the original lease continue for the remainder of the lease term. The average occupancyrates shown for this facility for all years were based on the combined number of beds occupied 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 acquisition by UHS, theHeart Hospital began operating under the same license as McAllen Medical Center (which has 370 available beds as of December 31, 2016). The net revenues of thecombined operations included revenues generated by the Heart Hospital, the real property of which is not owned by us. Accordingly, the McAllen Medical Center lease wasamended during 2001 to exclude from the bonus rent calculation, the estimated net revenues generated at the Heart Hospital (as calculated pursuant to a percentage basedallocation determined at the time of the merger). During 2000, UHS purchased the South Texas Behavioral Health Center, a behavioral health care facility located inMcAllen, Texas. In 2006, a newly constructed, 134-bed replacement facility for the South Texas Behavioral Health Center was completed and opened. We do not own thereal property of South Texas Behavioral Health Center. Upon UHS’s acquisition of the South Texas Behavioral Health Center in 2000, the facility’s license was mergedinto the operating license of McAllen Medical Center/McAllen Heart Hospital. There was no amendment to the McAllen Medical Center lease related to the operations ofthe South Texas Behavioral Health Center and its net revenues are distinct and excluded from the bonus rent calculation. In 2007, the operations of each of the above-mentioned facilities, as well as the operations of Edinburg Regional Medical Center/Children’s Hospital, a 213-bed facility located in Edinburg, Texas, were merged intoone license operating as the South Texas Health System (“STHS”). The real property of Edinburg Regional Medical Center/Children’s Hospital is not owned by us and itsnet revenues are distinct and excluded from the bonus rent calculation. In 2015, the newly constructed Weslaco and Mission Free Standing Emergency Departments(“FEDs”) were completed and opened. These facilities also operate under the STHS license. The real property of these two FEDs was purchased by us and leased back toSTHS. The average occupancy rates reflected above are based upon the combined occupancy and combined number of beds at McAllen Medical Center and McAllen HeartHospital. No assurance can be given as to the effect, if any, the consolidation of the facilities into one operating license, 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. (4)In 2014, an 80-bed expansion was added to Wellington Regional Medical Center increasing the hospital’s total available beds from 153 to 233. Pursuant to terms of theWellington Regional Medical Center lease, we are entitled to bonus rental on the net revenues generated from the 80-bed expansion. However, since we did not acquire theproperty associated with the additional 80-beds, the hospital’s base rental remained unchanged and the additional beds are not included in the number of available bedsreflected above. (5)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 include tenants who aresubsidiaries of UHS.(6)Minimum rent amounts contain impact of straight-line rent adjustments, if applicable.(7)The real estate assets of this facility are owned by an LLC in which we hold a 85% non-controlling ownership interest as of December 31, 2016.(8)See Note 2 to the consolidated financial statements-Relationship with UHS and Related Party Transactions, regarding UHS’s purchase option, right of first refusal andchange of control purchase option related to these properties. We believe the respective fair values for each of these hospitals exceeds the respective net book values as ofDecember 31, 2016 amounting to: $14.8 million for Southwest Healthcare System-Inland Valley Campus; $20.1 million for McAllen Medical Center, and; $14.8 millionfor Wellington Regional Medical Center. (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 (current term expires in2019). If exercised, the purchase option stipulates that the purchase price be the fair market value of the facility, subject to stipulated minimum and maximum prices. Ascurrently being utilized, we believe the estimated current fair market value of the property is between the stipulated minimum and maximum prices. We believe the fairmarket value of the facility exceeds the $3.0 million net book value as of December 31, 2016. The lessee also has a first refusal to purchase right which, if applicable andsubject to certain terms and conditions, grants the lessee the option to purchase the property at the same terms and conditions as an accepted third-party offer.(10)During the second quarter of 2016, the tenant of this facility provided the required notice to us, exercising the 5-year renewal option on the facility, extending the lease termto December, 2021 at existing lease rates. The lessee of this facility has a purchase option which is exercisable, subject to certain terms and conditions, at the expiration ofeach lease term. If exercised, the purchase option stipulates that the purchase price be the fair market value of the facility, subject to a stipulated minimum price. We believethe fair market value of the facility exceeds the $158,000 net book value as of December 31, 2016. The lessee also has a first refusal to purchase right which, if applicableand subject to certain terms and conditions, grants the lessee the option to purchase the property at the same terms and conditions as an accepted third-party offer.(11)This property was acquired during 2016.Leasing Trends at Our Significant Medical Office BuildingsDuring 2016, we had a total of 32 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 10% of the aggregate rentable square feet of theseproperties (7% related to renewed leases and 3% 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 19occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity ofour competitors in the market. The weighted-average tenant improvement costs associated with these new or renewed leases was approximately $12 persquare foot during 2016. The weighted-average leasing commissions on the new and renewed leases commencing during 2016 was approximately 2% of baserental revenue over the term of the leases. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided inconnection with new and renewed leases commencing during 2016 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 aredue. In connection with lease renewals executed during 2016, the weighted-average rental rates, as compared to rental rates on the expired leases, decreasedby approximately 3%.Set forth is information detailing the rentable square feet (“RSF”) associated with each of our properties as of December 31, 2016 (excludingHenderson Medical Plaza which is scheduled to be completed and opened during the first quarter of 2017) and the percentage of RSF on which leases expireduring the next five years and thereafter. For the MOBs that have scheduled lease expirations during 2017 of 10% or greater (of RSF), we have includedinformation regarding estimated market rates relative to lease rates on the expiring leases. 20 Percentage of RSF with lease expirations TotalRSF Availablefor LeaseJan. 1,2017 2017 2018 2019 2020 2021 2022andLater Hospital Investments: McAllen Medical Center 422,276 0% 0% 0% 0% 0% 100% 0%Wellington Regional Medical Center 196,489 0% 0% 0% 0% 0% 100% 0%Southwest Healthcare System - Inland Valley 164,377 0% 0% 0% 0% 0% 100% 0%Kindred Hospital Chicago Central 115,554 0% 0% 0% 0% 0% 100% 0%HealthSouth Deaconess Rehab. Hospital 77,440 0% 0% 0% 100% 0% 0% 0%Vibra Hospital Corpus Christi 69,700 0% 0% 0% 100% 0% 0% 0%Sub-total Hospitals 1,045,836 0% 0% 0% 14% 0% 86% 0% Medical Office Buildings: Saint Mary's Professional Office Building 190,754 0% 9% 0% 0% 42% 0% 49%Goldshadow - 2010/20 Goldring MOB (b.) 74,774 29% 19% 2% 3% 7% 12% 28%Goldshadow - 700 Shadow Lane MOB (b.) 42,060 3% 25% 19% 30% 23% 0% 0%Texoma Medical Plaza 115,284 0% 2% 6% 2% 57% 5% 28%St. Matthews Medical Plaza II 103,011 0% 1% 6% 2% 0% 11% 80%Desert Springs Medical Plaza 102,579 56% 2% 14% 8% 0% 6% 14%Peace Health Medical Clinic 98,886 0% 0% 0% 0% 0% 100% 0%Centennial Hills Medical Office Building 96,573 23% 8% 13% 5% 22% 12% 17%Summerlin Hospital Medical Office Building II(b.) 92,313 19% 19% 13% 21% 4% 20% 4%Summerlin Hospital Medical Office Building I(b.) 89,636 35% 22% 6% 14% 19% 4% 0%The Sparks Medical Building 35,127 10% 7% 6% 3% 17% 0% 57%Vista Medical Terrace (e.) 50,921 51% 18% 9% 0% 7% 1% 14%Chandler Corporate Center III 81,770 8% 0% 0% 0% 0% 0% 92%3811 E. Bell (a.) 80,484 34% 16% 16% 3% 4% 3% 24%Summerlin Hospital Medical Office Building III 77,713 0% 9% 8% 44% 10% 18% 11%Mid Coast Hospital MOB 74,629 0% 0% 5% 0% 0% 4% 91%North West Texas Professional Office Tower 72,351 0% 3% 0% 0% 0% 0% 97%Rosenberg Children's Medical Plaza 66,231 1% 0% 75% 6% 3% 0% 15%Frederick Crestwood MOB 62,297 0% 0% 0% 0% 0% 0% 100%Palmdale Medical Plaza 59,405 46% 5% 9% 0% 9% 12% 19%Sierra San Antonio Medical Plaza (c.) 59,160 35% 10% 0% 3% 0% 8% 44%Spring Valley Medical Office Building (b.) 57,828 21% 41% 12% 12% 0% 6% 8%Spring Valley Medical Office Building II 57,432 15% 0% 39% 21% 17% 0% 8%Southern Crescent Center II 53,680 49% 0% 0% 8% 4% 0% 39%Desert Valley Medical Center (a.) 53,625 7% 11% 11% 13% 9% 11% 38%Tuscan Professional Building 53,231 0% 0% 12% 0% 30% 19% 39%Lake Pointe Medical Arts Building (g.) 50,974 0% 33% 23% 14% 17% 9% 4%Forney Medical Plaza 50,947 9% 0% 67% 0% 0% 5% 19%2704 N. Tenaya Way 44,894 0% 0% 0% 0% 0% 0% 100%Southern Crescent Center I 41,897 68% 6% 21% 5% 0% 0% 0%Auburn Medical Office Building 41,311 10% 9% 0% 0% 20% 0% 61%BRB Medical Office Building (d.) 40,733 13% 11% 17% 3% 56% 0% 0%Cypresswood Prof. Center - 8101 10,200 100% 0% 0% 0% 0% 0% 0%Cypresswood Prof. Center - 8111 (c.) 29,882 10% 11% 7% 16% 56% 0% 0%Medical Center of Western Connecticut (h.) 36,141 0% 24% 5% 71% 0% 0% 0%Phoenix Children’s East Valley Care Center 30,960 0% 0% 0% 0% 0% 0% 100%Forney Medical Plaza II 30,507 42% 0% 5% 0% 0% 0% 53%Madison Station MOB 30,096 0% 0% 0% 0% 0% 0% 100% 21 Percentage of RSF with lease expirations TotalRSF Availablefor LeaseJan. 1,2017 2017 2018 2019 2020 2021 2022andLater Apache Junction Medical Plaza (a.) 26,901 9% 13% 0% 4% 0% 34% 40%Santa Fe Professional Plaza (a.) 24,883 25% 11% 11% 23% 10% 20% 0%Prof. Bldg at King's Crossing-Bldg A 11,528 100% 0% 0% 0% 0% 0% 0%Prof. Bldg at King's Crossing-Bldg B (f.) 12,790 0% 11% 20% 11% 18% 0% 40%Kelsey-Seybold Clinic at King's Crossing 20,470 0% 0% 0% 0% 100% 0% 0%Emory at Dunwoody Building 20,366 0% 0% 0% 0% 0% 0% 100%Piedmont - Roswell Physicians Center 19,927 0% 0% 0% 0% 0% 0% 100%Piedmont - Vinings Physicians Center 16,790 0% 0% 0% 0% 0% 0% 100%Ward Eagle Office Village 16,282 0% 0% 0% 0% 0% 0% 100%Haas Medical Office Park 15,850 0% 0% 0% 0% 0% 0% 100%Northwest Medical Center at Sugar Creek 13,696 0% 0% 0% 0% 0% 0% 100%Family Doctor's MOB 12,050 0% 0% 0% 0% 0% 100% 0%701 South Tonopah Building 10,747 0% 0% 0% 0% 0% 100% 0%The Children's Clinic at Springdale 9,761 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% 0% 0% 0% 100% 0%Chesterbrook Academy - New Britain 7,998 0% 0% 100% 0% 0% 0% 0% Ambulatory Care Centers: Hanover Freestanding Emergency Center 22,000 0% 0% 0% 0% 0% 0% 100%Mission Freestanding Emergency Center 13,578 0% 0% 0% 0% 0% 0% 100%Weslaco Freestanding Emergency Center 13,578 0% 0% 0% 0% 0% 0% 100%Sub-total Other Investments 2,758,454 15% 8% 10% 7% 12% 10% 38%Total 3,804,290 11% 6% 7% 9% 9% 31% 27% (a)The estimated market rates related to the 2017 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 2017 expiring RSF are greater than the lease rates on the expiring leases by an average of approximately 2%(c)The estimated market rates related to the 2017 expiring RSF are greater than the lease rates on the expiring leases by an average of approximately 1%.(d)The estimated market rates related to the 2017 expiring RSF are equal to the lease rates on the expiring leases.(e)The estimated market rates related to the 2017 expiring RSF are less than the lease rates on the expiring leases by an average of approximately 2%.(f)The estimated market rates related to the 2017 expiring RSF are less than the lease rates on the expiring leases by an average of approximately 3%.(g)The estimated market rates related to the 2017 expiring RSF are greater than the lease rates on the expiring leases by an average of approximately 5%.(h)The estimated market rates related to the 2017 expiring RSF are less than the lease rates on the expiring leases by an average of approximately 11%.On a combined basis, based upon the aggregate revenues and square footage for the hospital facilities owned as of December 31, 2016 and 2015, theaverage effective annual rental per square foot was $17.99 and $17.83, respectively. On a combined basis, based upon the aggregate consolidated andunconsolidated revenues and the estimated average occupied square footage for our MOBs, FEDs and childcare centers owned as of December 31, 2016 and2015, the average effective annual rental per square foot was $28.74 and $28.53, respectively. On a combined basis, based upon the aggregate consolidatedand unconsolidated revenues and estimated average occupied square footage for all of our properties owned as of December 31, 2016 and 2015, the averageeffective annual rental per square foot was $25.41 and $24.97, respectively. The estimated average occupied square footage for 2016 was calculated byaveraging the unavailable rentable square footage on January 1, 2016 and January 1, 2017. The estimated average occupied square footage for 2015 wascalculated by averaging the unavailable rentable square footage on January 1, 2015 and January 1, 2016.During 2016, the lease with one of the UHS-related hospitals (McAllen Medical Center) generated revenues that comprised more than 10% of ourconsolidated revenues. None of the properties had book values greater than 10% of our consolidated assets as of December 31, 2016. Including 100% of therevenues generated 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 2016. 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. 22The following table sets forth the average effective annual rental per square foot for 2016, based upon average occupied square feet for McAllenMedical Center: Property 2016AverageOccupiedSquareFeet 2016Revenues 2016AverageEffectiveRentalPer SquareFoot McAllen Medical Center 422,276 $7,070,000 $16.74 The following table sets forth lease expirations for each of the next ten years for our properties as of December 31, 2016. ExpiringSquareFeet NumberofTenants Annual Rentals ofExpiringLeases(1) PercentageofAnnualRentals(2) Hospital properties 2017 0 0 $0 0%2018 0 0 0 0%2019 147,140 2 1,452,063 2%2020 0 0 0 0%2021 898,696 4 12,637,102 15%2022 0 0 0 0%2023 0 0 0 0%2024 0 0 0 0%2025 0 0 0 0%2026 0 0 0 0%Thereafter 0 0 0 0%Subtotal-hospital facilities 1,045,836 6 $14,089,165 17%Other consolidated properties 2017 190,572 69 $5,345,497 7%2018 255,959 69 7,527,202 9%2019 168,768 51 4,891,996 6%2020 197,126 52 5,781,937 7%2021 249,951 40 6,969,460 9%2022 210,084 34 5,806,145 7%2023 176,052 22 4,496,861 6%2024 63,327 7 1,844,016 2%2025 84,510 9 2,350,258 3%2026 45,831 7 1,473,457 2%Thereafter 198,466 9 4,953,271 6%Subtotal-other consolidated properties 1,840,646 369 $51,440,100 64%Other unconsolidated properties (MOBs) 2017 20,380 7 $631,571 1%2018 18,174 5 570,116 1%2019 3,816 3 112,733 0%2020 145,312 16 4,467,896 5%2021 19,619 6 569,436 1%2022 32,376 8 953,827 1%2023 12,641 4 544,552 1%2024 40,113 7 1,274,727 1%2025 129,764 13 3,943,249 5%2026 68,024 8 1,852,770 2%Thereafter 11,169 2 555,682 1%Subtotal-other unconsolidated properties 501,388 79 $15,476,559 19%Total all properties at December 31, 2016 3,387,870 454 $81,005,824 100% 23 (1)The annual rentals of expiring leases reflected above were calculated based upon each property’s 2016 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 unconsolidatedLLCs/LPs in which we hold various non-controlling ownership interests at December 31, 2016 and exclude the bonus rentals earned on the UHShospital 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). 24ITEM 3.Legal ProceedingsNoneITEM 4.Mine Safety DisclosuresNot applicable PART IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur 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, 2016 and 2015 are summarized below: 2016 2015 HighPrice LowPrice HighPrice LowPrice First Quarter $56.80 $47.26 $56.87 $49.08 Second Quarter $57.85 $52.27 $56.86 $46.46 Third Quarter $64.06 $56.73 $50.35 $43.54 Fourth Quarter $65.59 $55.17 $53.40 $46.76 HoldersAs of January 31, 2017, there were approximately 355 shareholders of record of our shares of beneficial interest.DividendsIt 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: 2016 2015 First Quarter $.645 $.635 Second Quarter .650 .640 Third Quarter .650 .640 Fourth Quarter .655 .645 $2.600 $2.560 25Stock Price Performance GraphThe 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., Omega Healthcare Investors, Inc., Welltower, Inc. (previously known asHealth Care REIT, Inc.), Healthcare Realty Trust, Inc., LTC Properties, Inc., and National Health Investors, 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 2011. Base INDEXED RETURNS Period Years Ending Company Name / Index Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Universal Health Realty Income Trust $100 $137.17 $114.75 $145.96 $159.67 $218.59 S&P 500 Index $100 $116.00 $153.57 $174.60 $177.01 $198.18 Peer Group $100 $118.57 $108.71 $148.89 $140.58 $140.93 26ITEM 6.Selected Financial DataThe following table contains our selected financial data for, or at the end of, each of the five years ended December 31, 2016. 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) 2016 2015 2014 2013 2012 Operating Results: Total revenues(1) $67,081 $63,950 $59,786 $54,280 $53,950 Net income(2) $17,215 $23,691 $51,551 $13,169 $19,477 Balance Sheet Data: Real estate investments, net of accumulated depreciation(1)(3) $447,240 $390,496 $380,109 $297,748 $314,386 Investments in LLCs, net of liabilities(1)(4) 33,731 30,492 8,605 39,201 28,636 Intangible assets, net of accumulated amortization(3) 23,815 19,757 23,123 20,782 26,293 Total assets(1)(3) 524,750 458,503 428,490 372,626 382,558 Total indebtedness, including debt premium(1)(3)(5) 315,717 252,306 212,779 199,468 197,456 Other Data: Funds from operations(6) $41,559 $38,349 $35,937 $34,955 $34,280 Cash provided by (used in): Operating activities 40,733 38,178 32,796 31,294 30,783 Investing activities (74,834) (44,309) (4,038) (13,373) (8,565)Financing activities 34,137 6,164 (29,815) (17,491) (30,819)Per Share Data: Basic earnings per share: Total basic earnings per share(2) $1.28 $1.78 $3.99 $1.04 $1.54 Diluted earnings per share: Total diluted earnings per share(2) $1.28 $1.78 $3.99 $1.04 $1.54 Diluted funds from operations per share: Total diluted funds from operations per share $3.09 $2.88 $2.78 $2.75 $2.71 Dividends per share $2.600 $2.560 $2.520 $2.495 $2.460 Other Information (in thousands) Weighted average number of shares outstanding—basic 13,464 13,293 12,927 12,689 12,661 Weighted average number of shares and share equivalents outstanding—diluted 13,468 13,301 12,934 12,701 12,669 (1)As discussed in Note 1 “Summary of Significant Accounting Policies—Investments in Limited Liability Companies”, our consolidated financialstatements only include the accounts of our consolidated investments.(2)Net income and earnings per share during 2016 includes $528,000 of transactions costs related to various transactions during 2016. Net income andearnings per share during 2015 includes: (i) an $8.7 million gain recorded in connection with a property exchange transaction, and; (ii) $243,000 oftransaction costs related to various transactions during 2015. Net income and earnings per share during 2014 includes: (i) a $25.4 million gainrecorded in connection with our purchase of third-party minority ownership interests in eight LLCs (January and August, 2014, as discussed below) inwhich we formerly held non-controlling majority ownership interests (we own 100% of each of these entities since the effective dates); (ii) a $13.0million gain on the divestiture of real property (the Bridgeway), and; (iii) $427,000 of transaction costs related to the 2014 acquisition and divestitureactivity previously mentioned. Net income and earnings per share during 2013 includes approximately $200,000 of transaction costs related tovarious acquisitions. Net income and earnings per share during 2012 includes an $8.5 million gain on the divestitures of properties owned by twounconsolidated LLCs in which we formerly held non-controlling majority ownership interests, and $680,000 of transaction costs related to variousacquisitions.(3)Amounts include the fair value of the real property and debt of the eight previously unconsolidated LLCs, which we began consolidating during thefirst and third quarters of 2014 subsequent to our purchase of the third-party minority ownership interests on January 1, 2014 and August 1, 2014 (weowned 100% of each of these entities at December 31, 2014).(4)Investments in LLCs at December 31, 2014, 2013 and 2012 reflect the consolidation of various LLCs, as mentioned in notes 2 and 3 above, as well asthe divestiture of property owned by various unconsolidated LLCs during 2012. Additionally, at December 31, 2013, Investments in LLCs reflects thedeconsolidation of Palmdale Medical Properties. This LLC was deemed to be a variable interest entity during the term of the master lease and wasconsolidated in our financial statements through June 30, 2013 since we were the primary beneficiary through that date. Effective July 1, 2013, thisLLC is no longer be deemed a variable interest entity and is accounted for in our financial statements on an unconsolidated basis pursuant to theequity method. 27Effective January 1, 2014, Investments in LLCs reflects the consolidation of Palmdale Medical Properties, since we purchased the third-party minorityownership 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: $28.4 million as of December 31, 2016, $28.9 million as of December 31, 2015, $52.7 million as of December 31, 2014, $80.1 million as ofDecember 31, 2013 and $77.5 million as of December 31, 2012 (See Note 8 to the consolidated financial statements).(6)Our funds from operations (“FFO”) during 2016, 2015, 2014, 2013 and 2012 are net of reductions for transaction costs of $528,000, $243,000$427,000, $203,000 and $680,000, 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, which are non-GAAP financial measures (“GAAP” is Generally Accepted Accounting Principles in the United States of America), arehelpful to our investors as measures of our operating performance. We compute FFO, as reflected below, in accordance with standards established by theNational Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not compute FFOin accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO do not represent cashgenerated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance withGAAP. In addition, FFO 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. A reconciliation of our reported net income to FFO for each of the last five years is shown below: (000s) 2016 2015 2014 2013 2012 Net income $17,215 $23,691 $51,551 $13,169 $19,477 Depreciation and amortization expense on real property/intangibles: Consolidated investments 22,493 21,710 20,548 18,496 20,030 Unconsolidated affiliates 1,851 1,690 2,290 3,290 3,293 Less gains: Gain on property exchange — (8,742) — — — Gains on fair value recognition resulting from the purchase of minority interests in majority-owned LLCs, net — — (25,409) — — Gain on divestiture of real property — — (13,043) — — Gains on divestiture of properties owned by unconsolidated LLCs, net — — — — (8,520)Funds From Operations $41,559 $38,349 $35,937 $34,955 $34,280 Weighted average number of shares and equivalents outstanding -Diluted 13,468 13,301 12,934 12,701 12,669 Funds From Operations per diluted share $3.09 $2.88 $2.78 $2.75 $2.71 28 ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverviewWe 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. As of February 28, 2017, we have sixty-seven real estate investments or commitments in twenty states consisting of: •six hospital facilities including three acute care, one rehabilitation and two sub-acute; •three free-standing emergency departments (“FEDs”); •fifty-four medical office buildings (“MOBs”), including five owned by unconsolidated LLCs/LPs, and; •four preschool and childcare centers.Forward Looking StatementsThis 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, information concerning our possible future results ofoperations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effecton our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, andthe benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similarexpressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,”“expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in futuretense, identify forward-looking statements.Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of thetimes at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or ourgood faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially fromthose expressed in the statements. Such factors include, among other things, the following: •a substantial portion of our revenues are dependent upon one operator, Universal Health Services, Inc. (“UHS”). We cannot assure you thatsubsidiaries of UHS will renew the leases on our three acute care hospitals (which are scheduled to expire in December, 2021) and two FEDs atexisting lease rates or fair market value lease rates. In addition, if subsidiaries of UHS exercise their options to purchase the respective leasedhospital facilities and FEDs upon expiration of the lease terms, our future revenues and results of operations could decrease if we were unable toearn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currently earned pursuant to these leases; •in certain of our markets, the general real estate market has been unfavorably impacted by increased competition/capacity and decreases inoccupancy and rental rates which may adversely impact our operating results and the underlying value of our properties; •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; •our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund future growth of our business; •the outcome of known and unknown litigation, government investigations, and liabilities and other claims asserted against us, UHS or theother operators of our facilities; 29 •failure of UHS or the other operators of our hospital facilities to comply with governmental regulations related to the Medicare and Medicaidlicensing and certification 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 fundthe future 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 onthe future 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 ratesas well 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 programs; •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; decreasing in-patient admission trends; technological and pharmaceuticalimprovements that may increase the cost of providing, or reduce the demand for, health care, and; the ability to attract and retain qualifiedmedical 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 formost federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report releasedby the Congressional Budget Office. The 2011 Act provides for new spending on program integrity initiatives intended to reduce fraud andabuse under the Medicare program. Among its other provisions, the law established a bipartisan Congressional committee, known as the JointSelect Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing futurefederal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by theNovember 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implementedon March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across allMedicare programs. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, continued the 2% reductions to Medicarereimbursement imposed under the 2011 Act. We cannot predict whether Congress will restructure the implemented Medicare paymentreductions or what federal other deficit reduction initiatives may be proposed by Congress going forward. We also cannot predict the effectthese enactments will have on operators (including UHS), and, thus, our business; •in March, 2010, the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act (the “ACA”)were enacted into law and created significant changes to health insurance coverage for U.S. citizens as well as material revisions to the federalMedicare and state Medicaid programs. The two combined primary goals of these acts are to provide for increased access to coverage forhealthcare and to reduce healthcare-related expenses. Medicare, Medicaid and other health care industry changes are scheduled to beimplemented at various times during this decade. Initiatives to repeal the ACA, in whole or in part, to delay elements of implementation orfunding, and to offer amendments or supplements to modify its provisions, have been persistent and may increase as a result of the 2016election. The ultimate outcomes of legislative attempts to repeal or amend the ACA and legal challenges to the ACA are unknown. Results ofrecent Congressional elections and the change of Presidential administrations beginning in 2017 could create a political environment in whichsubstantial portions of the ACA are repealed or revised. Specifically, President Donald Trump’s 100 Day Action Plan called for full repeal ofthe ACA and its replacement with health savings accounts, cross-states sales of health insurance, and modifications to state-managed Medicaidprograms. Nevertheless, 30 prospects for rapid enactment of radical change in the health care regulatory landscape are not clear, and President Donald Trump has alreadyindicated that popular provisions of the ACA should be preserved. It remains unclear what portions of the ACA may remain, or what anyreplacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significantimpact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offeredby our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will nothave a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by suchpotential legislation, or for the operators of our hospitals to receive payment for services; •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 370-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 byoperating activities, we would be required to generate cash from other sources which could adversely affect our financial condition; •our ownership interest in five LLCs/LPs in which we hold non-controlling equity interests. In addition, pursuant to the operating and/orpartnership agreements of the five LLCs/LPs in which we continue to hold non-controlling ownership interests, the third-party member and theTrust, at any time, potentially subject to certain conditions, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member (“Offerto Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-OfferingMember (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchasethe entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at theequivalent proportionate Transfer Price. The closing of the transfer must occur within 60 to 90 days of the acceptance by the Non-OfferingMember. •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 EstimatesThe 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. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financialstatements, 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. 31 The minimum rent for our six hospital facilities, which is paid monthly, is fixed over the term of the respective leases which are scheduled to expire in2019 (2 hospitals) or 2021 (4 hospitals). In addition, for the three hospital facilities leased to subsidiaries of UHS, bonus rents are paid on a quarterly basis,based upon a computation that compares the hospitals’ current quarter net revenues to the corresponding quarter in the base year. Rental income recorded byour other properties, including our consolidated and unconsolidated MOBs, relating to leases in excess of one year in length, is recognized using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenueresulting from 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. Tenant reimbursements for operating expenses are accrued asrevenue in the same period the related expenses are incurred.Purchase Accounting for Acquisition of Investments in Real Estate:Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordancewith current accounting guidance, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land,building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases,and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above market rate loans, or loan discounts, inthe case of below market loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate. The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacementcosts adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are alsodetermined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvementsbased on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a propertybased on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there isintangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value resultsprimarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses andunreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in performing these analysesinclude an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similarleases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentalrevenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leasesincluding leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense overthe remaining initial terms of the respective leases. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-placelease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of thedifference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from theperspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remainingnon-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewalperiods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of therespective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rentalincome over the initial terms of the respective leases. Asset Impairment: We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicatorsmay include a significant decrease in the market price of the property, a change in the expected holding period for the property, a significant adverse changein how the property is being used or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excessof the amount originally expected for the acquisition or development of the property, or a history of operating or cash flow losses of the property. When suchimpairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the realestate investment’s use and eventual disposition and compare that estimate to the carrying value of the property. We consider factors such as future operatingincome, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluationindicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying valueexceeds the estimated fair value of the property. These losses have a direct impact on our net income because recording an impairment loss results in animmediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regardingfuture occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on propertiesconsidered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether the carrying value of a property isrecoverable, our strategy of holding properties over the long-term directly decreases the likelihood of their 32 carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwisedictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test,the affected assets must be reduced to their fair value. We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues,expenses and capital improvement costs that a market participant would use based on the highest and best use of the asset, which is similar tothe income approach that is commonly utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside brokeropinions of value or third party appraisals. In considering whether to classify a property as held for sale, we consider factors such as whether management has committed to a plan tosell the property, the property is available for immediate sale in its present condition for a price that is reasonable in relation to its current value,the sale of the property is probable, and actions required for management to complete the plan indicate that it is unlikely that any significantchanges will made to the plan. If all the criteria are met, we classify the property as held for sale. Upon being classified as held for sale,depreciation and amortization related to the property ceases and it is recorded at the lower of its carrying amount or fair value less cost to sell. Theassets and related liabilities of the property are classified separately on the consolidated balance sheets for the most recent reporting period. Onlythose assets held for sale that constitute a strategic shift or that will have a major effect on our operations are classified as discontinuedoperations. An other than temporary impairment of an investment 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.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 ordinaryincome plus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise taxhas been reflected in the financial statements as no tax was due.Earnings and profits, which 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.Results of OperationsYear ended December 31, 2016 as compared to the year ended December 31, 2015:For the year ended December 31, 2016, net income was $17.2 million as compared to $23.7 million during 2015. The $6.5 million decrease in netincome during 2016, as compared to 2015, was primarily attributable to the following: •a decrease of approximately $8.7 million resulting from the gain recorded on a property exchange transaction that occurred in May, 2015; •a $1.1 million decrease due to an increase in interest expense resulting primarily from: (i) the refinancing in the form of a member loan (duringthe fourth quarter of 2015) of a previously outstanding $22.8 million, third-party mortgage loan of an unconsolidated LLC utilizing fundsborrowed under our revolving credit facility, and; (ii) the interest expense incurred on the additional borrowings utilized to finance the 2016acquisitions, as discussed herein; •a $1.9 million increase in equity in income of unconsolidated LLCs, due in large part to the above-mentioned refinancing of the previouslyoutstanding $22.8 million, third-party mortgage loan during the fourth quarter of 2015, as well as our purchase of an additional 10% ownershipinterest in the Arlington Medical Properties, LLC from the third-party minority member, and; •$1.4 million of other combined net increases due primarily to increased net income generated at various properties, the income generated at theproperties acquired during 2016 (before interest expense) and the favorable impact resulting from the property exchange transaction completedduring the second quarter of 2015. 33 Total revenue increased $3.1 million, or 4.9%, during the year ended December 31, 2016, as compared to 2015, due primarily to the revenuesgenerated at MOBs acquired during 2016, as well as net increases at various other properties.Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $16.4 million for each of theyears ended December 31, 2016 and 2015. A large portion of the expenses associated with our consolidated medical office buildings is passed on directly tothe tenants either directly as tenant reimbursements of common area maintenance expenses or included in base rental amounts. During 2016, we had a total of 32 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we havesignificant investments, some of which are accounted for by the equity method. These leases comprised approximately 10% of the aggregate rentable squarefeet of these properties (7% related to renewed leases and 3% related to new leases). Rental rates, tenant improvement costs and rental concessions vary fromproperty to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions,proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. The weighted-average tenant improvementcosts associated with these new or renewed leases was approximately $12 per square foot during 2016. The weighted-average leasing commissions on thenew and renewed leases commencing during 2016 was approximately 2% of base rental revenue over the term of the leases. The average aggregate value ofthe tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during 2016 wasapproximately 2% of the future aggregate base rental revenue over the lease terms. Rent abatements were, or will be, recognized in our results of operationsunder the straight-line method over the lease term regardless of when payments are due. In connection with lease renewals executed during 2016, theweighted-average rental rates, as compared to rental rates on the expired leases, decreased by approximately 3%.During 2015, we had a total of 60 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 14% of the aggregate rentable square feet of these properties (4%related to renewed leases and 10% 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 occupancy 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 $11 per square foot during 2015. The weighted-average leasing commissions on the new and renewed leasescommencing during 2015 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 2015 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 2015, the weighted-average rental rates, ascompared to rental rates on the expired leases, decreased by approximately 3%.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, which are non-GAAP financial measures (“GAAP” is Generally Accepted Accounting Principles in the United States of America), arehelpful to our investors as measures of our operating performance. We compute FFO, as reflected below, in accordance with standards established by theNational Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not compute FFOin accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO does not represent cashgenerated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance withGAAP. In addition, FFO 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.Below is a reconciliation of our reported net income to FFO for 2016 and 2015 (in thousands): 2016 2015 Net income $17,215 $23,691 Depreciation and amortization expense on consolidated investments 22,493 21,710 Depreciation and amortization expense on unconsolidated affiliates 1,851 1,690 Gain on property exchange — (8,742)Funds From Operations $41,559 $38,349 Weighted average number of shares and equivalents outstanding - Diluted 13,468 13,301 Funds From Operations per diluted share $3.09 $2.88 34 Our FFO increased $3.2 million to $41.6 million, or $3.09 per diluted share, during 2016, as compared to $38.3 million, or $2.88 per diluted share,during 2015. The increase in FFO during 2016, as compared to 2015, related primarily to: (i) an increase in income generated at various properties as well asthe favorable impact on our net income resulting from the property exchange transaction in May, 2015, and; (ii) a $944,000 net increase in the addback ofdepreciation and amortization expense incurred at our properties on a consolidated and unconsolidated basis.Year ended December 31, 2015 as compared to the year ended December 31, 2014: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, 2015 includes the revenues and expenses associated with each of theseproperties. Prior to August 1, 2014, these LLCs were accounted for on an unconsolidated basis pursuant to the equity method, as discussed above, and ourConsolidated Statement of Income for the year ended December 31, 2014 includes the revenues and expenses associated with each of these properties for thefive-month period ended December 31, 2014.The table below provides supplemental financial information related to each of the above-mentioned entities for the seven-month period endedJuly 31, 2014, and also presents the twelve-month period of 2014 on an “As Adjusted” financial statement presentation basis similar to the presentationapplied for each entity for the twelve-month periods ended December 31, 2015. Other than increased depreciation and amortization expense resulting fromthe amortization of the intangible assets recorded in connection with these transactions, there was no material impact to our net income as a result of theconsolidation of these LLCs.Year Ended December 31, 2015 as compared to the Year Ended December 31, 2014: As reported inConsolidatedStatementsof Income forthe YearEndedDecember 31,2015 As reported inConsolidatedStatementsof Income forthe YearEndedDecember 31,2014 2014Adjustments(a.) “AsAdjusted”TwelveMonthsEndedDecember 31,2014 “AsAdjusted”Variance Revenues $63,950 $59,786 $3,581 $63,367 $583 Expenses: Depreciation and amortization 22,108 20,885 732 21,617 (491)Advisory fees to UHS 2,810 2,545 — 2,545 (265)Other operating expenses 18,152 16,882 1,644 18,526 374 Transaction costs 243 427 — 427 184 43,313 40,739 2,376 43,115 (198)Income before equity in income of unconsolidated LLCs, interest expense and gains 20,637 19,047 1,205 20,252 385 Equity in income of unconsolidated LLCs 2,536 2,428 (551) 1,877 659 Gain on property exchange 8,742 — — — 8,742 Gains on fair value recognition resulting from purchase of minority interests in majority-owned LLCs — 25,409 — 25,409 (25,409) Gain on divestiture of real property -— 13,043 — 13,043 (13,043) Interest expense, net (8,224) (8,376) (654) (9,030) 806 Net income $23,691 $51,551 $— $51,551 $(27,860) (a.)Adjustments consist of revenues and expenses for the seven months ended July 31, 2014, for the six LLCs that we began consolidating effectiveAugust 1, 2014, as mentioned above. 35 For the year ended December 31, 2015, net income was $23.7 million as compared to $51.6 million during 2014. The $27.9 million decrease in netincome during 2015, as compared to 2014, was primarily attributable to the following, as computed utilizing the “As Adjusted” Variance column indicatedon the table above: •a decrease of approximately $25.4 million from the aggregate gain recorded during 2014 on the fair value recognition resulting from thepurchase of minority interests in majority-owned LLCs, as discussed above; •a decrease of approximately $13.0 million from the gain recorded during 2014 on the divestiture of real property (The Bridgeway); •an increase of approximately $8.7 million due to the gain recorded during the second quarter of 2015 in connection with a property exchangetransaction; •a decrease of $491,000 (“As Adjusted”) attributable to a net increase in depreciation and amortization expense partially resulting from the fairvalue recognition recorded in connection with our acquisition of minority ownership interests in various LLCs in August, 2014; •an increase of $806,000 attributable to a decrease in interest expense (“As Adjusted”) due primarily to the repayment of three third-partymortgages (during the third quarter of 2014 and the first and fourth quarters of 2015) utilizing funds borrowed under our revolving creditfacility which bears interest at a comparatively lower interest rate, and a decrease in our average cost of borrowings under our revolving creditfacility; •an increase of $659,000 (“As Adjusted”) in equity in income of unconsolidated LLCs, resulting from combined net increases at variousunconsolidated properties, and; •other combined net increases of approximately $876,000, including the income generated at properties acquired during 2015.Total revenue increased $583,000 (“As Adjusted”) during the year ended December 31, 2015, as compared to 2014, due primarily to the revenuesgenerated at MOBs acquired during the third quarter of 2014 and the first and second quarters of 2015.Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $16.4 million and $16.9million (“As Adjusted”) for the years ended December 31, 2015 and 2014, respectively. A large portion of the expenses associated with our consolidatedmedical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses or included inbase rental amounts. Information related to new or renewed leases that commenced during 2015 at the medical office buildings in which we have significant investments isprovided above. 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 occupancy 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%. 36 Below is a reconciliation of our reported net income to FFO for 2015 and 2014 (in thousands): 2015 2014 Net income $23,691 $51,551 Depreciation and amortization expense on consolidated investments 21,710 20,548 Depreciation and amortization expense on unconsolidated affiliates 1,690 2,290 Gain on property exchange (8,742) — 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 $38,349 $35,937 Weighted average number of shares and equivalents outstanding - Diluted 13,301 12,934 Funds From Operations per diluted share $2.88 $2.78 Our FFO increased $2.4 million to $38.3 million during 2015, as compared to $35.9 million during 2014. The increase in FFO during 2015, ascompared to 2014, related primarily to: (i) a net increase in income generated at our properties, including the income generated at our properties acquired atvarious times during 2015 and 2014, and; (ii) the $806,000 net decrease in interest expense (“As Adjusted”), as discussed above.Effects of InflationInflation 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. 37 Liquidity and Capital ResourcesYear ended December 31, 2016 as compared to December 31, 2015:Net cash provided by operating activitiesNet cash provided by operating activities was $40.7 million during 2016 as compared to $38.2 million during 2015. The $2.6 million increase wasattributable to: •a favorable change of approximately $3.1 million due to an increase in net income plus the adjustments to reconcile net income to net cashprovided by operating activities (depreciation and amortization, amortization of debt premium, stock-based compensation and gain on propertyexchange); •an unfavorable change of $914,000 in rent receivable due, in part, to increased receivables at newly acquired properties, and; •other combined net favorable changes of approximately $410,000 Net cash used in investing activitiesNet cash used in investing activities was $74.8 million during 2016 as compared to $44.3 million during 2015.2016:During 2016, we used $74.8 million of net cash in investing activities as follows: •spent $5.5 million to fund equity investments in unconsolidated LLCs; •spent $11.2 million in additions to real estate investments, including the construction of an MOB in Las Vegas, Nevada, which is scheduled to becompleted and opened during the first quarter of 2017, as well as tenant improvements at various MOBs; •spent $60.4 million to acquire the real estate assets of four MOBs, as discussed in Note 3 to the consolidated financial statements – NewConstruction, Acquisitions, Dispositions and Property Exchange Transaction; •received $851,000 of cash repayments for an outstanding member loan to an unconsolidated LLC, as discussed in Note 8 to the consolidatedfinancial statements – Summarized Financial Information of Equity Affiliates, and; •received $1.4 million of cash in excess of income related to our unconsolidated LLCs ($5.8 million of cash distributions received less $4.4million of equity in income of unconsolidated LLCs).2015:During 2015, we used $44.3 million of net cash in investing activities as follows: •spent $667,000 to fund equity investments in unconsolidated LLCs; •spent $22.8 million in advances in the form of a member loan to an unconsolidated LLC; •spent $5.3 million in additions to real estate investments primarily for tenant improvements at various MOBs; •spent $150,000 consisting of a deposit on real estate assets; •spent $16.8 million to acquire the real estate assets of a medical office building and two free-standing emergency departments; •spent $2.3 million for payment of a note payable related to the purchase of third-party minority interests in six majority-owned LLCs during thethird quarter of 2014, as discussed above; •received $306,000 of cash as repayment for the above-mentioned member loan to an unconsolidated LLC; •received $224,000 of cash in excess of income related to our unconsolidated LLCs ($2.8 million of cash distributions received less $2.5 millionof equity in income of unconsolidated LLCs); •received $1.1 million of cash proceeds in connection with the refinancing of third-party debt by a majority-owned LLC in which we hold anoncontrolling ownership interest, and; •received $2.0 million of cash proceeds in connection with the property exchange with an unrelated third party. Net cash provided by financing activitiesNet cash provided by financing activities was $34.1 million during 2016 as compared to $6.2 million during 2015.2016:The $34.1 million of net cash provided by financing activities during 2016 consisted of: •received $59.4 million of additional borrowings on our revolving line of credit; 38 •received $13.5 million of net cash from the issuance of shares of beneficial interest, $13.2 million of which related to our at-the-marketequity issuance program (as discussed below) and approximately $280,000 of which was primarily related to our dividend reinvestmentprogram; •paid $3.2 million on mortgages and other notes payable that are non-recourse to us; •paid $307,000 of financing costs related to the amendment of our revolving credit facility; •paid $35.1 million of dividends, and; •paid $30,000 of partial settlements of dividend equivalent rights.2015:The $6.2 million of net cash provided by financing activities during 2015 consisted of: •received $52.4 million of additional borrowings on our revolving line of credit; •received $5.2 million of proceeds related to a new mortgage note payable (refinance) that is non-recourse to us; •received $1.7 million of net cash from the issuance of shares of beneficial interest ($1.1 million relates to shares issued in late December,2014, as discussed below); •paid $17.8 million on mortgages and other notes payable that are non-recourse to us, (including the pay-off of the $4.9 million and $5.9million outstanding mortgages on the Spring Valley Medical Office Building and the Palmdale Medical Plaza, respectively, utilizing fundsborrowed under our revolving credit facility); •paid $1.1 million of financing costs on the new revolving credit facility and a new mortgage note payable refinance, and; •paid $34.1 million of dividends.At-The-Market Equity Issuance Program (“ATM”):During the second quarter of 2016, we recommenced our at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we maysell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of approximately $23.3 million to or through Merrill Lynch,Pierce, Fenner and Smith, Incorporated (“Merrill Lynch”), as sales agent and/or principal. The common shares were offered pursuant to the RegistrationStatement filed with the Securities and Exchange Commission, which became effective during the fourth quarter of 2015.Pursuant to the ATM Program, during the twelve months ended December 31, 2016, there were 249,016 shares issued at an average price of $55.30 pershare (all of which were issued during the second quarter), which generated approximately $13.2 million of cash net proceeds (net of approximately$558,000, consisting of compensation of $344,000 to Merrill Lynch, as well as $214,000 of other various fees and expenses). As of December 31, 2016, wehad approximately $9.5 million of gross proceeds still available for issuance under the program. Since inception of this ATM program through December 31,2016, we have issued 829,916 shares at an average price of $48.77 per share, which generated approximately $38.8 million of net proceeds (net ofapproximately $1.7 million, consisting of compensation of $1.0 million to Merrill Lynch as well as $680,000 of other various fees and expenses). We have,and intend, to use the proceeds generated pursuant to the ATM program to reduce amounts outstanding under our revolving credit agreement. After suchrepayment of debt, we may re-borrow funds under our revolving credit agreement for general operating purposes, including working capital, capitalexpenditures, acquisitions, dividend payments and the refinance of third-party debt.There were no shares issued pursuant to an ATM program during 2015. During 2014, pursuant to an ATM equity issuance program in effect at thattime, which is now expired, we issued 426,187 shares at an average price of $47.51 per share, which generated approximately $19.5 million of net proceeds,approximately $1.1 million of which were received in early January, 2015 (net of approximately $700,000, consisting of compensation of $506,000 toMerrill Lynch, as well as $195,000 of other various fees and expenses).Year ended December 31, 2015 as compared to December 31, 2014:Net cash provided by operating activitiesNet cash provided by operating activities was $38.2 million during 2015 as compared to $32.8 million during 2014. The $5.4 million increase wasattributable to: •a favorable change of approximately $3.2 million due to an increase in net income plus the adjustments to reconcile net income to net cashprovided by operating activities (depreciation and amortization, amortization of debt premium, stock-based compensation and gains on propertyexchange, divestiture of real property and purchases of minority interests in majority-owned LLCs); 39 •a favorable change of approximately $2.1 million in tenant reserves, escrows, deposits and prepaid rents, and; •other combined net favorable changes of approximately $109,000.Net cash used in investing activitiesNet cash used in investing activities was $44.3 million during 2015 as compared to $4.0 million during 2014. The factors contributing to the $44.3million of net cash used in investing activities during 2015 are detailed above.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; •spent $100,000 consisting of a deposit on real estate assets related to the acquisition of a medical office building that we purchased during thefirst quarter of 2015; •received $17.3 million of cash proceeds in connection with the sale of the real property of The Bridgeway, as discussed herein; •received $2.3 million of cash distribution proceeds in connection with refinancing of third-party debt by the LP 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).Net cash provided by/(used in) financing activitiesNet cash provided by financing activities was $6.2 million during 2015, as compared to $29.8 million of net cash used in financing activities during2014. The factors contributing to the $6.2 million of net cash provided by financing activities are detailed above.2014:The $29.8 million of net cash used in financing activities during 2014 consisted of: •received $19.3 million of net cash from the issuance of shares of beneficial interest, $19.0 million of which related to our at-the-market equityissuance program and approximately $250,000 of which was primarily related to our dividend reinvestment program; •paid $32.7 million of dividends; •paid $12.3 million on mortgage and other notes payable that are non-recourse to us (including the pay-off of the $9.1 million outstandingmortgage balance on the Summerlin Hospital Medical Office Building I utilizing borrowed funds under our revolving credit facility); •paid $4.0 million net repayments on our revolving line of credit, and; •paid $94,000 as partial settlement of accrued dividend equivalent rights.Additional cash flow and dividends paid information for 2016, 2015 and 2014:As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of $40.7 million during 2016, $38.2million during 2015 and $32.8 million during 2014. As also indicated on our statements of cash flows, noncash expenses such as depreciation andamortization expense, amortization of debt premium, stock-based compensation expense and gains recorded during 2015 and 2014, are the primarydifferences between our net income and net cash provided by operating activities for each year. In addition, as reflected in the cash flows from investingactivities section, we received $1.4 million during 2016, $224,000 during 2015 and $1.0 million during 2014, of cash distributions in excess of income fromvarious unconsolidated LLCs which represents our share of the net cash flow distributions from these entities. These cash distributions in excess of incomerepresent operating cash flows net of capital expenditures and debt repayments made by the LLCs.We therefore generated $42.1 million during 2016, $38.4 million during 2015 and $33.8 million during 2014, related to the operating activities of ourproperties recorded on a consolidated and an unconsolidated basis. We paid dividends of $35.1 million during 2016, $34.1 million during 2015 and $32.7million during 2014. During 2016, the $42.1 million of cash generated related to the operating activities of our properties was approximately $7.0 milliongreater than the $35.1 million of dividends paid. During 2015, 40 the $38.4 million of cash generated related to the operating activities of our properties exceeded the $34.1 million of dividends paid by approximately $4.3million. During 2014, the $33.8 million of net cash generated related to the operating activities of our properties exceeded the $32.7 million of dividendspaid by approximately $1.1 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. From time to time, various other sources and uses of cash may include items such asinvestments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt,and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent onthe operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions ofreal property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties weown either in whole or through LLCs, as outlined above.In 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 owned in LLCs, and; (iii) our future capitalcommitments and debt repayments, including those of our LLCs. Based upon the information discussed above, as well as consideration of projections andforecasts of our future operating cash flows, management and the Board of Trustees have determined that our operating cash flows have been sufficient tofund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to our projectedfuture results of operations.We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally generated and additional funds. Additionalfunds may be obtained through: (i) borrowings under our $250 million revolving credit facility agreement (which had $45.8 million of available borrowingcapacity, net of outstanding borrowings and letters of credit, as of December 31, 2016); (ii) the issuance of equity pursuant to our at-the-market (“ATM”)equity issuance program; (iii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by ourconsolidated and unconsolidated LLCs/LPs, 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 access tothe capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months,including providing sufficient capital to allow us to make distributions necessary to enable us to continue to qualify as a REIT under Sections 856 to 860 ofthe Internal Revenue Code of 1986. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will beable to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a materialunfavorable impact on our results of operations, financial condition and liquidity.Credit facilities and mortgage debtManagement routinely monitors and analyzes the Trust’s capital structure in an effort to maintain the targeted balance among capital resourcesincluding the level of borrowings pursuant to our $250 million revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debtsecured by the real property of our properties and our level of equity including consideration of additional equity issuances pursuant to our at-the-marketequity issuance program. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projectedoccupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust’s current stock price, the capital resourcesrequired for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of theTrust’s current balance of revolving credit facility borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capitalresource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust’s growth.On March 27, 2015, we entered into a $185 million revolving credit agreement (“Credit Agreement”) which was amended on May 24, 2016 to, amongother things, increase the borrowing capacity to $250 million. The amended Credit Agreement, which is scheduled to mature in March, 2019, includes a $40million sub limit for letters of credit and a $20 million sub limit for swingline/short-term loans. The Credit Agreement also provides a one-time option toextend the maturity date for an additional one year period, and an option to increase the total facility borrowing capacity up to an additional $50 million,subject to lender agreement. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under theCredit Agreement are secured by first priority security interests in and liens on all equity interests in the Trust’s wholly-owned subsidiaries. Borrowings madepursuant to the Credit Agreement will bear interest, at our option, at one, two, three, or six month LIBOR plus an applicable margin ranging from 1.50% to2.00% or at the Base Rate plus an applicable margin ranging from 0.50% to 1.00%. The 41 Credit Agreement defines “Base Rate” as the greatest of: (a) the administrative agent’s prime rate; (b) the federal funds effective rate plus 1/2 of 1%, and;(c) one month LIBOR plus 1%. A commitment fee of 0.20% to 0.40% (depending on our total leverage ratio) will be charged on the average unused portionof the revolving credit commitments. The margins over LIBOR, Base Rate and the commitment fee are based upon our ratio of debt to total capital. AtDecember 31, 2016, the applicable margin over the LIBOR rate was 1.625%, the margin over the Base Rate was 0.625%, and the commitment fee was 0.25%.At December 31, 2016, we had $201.5 million of outstanding borrowings and $2.7 million of letters of credit outstanding against our revolving creditagreement. The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was $201.5 million at December 31, 2016. Wehad $45.8 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2016. There are nocompensating balance requirements. The average amount outstanding under our revolving credit agreement (which as amended in May, 2016 to anincreased borrowing capacity of $250 million, as discussed above) was $164.2 million in 2016, with a corresponding effective interest rate, includingcommitment fees, of 2.3%. The average amount outstanding under our revolving credit agreement was $114.3 million in 2015 with a corresponding effectiveinterest rate, including commitment fees, of 2.1%. The average amount outstanding under our previous revolving credit agreement (which was replaced inMarch, 2015, as discussed above), was $104.6 million in 2014 with a corresponding effective interest rate, including commitment fees, of 2.4%.The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions andother investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenantsregarding the Trust’s ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of totalunsecured debt to total unencumbered asset value, and minimum net worth, as well as customary events of default, the occurrence of which may trigger anacceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants at December 31, 2016. We also believe thatwe would remain in compliance 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 31,2016 Tangible net worth $125,000 $167,462 Total leverage< 60% 48.6%Secured leverage< 30% 18.1%Unencumbered leverage< 60% 50.3%Fixed charge coverage> 1.50x 3.6x 42 As indicated on the following table, we have fifteen mortgages, all of which are non-recourse to us, included on our consolidated balance sheet as ofDecember 31, 2016 (amounts in thousands): Facility Name OutstandingBalance(in thousands)(a.) InterestRate MaturityDateSummerlin Hospital Medical Office Building III floating rate mortgage loan (b.) $10,384 3.88% March, 2017Peace Health fixed rate mortgage loan (b.) 20,309 5.64% April, 2017Auburn Medical II floating rate mortgage loan (b.) 6,726 3.37% April, 2017Medical Center of Western Connecticut fixed rate mortgage loan (b.) 4,535 6.00% June, 2017Summerlin Hospital Medical Office Building II fixed rate mortgage loan (b.) 11,092 5.50% October, 2017Phoenix Children’s East Valley Care Center fixed rate mortgage loan (b.) 6,202 5.88% December, 2017Centennial Hills Medical Office Building floating rate mortgage loan 10,040 3.88% January, 2018Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan 4,231 3.88% February, 2018Rosenberg Children’s Medical Plaza fixed rate mortgage loan 8,146 4.85% May, 2018Vibra Hospital-Corpus Christi fixed rate mortgage loan 2,723 6.50% July, 2019700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 6,248 4.54% June, 2022BRB Medical Office Building fixed rate mortgage loan 6,316 4.27% December, 2022Desert Valley Medical Center fixed rate mortgage loan 5,081 3.62% January, 20232704 North Tenaya Way fixed rate mortgage loan 7,137 4.95% November, 2023Tuscan Professional Building fixed rate mortgage loan 4,992 5.56% June, 2025Total, excluding net debt premium and net financing fees 114,162 Less net financing fees (381) Plus net debt premium 436 Total mortgage notes payable, non-recourse to us, net $114,217 (a.)All mortgage loans require monthly principal payments through maturity and most include a balloon principal payment upon maturity.(b.)This loan is scheduled to mature within the next twelve months, at which time we will decide whether to refinance pursuant to a new mortgage loan orby utilizing borrowings under our Credit Agreement.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 $115.7 million as of December 31, 2016. 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.At December 31, 2015, we had fourteen mortgages, all of which were non-recourse to us, included in our consolidated balance sheet. The combinedoutstanding balance of these fourteen mortgages was $110.3 million (excluding net debt premium of $298,000 and net of net financing fees of $398,000 atDecember 31, 2015), and had a combined fair value of approximately $112.4 million at December 31, 2015. 43 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, 2016 (amountsin thousands): Payments Due by Period (dollars in thousands) Debt and Contractual Obligation Total Less than 1Year 2-3 years 4-5 years More than5 years Long-term non-recourse debt-fixed(a)(b) $82,781 $43,532 $12,996 $2,648 $23,605 Long-term non-recourse debt-variable(a)(b) 31,381 17,583 13,798 — — Long-term debt-variable(c) 201,500 — 201,500 — — Estimated future interest payments on debt outstanding as of December 31, 2016(d) 21,159 8,685 8,875 2,272 1,327 Equity and debt financing commitments(e) 1,141 1,141 — — — Total contractual obligations $337,962 $70,941 $237,169 $4,920 $24,932 (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 $115.7 million as of December 31, 2016. 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 $28.4 million of combined third-party debtoutstanding as of December 31, 2016, 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 $201.5 million of borrowings outstanding as of December 31, 2016 under the terms of our $250 million Credit Agreement which matureson March 27, 2019. The amount outstanding approximates fair value as of December 31, 2016.(d)Assumes that all debt outstanding as of December 31, 2016, including borrowings under the Credit Agreement, and the fifteen 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, 2016. We have the right to repay borrowings under the Credit Agreement at any time during the terms of the agreement, withoutpenalty. 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, 2016, we have equity investment and debt financing commitments remaining in connection with our investments in variousunconsolidated LLCs. As of December 31, 2016, we had outstanding letters of credit which secured the majority of these equity and debt financingcommitments. The $45.8 million of available borrowing capacity as of December 31, 2016, 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 $149 FTX MOB Phase II 369 Arlington Medical Properties 623 Total $1,141 Off Balance Sheet ArrangementsAs of December 31, 2016, 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, 2016 totaled $2.7 millionconsisting of: (i) $1.7 million related to Centennial Hills Medical Properties; (ii) $646,000 related to Banburry Medical Properties, and; (iii) $376,000 relatedto FTX MOB Phase II.ITEM 7A.Quantitative and Qualitative Disclosures About Market RiskMarket Risks Associated with Financial InstrumentsDuring 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, 2016, no payments have been made to us by thecounterparties pursuant to the terms of these caps which expired in January, 2017. 44 During the second quarter of 2016, we entered into an interest rate cap on a total notional amount of $30 million whereby we paid a premium of$115,000. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.50% and one-month LIBOR if one-monthLIBOR rises above 1.50% during the term of the cap. This interest rate cap became effective in January, 2017, coinciding with the expiration of the above-mentioned interest rate caps and expires in March, 2019. During the third quarter of 2016, we entered into an additional interest rate cap agreement on a totalnotional amount of $30 million whereby we paid a premium of $55,000. In exchange for the premium payment, the counterparties agreed to pay us thedifference between 1.5% and one-month LIBOR if one-month LIBOR rises above 1.5% during the term of the cap. This interest rate cap became effective inOctober, 2016 and expires in March, 2019.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 $317.2 million. The difference between actual amounts outstanding and fair value is approximately $1.6 million.The table below presents information about our financial instruments that are sensitive to changes in interest rates, including debt obligations as ofDecember 31, 2016. 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) 2017 2018 2019 2020 2021 Thereafter Total Long-term debt: Fixed rate: Debt(a) $43,532 $9,245 $3,751 $1,292 $1,356 $23,605 $82,781 Average interest rates 5.1% 4.9% 4.7% 4.6% 4.6% 5.0% 4.8%Variable rate: Debt(b) $17,583 $13,798 $201,500 $— $— $— $232,881 Average interest rates 2.5% 2.4% 2.4% — — — 2.4%Interest rate caps: Notional amount $30,000 $— $60,000 $— $— $— $90,000 Interest rates 1.5% — 1.5% — — — 1.5% (a)Consists of non-recourse mortgage notes payable.(b)Includes $31.4 million of non-recourse mortgage notes payable and of $201.5 million of outstanding borrowings under the terms of our $250 millionrevolving credit agreement.As calculated based upon our variable rate debt outstanding as of December 31, 2016 that is subject to interest rate fluctuations, and giving effect tothe above-mentioned interest rate caps, each 1% change in interest rates would impact our net income by approximately $2.2 million.ITEM 8.Financial Statements and Supplementary DataOur Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Changes in Equity and Cash Flows, together with thereports of KPMG LLP, an independent registered public accounting firm, are included elsewhere herein. Reference is made to the “Index to FinancialStatements and Schedule.”ITEM 9.Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.ITEM 9A.Controls and ProceduresConclusion Regarding the Effectiveness of Disclosure Controls and ProceduresAs of December 31, 2016, 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. 45 Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting or in other factors during the fourth quarter of 2016 that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting. 46 Management’s Report on Internal Control Over Financial ReportingManagement 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 established in Internal Control—Integrated Framework (2013), issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S.generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk thatcontrols may become inadequate 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, 2016,based on criteria established in Internal Control—Integrated Framework (2013), issued by the COSO. The effectiveness of our internal control over financialreporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which isincluded herein. 47 Report of Independent Registered Public Accounting Firm The Board of Trustees and ShareholdersUniversal Health Realty Income Trust:We have audited Universal Health Realty Income Trust’s internal control over financial reporting as of December 31, 2016, 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 standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material 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, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO).We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Universal Health Realty Income Trust and subsidiaries as of December 31, 2016 and 2015, the related consolidated statements of income, comprehensiveincome, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and the related financial statementschedule III, real estate and accumulated depreciation – December 31, 2016, and our report dated February 28, 2017 expressed an unqualified opinion onthose consolidated financial statements and financial statement schedule.(signed) KPMG LLPPhiladelphia, PennsylvaniaFebruary 28, 2017 48 ITEM 9B.Other InformationNone. PART IIIITEM 10.Directors, Executive Officers and Corporate GovernanceThere 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, 2016. See also “Executive Officers of the Registrant” appearing in Item 1 hereof.ITEM 11.Executive CompensationThere 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, 2016.ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThere 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, 2016.ITEM 13.Certain Relationships and Related Transactions, and Director IndependenceThere 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, 2016.ITEM 14.Principal Accounting Fees and ServicesThere 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, 2016. 49 PART IVITEM 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 3.1 to the Trust’s Current Report on Form 8-K dated September 28, 2016 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 1, 2016, 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 Credit Agreement, dated as of March 27, 2015, by and among the Trust, a syndicate of lenders and Wells Fargo Bank, National Association, asAdministrative 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 Current Report on Form 8-K dated March 27, 2015, is incorporated herein by reference.10.8 First Amendment to Credit Agreement, dated as of May 24, 2016, between Universal Health Realty Income Trust, certain subsidiaries ofUniversal Health Realty Income Trust, certain banks and financial institutions from time to time party thereto, and Wells Fargo Bank, National Association,as administrative agent, previously filed as Exhibit 10.1 to the Trust’s Current Report on form 8-K dated May 24, 2016, as incorporated herein by reference.10.9 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. 50 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* Amendment and Restatement of the Universal Health Realty Income Trust 2007 Restricted Stock Plan, previously filed as Exhibit 4.1 to theTrust’s Registration Statement on Form S-8 (File No. 333-211903), is incorporated herein by reference.10.13* Form of Restricted Stock Agreement, previously filed as Exhibit 10.2 to the Trust’s Current Report on Form 8-K dated April 27, 2007, isincorporated herein by reference.11 Statement re computation of per share earnings is set forth on the Consolidated Statements of Income.21 Subsidiaries of Registrant, 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. 51 SIGNATURESPursuant 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 TRUST By:/S/ ALAN B. MILLER Alan B. Miller,Chairman of the Board,Chief Executive Officer and PresidentDate: February 28, 2017Pursuant 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. SignaturesTitleDate /S/ ALAN B. MILLER Alan B. MillerChairman of the Board, ChiefExecutive Officer and President(Principal Executive Officer)February 28, 2017 /S/ JAMES E. DALTON, JR. James E. Dalton, Jr.TrusteeFebruary 28, 2017 /S/ MILES L. BERGER Miles L. BergerTrusteeFebruary 28, 2017 /S/ ELLIOT J. SUSSMAN Elliot J. Sussman, M.D., M.B.A.TrusteeFebruary 28, 2017 /S/ ROBERT F. MCCADDEN Robert F. McCaddenTrusteeFebruary 28, 2017 /S/ MARC D. MILLER Marc D. MillerTrusteeFebruary 28, 2017 /S/ CHARLES F. BOYLE Charles F. BoyleVice President and Chief Financial Officer(Principal Financial and AccountingOfficer)February 28, 2017 52 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE PageConsolidated Financial Statements: Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Schedule54Consolidated Balance Sheets—December 31, 2016 and December 31, 201555Consolidated Statements of Income—Years Ended December 31, 2016, 2015 and 201456Consolidated Statements of Comprehensive Income —Years Ended December 31, 2016, 2015 and 201457Consolidated Statements of Changes in Equity—Years Ended December 31, 2016, 2015 and 201458Consolidated Statements of Cash Flows—Years Ended December 31, 2016, 2015 and 201459Notes to the Consolidated Financial Statements60Schedule III—Real Estate and Accumulated Depreciation—December 31, 201679Notes to Schedule III—December 31, 201682 53 Report of Independent Registered Public Accounting Firm The Board of Trustees and ShareholdersUniversal Health Realty Income Trust:We have audited the accompanying consolidated balance sheets of Universal Health Realty Income Trust and subsidiaries (the Company) as of December 31,2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in thethree‑year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statementschedule III, real estate and accumulated depreciation - December 31, 2016. These consolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statementschedule based on our 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three‑yearperiod ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statementschedule III, real estate and accumulated depreciation - December 31, 2016, when considered in relation to the basic consolidated financial statements takenas a whole, presents fairly, 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, 2016, 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 February 28, 2017 expressed anunqualified opinion on the effectiveness of the Company’s internal control over financial reporting. (signed) KPMG LLP Philadelphia, PennsylvaniaFebruary 28, 2017 54 UNIVERSAL HEALTH REALTY INCOME TRUSTCONSOLIDATED BALANCE SHEETS(dollar amounts in thousands) December 31, December 31, 2016 2015 Assets: Real Estate Investments: Buildings and improvements and construction in progress $534,190 $469,933 Accumulated depreciation (138,588) (121,161) 395,602 348,772 Land 51,638 41,724 Net Real Estate Investments 447,240 390,496 Investments in and advances to limited liability companies ("LLCs") 35,593 31,597 Other Assets: Cash and cash equivalents 3,930 3,894 Base and bonus rent receivable from UHS 2,321 2,116 Rent receivable - other 5,291 4,292 Intangible assets (net of accumulated amortization of $27.1 million and $25.1 million at December 31, 2016 and December 31, 2015, respectively) 23,815 19,757 Deferred charges and other assets, net 6,560 6,351 Total Assets $524,750 $458,503 Liabilities: Line of credit borrowings $201,500 $142,150 Mortgage notes payable, non-recourse to us, net 114,217 110,156 Accrued interest 626 504 Accrued expenses and other liabilities 11,809 6,807 Tenant reserves, deposits and prepaid rents 5,321 3,844 Total Liabilities 333,473 263,461 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: 2016 - 13,599,055; 2015 - 13,327,020 136 133 Capital in excess of par value 255,656 241,700 Cumulative net income 572,501 555,286 Cumulative dividends (637,121) (601,983)Accumulated other comprehensive income/(loss) 105 (94)Total Equity 191,277 195,042 Total Liabilities and Equity $524,750 $458,503 See the accompanying notes to these consolidated financial statements. 55 UNIVERSAL HEALTH REALTY INCOME TRUSTCONSOLIDATED STATEMENTS OF INCOME(amounts in thousands, except per share amounts) Year ended December 31, 2016 2015 2014 Revenues: Base rental - UHS facilities $16,299 $15,955 $15,601 Base rental - Non-related parties 37,060 35,157 31,386 Bonus rental - UHS facilities 4,723 4,565 4,607 Tenant reimbursements and other - Non-related parties 8,113 7,490 7,490 Tenant reimbursements and other - UHS facilities 886 783 702 67,081 63,950 59,786 Expenses: Depreciation and amortization 22,956 22,108 20,885 Advisory fees to UHS 3,263 2,810 2,545 Other operating expenses 18,220 18,152 16,882 Transaction costs 528 243 427 44,967 43,313 40,739 Income before equity in income of unconsolidated limited liability companies ("LLCs"), interest expense and gains 22,114 20,637 19,047 Equity in income of unconsolidated LLCs 4,456 2,536 2,428 Gain on property exchange — 8,742 — 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 Interest expense, net (9,355) (8,224) (8,376)Net income $17,215 $23,691 $51,551 Basic earnings per share $1.28 $1.78 $3.99 Diluted earnings per share $1.28 $1.78 $3.99 Weighted average number of shares outstanding - Basic 13,464 13,293 12,927 Weighted average number of share equivalents 4 8 7 Weighted average number of shares and equivalents outstanding - Diluted 13,468 13,301 12,934 See the accompanying notes to these consolidated financial statements. 56 UNIVERSAL HEALTH REALTY INCOME TRUSTCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(dollar amounts in thousands) Year ended December 31, 2016 2015 2014 Net Income $17,215 $23,691 $51,551 Other comprehensive income/(loss): Unrealized derivative gains/(losses) on interest rate caps 199 (6) (31)Total other comprehensive income/(loss): 199 (6) (31)Total comprehensive income $17,414 $23,685 $51,520 See the accompanying notes to these consolidated financial statements. 57 UNIVERSAL HEALTH REALTY INCOME TRUSTCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Common Shares Capital in Accumulated other UHT Number excess of Cumulative Cumulative comprehensive Shareholders' Total of Shares Amount par value net income dividends income/(loss) Equity Equity January 1, 2014 12,859 $128 $220,691 $480,044 $(535,176) $(57) $165,630 $165,630 Shares of Beneficial Interest: Issued 443 5 19,839 — — — 19,844 19,844 Partial settlement of dividend equivalentrights — — (94) — — — (94) (94)Restricted stock-based compensationexpense — — 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 51,520 January 1, 2015 13,302 133 240,835 531,595 (567,894) (88) 204,581 204,581 Shares of Beneficial Interest: Issued 25 — 513 — — — 513 513 Partial settlement of dividend equivalentrights — — (75) — — — (75) (75)Restricted stock-based compensationexpense — — 427 — — — 427 427 Dividends ($2.56/share) — — — — (34,089) — (34,089) (34,089)Comprehensive income: Net income — — — 23,691 — — 23,691 23,691 Unrealized loss on interest rate cap — — — - — (6) (6) (6)Subtotal - comprehensive income 23,691 (6) 23,685 23,685 January 1, 2016 13,327 133 241,700 555,286 (601,983) (94) 195,042 195,042 Shares of Beneficial Interest: Issued 272 3 13,505 — — — 13,508 13,508 Partial settlement of dividend equivalentrights — — (30) — — — (30) (30)Restricted stock-based compensationexpense — — 481 — — — 481 481 Dividends ($2.60/share) — — — — (35,138) — (35,138) (35,138)Comprehensive income: Net income — — — 17,215 — — 17,215 17,215 Unrealized gain on interest rate cap — — — — — 199 199 199 Subtotal - comprehensive income 17,215 199 17,414 17,414 December 31, 2016 13,599 $136 $255,656 $572,501 $(637,121) $105 $191,277 $191,277 See the accompanying notes to these consolidated financial statements. 58 UNIVERSAL HEALTH REALTY INCOME TRUSTCONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands) Year ended December 31, 2016 2015 2014 Cash flows from operating activities: Net income $17,215 $23,691 $51,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,008 22,198 20,975 Amortization of debt premium (225) (225) (312)Stock-based compensation expense 481 427 399 Gain on property exchange — (8,742) — Gain on divestiture of real property — — (13,043)Gains on purchase of minority interests in majority-owned LLCs — — (25,409)Changes in assets and liabilities: Rent receivable (1,204) (290) (555)Accrued expenses and other liabilities 3 (184) (509)Tenant reserves, deposits and prepaid rents 1,377 1,781 (303)Accrued interest 122 (41) (62)Leasing costs (627) (556) (787)Other, net 583 119 851 Net cash provided by operating activities 40,733 38,178 32,796 Cash flows from investing activities: Investments in LLCs (5,454) (667) (1,337)Repayments of advances made to LLCs 851 306 — Advances made to LLCs — (22,795) — Cash distributions in excess of income from LLCs 1,362 224 1,029 Cash distribution of refinancing proceeds from LLCs — 1,045 2,280 Additions to real estate investments, net (11,204) (5,257) (2,866)Cash received for property exchange — 2,000 — Deposits on real estate assets — (150) (100)Net cash paid for acquisition of properties (60,389) (16,765) (15,600)Cash paid to acquire minority interests in majority-owned LLCs — (2,250) (4,744)Cash proceeds received from divestiture of real property — — 17,300 Net cash used in investing activities (74,834) (44,309) (4,038)Cash flows from financing activities: Net borrowings on line of credit 59,350 52,400 — Net repayments on line of credit — — (3,950)Proceeds from mortgage notes payable — 5,200 — Repayments of mortgage notes payable (3,230) (17,826) (12,327)Financing costs paid (307) (1,114) — Dividends paid (35,138) (34,089) (32,718)Partial settlement of dividends equivalent rights (30) (75) (94)Issuance of shares of beneficial interest, net 13,492 1,668 19,274 Net cash provided by/(used in) financing activities 34,137 6,164 (29,815)Increase/(decrease) in cash and cash equivalents 36 33 (1,057)Increase in cash due to recording of LLCs on a consolidated/unconsolidated basis — — 1,581 Cash and cash equivalents, beginning of period 3,894 3,861 3,337 Cash and cash equivalents, end of period $3,930 $3,894 $3,861 Supplemental disclosures of cash flow information: Interest paid $8,895 $8,025 $8,268 Supplemental disclosures of non-cash transactions: Acquisitions: Financing assumed in acquisition $7,499 $— $— Consolidation of LLCs: Net real estate investments $— $— $84,064 Cash and cash equivalents — — 1,581 Intangible assets — — 6,490 Rent receivable - other — — 388 Deferred charges and other assets, net — — 100 Investment in LLCs — — (28,616)Mortgage notes payable, non-recourse to us — — (29,758)Accrued interest — — (116)Accrued expenses and other liabilities — — (1,245)Tenant reserves, escrows, deposits and prepaid rents — — (485)Note payable to previous third-party member — — (2,250)Gains on purchases of minority interests in majority-owned LLCs — — (25,409)Cash paid for purchase of minority interests in majority-owned LLCs $— $— $4,744 Property Exchange Transaction: Net assets acquired in property exchange $— $9,886 $— Net assets relinquished in property exchange — (3,144) — See accompanying notes to these consolidated financial statements. 59 UNIVERSAL HEALTH REALTY INCOME TRUSTNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2016 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of OperationsUniversal Health Realty Income Trust and subsidiaries (the “Trust”) is organized as a Maryland real estate investment trust. We invest in healthcareand human service related facilities 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, 2017, we have sixty-seven real estate investments or commitmentslocated in twenty states consisting of: •six hospital facilities including three acute care, one rehabilitation and two sub-acute; •three free-standing emergency departments (“FEDs”); •fifty-four medical office buildings, including five owned by unconsolidated limited liability companies (“LLCs”)/limited liability partnerships(“LPs”), 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. Management is unable to predict the effect, if any, that these factors may have on the operating results of our lessees or on their ability to meettheir obligations under the terms of their leases with us. Management’s estimate of future cash flows from our leased properties could be materially affected inthe near term, if certain of the leases are not renewed or renewed with less favorable terms at the end of their lease terms.Revenue RecognitionOur 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 our six hospital facilities, which is paid monthly, is fixed over the term of the respective leases which are scheduled to expire in2019 (2 hospitals) or 2021 (4 hospitals). In addition, for the three hospital facilities leased to subsidiaries of UHS, bonus rents are paid on a quarterly basis,based upon a computation that compares the hospitals’ current quarter net revenues to the corresponding quarter in the base year. Rental income recorded byour other properties, including our consolidated and unconsolidated MOBs, relating to leases in excess of one year in length, is recognized using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenueresulting from 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. Tenant reimbursements for operating expenses are accrued asrevenue in the same period the related expenses are incurred.Real Estate InvestmentsLand, buildings and capital improvements are recorded at cost and stated at cost less accumulated depreciation. Expenditures for maintenance andrepairs are charged to operations as incurred. Renovations or replacements, which improve or extend the life of an asset, are capitalized and depreciated overtheir estimated useful lives.Purchase Accounting for Acquisition of Investments in Real EstatePurchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordancewith current accounting guidance, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land,building and tenant improvements, and identified intangible assets and liabilities, consisting of the value 60 of above-market and below-market leases, and acquired ground leases, based in each case on their fair values. Loan premiums, in the case ofabove market rate loans, or loan discounts, in the case of below market loans, are recorded based on the fair value of any loans assumed inconnection with acquiring the real estate. The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacementcosts adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are alsodetermined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvementsbased on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a propertybased on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there isintangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value resultsprimarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses andunreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in performing these analysesinclude an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similarleases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentalrevenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leasesincluding leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense overthe remaining initial terms of the respective leases. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-placelease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of thedifference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from theperspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remainingnon-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewalperiods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of therespective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rentalincome over the initial terms of the respective leases.Our intangible assets primarily consist of the value of in-place leases at December 31, 2016, and will be amortized over the remaining lease terms(aggregate weighted average of 4.3 years at December 31, 2016) and is expected to result in estimated aggregate amortization expense of $4.9 million,$3.6 million, $2.9 million $2.7 million and $2.3 million for 2017, 2018, 2019, 2020 and 2021, respectively. Amortization expense on intangible values of inplace leases and above-market leases was $5.1 million for the year ended December 31, 2016, $5.5 million for the year ended December 31, 2015 and $6.1million for the year ended December 31, 2014. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings andcapital improvements. The estimated original useful lives of our buildings ranges from 25-45 years and the estimated original useful lives of capitalimprovements ranges from 3-35 years. On a consolidated basis, depreciation expense was $17.4 million for the year ended December 31, 2016, $16.2 millionfor the year ended December 31, 2015 and $14.4 million for the year ended December 31, 2014.Cash and Cash EquivalentsWe consider all highly liquid investment instruments with original maturities of three months or less to be cash equivalents. Asset Impairment We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include asignificant decrease in the market price of the property, a change in the expected holding period for the property, a significant adverse change inhow the property is being used or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantlyin excess of the amount originally expected for the acquisition or development of the property, or a history of operating or cash flow losses of theproperty. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges)expected to result from the real estate investment’s use and eventual disposition and compare that estimate to the carrying value of the property.We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and otherfactors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment,an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a directimpact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation ofanticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirementsthat could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held andused are considered on an undiscounted basis to determine whether the carrying value of a property is recoverable, our strategy of holdingproperties over the long-term directly decreases the likelihood of their carrying values not being 61 recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earliersale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test, theaffected assets must be reduced to their fair value. We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues,expenses and capital improvement costs that a market participant would use based on the highest and best use of the asset, which is similar tothe income approach that is commonly utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside brokeropinions of value or third party appraisals. In considering whether to classify a property as held for sale, we consider factors such as whether management has committed to a plan tosell the property, the property is available for immediate sale in its present condition for a price that is reasonable in relation to its current value,the sale of the property is probable, and actions required for management to complete the plan indicate that it is unlikely that any significantchanges will made to the plan. If all the criteria are met, we classify the property as held for sale. Upon being classified as held for sale,depreciation and amortization related to the property ceases and it is recorded at the lower of its carrying amount or fair value less cost to sell. Theassets and related liabilities of the property are classified separately on the consolidated balance sheets for the most recent reporting period. Onlythose assets held for sale that constitute a strategic shift or that will have a major effect on our operations are classified as discontinuedoperations. An other than temporary impairment of an investment 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”)In accordance with the Financial Accounting Standards Board’s (“FASB”) standards and guidance relating to accounting for investments and realestate ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity method of accounting. The third-partymembers 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.In the Consolidated Statements of Cash Flows, distributions and equity in net income are presented net as cash flows from operatingactivities. Cumulative distributions received exceeding cumulative equity in earnings represent returns of investments and are classified as cash flows frominvesting activities in the Consolidated Statements of Cash Flows.At December 31, 2016, we have non-controlling equity investments or commitments in five jointly-owned LLCs/LPs which own MOBs. Weaccounted for these LLCs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities and we do not have acontrolling voting interest. The majority of these LLCs are joint-ventures between us and non-related parties that manage and hold minority ownershipinterests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flowrequirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required fromus to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significantcapital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additionalcash fundings are typically advanced as equity or member loans. These entities maintain property insurance on the properties. Federal Income TaxesNo 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 ordinaryincome plus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise taxhas been reflected in the financial statements as no tax was due. 62 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 $561 million and $385 million,respectively, at December 31, 2016. The aggregate cost basis and net book value of the properties for federal income tax purposes were approximately $489million and $325 million, respectively, at December 31, 2015.Stock-Based CompensationWe 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 ValueFair 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.The 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. Concentration of RevenuesThe rental revenue earned pursuant to the lease on McAllen Medical Center generated approximately 11% during each of 2016 and 2015, and 12%during 2014, of our consolidated revenues.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results coulddiffer from those estimates.New Accounting StandardsExcept as noted below there were no new accounting pronouncements that impacted, or are expected to impact us.In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, an update to the accounting standard relatingto the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability will be presented on the balancesheet as a direct deduction from the debt liability. In the event that there is not an associated debt liability recorded in the consolidated financial statements,the debt issuance costs will continue to be recorded on the consolidated balance sheet as an asset until the debt liability is recorded. The new standardbecame effective for the Trust on January 1, 2016. The adoption of this guidance did not have a material impact on our consolidated financial position orresults of operations as the update only related to changes in financial statement presentation. 63 In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the currentconsolidation guidance affecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does notadd or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of thesecharacteristics. The new standard became effective for the Trust on January 1, 2016 and did not have a material impact on our consolidated financial positionor results of operations as none of its existing consolidation conclusions were changed. In August, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-15, Classification of Certain Cash Receipts and CashPayments, which adds or clarifies guidance of the classification of certain cash receipts and payments in the statement of cash flows with the intent toalleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning afterDecember 15, 2017, with early adoption permitted. We are currently evaluating the impact of this ASU on our statement of cash flows. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement,presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dualapproach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financedpurchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on astraight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a termof greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existingguidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent toexisting guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard,Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. We are currently in the process of evaluating theimpact the adoption of ASU 2016-02 will have on our financial position or results of operations. In 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (“ASU 2014-09”), which outlines a comprehensive model forentities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer ofpromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate orequipment. In 2015, the FASB provided for a one-year deferral of the effective date for ASU 2014-09, which is now effective for us beginning January 1,2018. We are continuing to evaluate ASU 2014-09 (and related clarifying guidance issued by the FASB); however, we do not expect its adoption to have asignificant impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements,which is specifically excluded from ASU 2014-09. In January, 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” to clarify thedefinition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets orbusinesses. ASU 2017-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlyadoption is permitted. The future impact of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions made by us, if any. (2) RELATIONSHIP WITH UHS AND RELATED PARTY TRANSACTIONSLeases: We commenced operations in 1986 by purchasing properties of certain subsidiaries from UHS and immediately leasing the properties backto the respective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years withup to six additional 5-year renewal terms. The current base rentals and lease and renewal terms for each of the three hospital facilities leased to subsidiaries ofUHS are provided below. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on aquarterly basis based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital leases withsubsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another.The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 27% of our total revenue for the fiveyears ended December 31, 2016 (approximately 24%, 25% and 28% for the years ended December 31, 2016, 2015 and 2014, respectively). The decreaseduring 2016 and 2015 as compared to 2014 is due primarily to the 2016 and 2015 acquisitions, which are unrelated to UHS, as well as the divestiture of TheBridgeway which, as discussed below, occurred on December 31, 2014. Including 100% of the revenues generated at the unconsolidated LLCs in which wehave various non-controlling 64 equity interests ranging from 33% to 95%, the leases on the UHS hospital facilities accounted for approximately 21% of the combined consolidated andunconsolidated revenue for the five years ended December 31, 2016 (approximately 19%, 20% and 22% for the years ended December 31, 2016, 2015 and2014). In addition, we have seventeen MOBs, or free-standing emergency departments (“FEDs”), that are either wholly or jointly-owned by us, that includetenants 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. UHS also has the right to purchase the respective leased facilities at the end ofthe lease terms or any renewal terms at the appraised fair market value. In addition, the Master Lease, as amended during 2006, includes a change of controlprovision whereby UHS has the right, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the three leasedhospital properties listed below at their appraised fair market value. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilitiesduring and for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leasedfacility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer. The leases related to the hospitalfacilities of UHS are guaranteed by UHS and cross-defaulted with one another.In June, 2016, three wholly-owned subsidiaries of UHS provided the required notice to us, exercising the 5-year renewal options on the leasesrelated to our acute care hospitals noted in the table below. The renewals extended the lease terms on these facilities, at existing lease rates, to December,2021. The table below details the existing lease terms and renewal options for our three acute care hospitals operated by wholly-owned subsidiaries ofUHS: Hospital Name AnnualMinimumRent End ofLease Term RenewalTerm(years) McAllen Medical Center $5,485,000 December, 2021 10 (a)Wellington Regional Medical Center $3,030,000 December, 2021 10 (b)Southwest Healthcare System, Inland Valley Campus $2,648,000 December, 2021 10 (b) (a)UHS has two 5-year renewal options at existing lease rates (through 2031).(b)UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031).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 or FED facilities upon expiration of the lease terms, ourfuture revenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the rental revenue currentlyearned pursuant to these leases. During the first quarter of 2016, we committed to invest up to $21.1 million in the development and construction of the Henderson Medical Plaza, anMOB located on the campus of the Henderson Hospital. Henderson Hospital, which is owned and operated by a subsidiary of UHS, is a newly constructed,130-bed acute care hospital that was completed and opened during the fourth quarter of 2016. Henderson Medical Plaza, which contains approximately78,800 rentable square feet, is scheduled to be completed and opened during the first quarter of 2017. A ground lease has been executed between the limitedliability company that owns the MOB and a subsidiary of UHS, the terms of which include a seventy-five year lease term with two, ten-year renewal optionsat the lessee’s option at an adjusting lease rate. We have invested $9.5 million on the development and construction of this MOB as of December 31, 2016.During the first quarter of 2015, we purchased from wholly-owned subsidiaries of UHS, the real property of two newly-constructed and recentlyopened FEDs located in Weslaco and Mission, Texas. Each FED consists of approximately 13,600 square feet and is operated by wholly-owned subsidiariesof UHS. In connection with these acquisitions, ten-year lease agreements with six, 5-year renewal terms were 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 a cumulative and compounded basis, and thelast two, 5-year renewal terms (covering the years 2045 through 2054) will be at the then fair market value lease rates. These leases are cross-defaulted withone another. UHS has the option to purchase the leased properties upon the expiration of the fixed term and each five-year extended term at the fair marketvalue at that time. The aggregate acquisition cost of these facilities was approximately $12.8 million, and the aggregate rental revenue earned by us at thecommencement of the leases is approximately $900,000 annually. 65 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. Pursuant to the terms of the lease, we and thewholly-owned subsidiary of UHS were both required to obtain independent appraisals of the property to determine its fair market value. On December 31,2014, The Bridgeway, a 103-bed behavioral health facility located in North Little Rock, Arkansas, was sold to UHS for $17.3 million. A gain on divestitureof real property of approximately $13.0 million is included in our results of operations for the twelve-month period ended December 31, 2014. Prior to itsdivestiture in 2014, our revenues, net cash provided by operating activities and funds from operations included approximately $1.1 million earned annuallyin connection with The Bridgeway’s lease.Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an AdvisoryAgreement (the “Advisory Agreement”) dated December 24, 1986. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investmentprogram to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investmentopportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved bythe Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilizeindependent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The AdvisoryAgreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of eachyear; however, it is renewable by us, subject to a determination by the Independent Trustees, that the Advisor’s performance has been satisfactory. Ouradvisory fee was 0.70% during each of 2016, 2015 and 2014 of our average invested real estate assets, as derived from our consolidated balance sheet. InDecember of 2016, based upon a review of our advisory fee and other general and administrative expenses as compared to an industry peer group, theAdvisory Agreement was renewed for 2017 pursuant to the same terms as the Advisory Agreement in place during the last three years.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 2016, 2015 or 2014 since the incentive fee requirements were not achieved. Advisory fees incurred and paid(or payable) to UHS amounted to $3.3 million during 2016, $2.8 million during 2015 and $2.5 million during 2014 and were based upon average investedreal estate assets of $466 million, $401 million and $363 million during 2016, 2015 and 2014, respectively.Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of December 31, 2016 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, 2016 and 2015, UHS owned 5.8% and 5.9%, 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 24%, 25% and 28% of our consolidated revenues for the yearsended December 31, 2016, 2015 and 2014, respectively, and since a subsidiary of UHS is our Advisor, you are encouraged to obtain the publicly availablefilings for Universal Health Services, Inc. from the SEC’s website. These filings are the sole responsibility of UHS and are not incorporated by referenceherein. (3) NEW CONSTRUCTION, ACQUISITIONS, DISPOSITIONS AND PROPERTY EXCHANGE TRANSACTIONNew Construction:During the first quarter of 2016, we committed to invest up to $21.1 million in the development and construction of the Henderson Medical Plaza,an MOB located on the campus of the Henderson Hospital. Henderson Hospital, which is owned and operated by a subsidiary of UHS, is a newly constructed,130-bed acute care hospital that was completed and opened during the fourth 66 quarter of 2016. Henderson Medical Plaza, which contains approximately 78,800 rentable square feet, is scheduled to be completed and opened during thefirst quarter of 2017. A ground lease has been executed between the limited liability company that owns the MOB and a subsidiary of UHS, the terms ofwhich include a seventy-five year lease term with two, ten-year renewal options at the lessee’s option at an adjusting lease rate. We have invested $9.5million on the development and construction for this MOB as of December 31, 2016. 2016:Acquisitions:During 2016, we paid approximately $60.4 million in cash, and assumed approximately $7.1 million of third-party debt that is non-recourse to us, to: •purchase the 2704 North Tenaya Way MOB located in Las Vegas, Nevada, during the fourth quarter for a total purchase price ofapproximately $15.3 million, including the assumption of approximately $7.1 million of third-party debt that is non-recourse to us. Theproperty consists of approximately 45,000 rentable square feet and is fully occupied pursuant to the terms of a triple-net lease with aremaining lease term of approximately 7.1 years at the time of acquisition. •purchase the Frederick Memorial Hospital Crestwood, an MOB located in Frederick, Maryland, during the third quarter forapproximately $24.3 million. The property, which consists of approximately 62,300 rentable square feet, is fully occupied pursuant tothe terms of triple-net leases with an average remaining lease term of approximately 12 years at the time of acquisition. •purchase the Chandler Corporate Center III located in Chandler, Arizona, during the second quarter for approximately $18.0million. The property, which consists of 82,000 rentable square feet, is currently 92% occupied by one tenant pursuant to the terms of atwelve year escalating triple-net lease, with a ten year fair-market value renewal option. The lease had a remaining lease term ofapproximately 11.3 years at the time of acquisition. •purchase the Madison Professional Office Building located in Madison, Alabama, during the first quarter for approximately $10.1million, including a $150,000 deposit paid in 2015. This multi-tenant property consists of approximately 30,100 rentable square feetand is fully occupied with an average remaining lease term of approximately 6.2 years at the time of acquisition.The aggregate purchase price for these acquisitions was allocated to the assets acquired and liabilities assumed consisting of tangible property andintangible assets and liabilities, based on the fair value estimated or finalized at acquisition as detailed in the table below. Previous reported estimatedpurchase price allocations that have been finalized in the fourth quarter did not have a material impact on our consolidated financial statements. Theintangible assets include the value of in-place leases at the properties at the time of acquisition as well as the above market lease values. The value of the in-place leases will be amortized over the average remaining lease terms of approximately 6 to 12 years at the time of acquisition (aggregate weighted averageof 8.0 years at December 31, 2016). The above/below market leases, which are reflected below as intangible assets/below-market intangibles will beamortized over the remaining term of the respective leases. The estimated aggregate allocation is as follows: Land$9,914Buildings and improvements50,117Intangible assets9,211Below-market lease intangibles(1,287)Deposit paid in 2015………………………………………...……………………………….. (150)Debt (including fair value adjustment of $362)…...……..……………………………….…..(7,499) Financing fees paid on debt acquired……………...……..……………………………….….. 83 Net cash paid$60,389 For these properties acquired during 2016, we recorded aggregate net revenue of approximately $2.4 million since the date of acquisition. Theaggregate net losses generated by these properties since the date of acquisition, including the cost of borrowings and advisory fee expenses wasapproximately $134,000. 67 Assuming the 2016 acquisitions occurred on January 1, 2015, our unaudited pro forma net revenues for the year ended December 31, 2015 wouldhave been approximately $67.8 million and our unaudited pro forma net income for the year ended December 31, 2015 would have been approximately$22.4 million, or $1.68 per diluted share. The Chandler Corporate Center III was not operational during the first nine months of 2015. Assuming theseacquisitions occurred on January 1, 2016, our unaudited pro forma net revenues for the year ended December 31, 2016, would have been approximately$70.2 million and our unaudited pro forma net income for the year ended December 31, 2016 would have been approximately $16.7 million, or $1.24 perdiluted share.As of December 31, 2016, our net intangible assets total $23.8 million (net of $27.1 million accumulated amortization) and substantially all of theamount is related to acquired, in-place leases which have a weighted average remaining amortization period of 4.3 years.Divestitures: There were no divestitures during 2016.2015:Property Exchange Transaction:In May, 2015, in exchange for the real property of Sheffield Medical Building (“Sheffield”), a 73,446 square foot MOB located in Atlanta, Georgia,we received $2 million in cash and the real property of two MOBs located in Sandy Springs and Vinings, Georgia, from an unrelated third party. Inconnection with the two MOBs acquired in this transaction, triple net, master lease agreements applicable to 100% of the combined 36,700 rentable squarefeet of these properties were executed with the counterparty. These master lease agreements have initial terms of 15 years and provide for 3% annual rentincreases. We recorded an $8.7 million gain which is included in our Consolidated Statements of Income for the year ended December 31, 2015, representingthe difference between recorded net book value of Sheffield and the fair values of the properties exchanged, combined with the cash proceeds received. Acquisitions:In February, 2015, we purchased the Haas Medical Office Park, two single story buildings having an aggregate of approximately 16,000 rentablesquare feet, located in Ottumwa, Iowa, for approximately $4.1 million.In January and February of 2015, we purchased from wholly-owned subsidiaries of UHS, the real property of two newly-constructed and recentlyopened FEDs located in Weslaco and Mission, Texas, for an aggregate acquisition cost of approximately $12.8 million. Each FED consists of approximately13,600 square feet and is operated by wholly-owned subsidiaries of UHS. In connection with these acquisitions, ten-year lease agreements with six 5-yearrenewal terms were executed with UHS for each FED. In connection with the lease agreements, the lessee shall have the option to purchase the leased propertyupon the expiration of the fixed term and each five-year extended term at the fair market value at that time. The aggregate purchase price for these three MOBs and two FEDs was allocated to the assets acquired and liabilities assumed consisting of tangibleproperty and identified intangible assets, based on their respective fair values at acquisition as detailed in the table below. Substantially all of the intangibleassets include the value of the in-place leases at the MOBs at the time of acquisition which will be amortized over the average remaining lease term ofapproximately 15.0 years at the time of acquisition (aggregate weighted average of 13.4 years at December 31, 2016) for each of the MOBs located in SandySprings and Vinings, Georgia and approximately 10.4 years at the time of acquisition (aggregate weighted average of 8.6 years at December 31, 2016) for theHaas Medical Office Park. Land$7,050Buildings and improvements17,518Intangible assets2,182Cash received- exchange transaction 2,000Other liabilities(116)Deposit paid in 2014 (100)Net book value of property divested in exchange transaction(3,027)Gain on exchange transaction(8,742) Net cash paid$16,765 68 2014:Acquisitions:In August, 2014, we purchased the Hanover Emergency Center, a 22,000 rentable square feet, free-standing, full service emergency and imagingcenter, located in Mechanicsville, VA, for approximately $8.6 million. The single-tenant property is occupied pursuant to the terms of a 10-year lease withHCA Health Services of Virginia, Inc.In January, 2014, we paid an aggregate of $7.2 million, (including a $150,000 deposit made in 2013), to purchase the following in a singletransaction: (i) The Children’s Clinic at Springdale – a 9,800 square foot, single-tenant medical office building located in Springdale, Arkansas, and; (ii) TheNorthwest 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 7.5 years at December 31, 2016) for the Hanover Emergency Center andapproximately 9.7 years at the time of acquisition (aggregate weighted average of 6.7 years at December 31, 2016) for the Arkansas facilities. Land$3,010Buildings and improvements10,664Intangible assets2,076Deposit paid in 2013(150) Net cash paid$15,600 Additionally, during January and August, 2014, we spent an aggregate of $7.0 million, including $4.7 million in cash plus an additional $2.3 millionin the form of a note payable to the previous third-party member (which was fully repaid in January, 2015) to purchase the minority ownership interests heldby third party members in eight LLCs (as noted in the table below) in which we previously held various non-controlling majority ownership interests rangingfrom 85% to 95%. Name of LLC/LP Ownershipprior tominorityinterestpurchase Property Owned by LLC Effective DatePalmdale Medical Properties 95% Palmdale Medical Plaza January 1, 2014Sparks Medical Properties 95% Vista Medical Terrace & Sparks MOB January 1, 2014DVMC Properties 90% Desert Valley Medical Center August 1, 2014Santa Fe Scottsdale 90% Santa Fe Professional Plaza August 1, 2014PCH Medical Properties 85% Rosenberg Children’s Medical Plaza August 1, 2014Sierra Medical Properties 95% Sierra San Antonio Medical Plaza August 1, 2014PCH Southern Properties 95% Phoenix Children’s East Valley Care Center August 1, 20143811 Bell Medical Properties 95% 3811 E. Bell 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 69 years at the time of acquisition (aggregate weighted average of 4.0 years at December 31, 2016) for the August, 2014 transactions and 5.3 years at the time ofacquisition (aggregate weighted average of 3.9 years at December 31, 2016) for the January, 2014 transactions. Other than the increased depreciation andamortization expense resulting from the amortization of the intangible assets recorded in connection with these transactions, there was no material impact onour net income as a result of the consolidation of these LLCs.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. A $13.0 gain is included in our Consolidated Statement of Income for the twelve months endedDecember 31, 2014, representing the difference between the fair market value and the book value of this property. (4) LEASESAll 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 adjustments, are as follows (amounts inthousands): 2017 $54,922 2018 49,885 2019 44,647 2020 39,742 2021 35,837 Thereafter 64,932 Total minimum base rents $289,965 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 INSTRUMENTSDebt:Management routinely monitors and analyzes the Trust’s capital structure in an effort to maintain the targeted balance among capital resourcesincluding the level of borrowings pursuant to our $250 million revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debtsecured by the real property of our properties and our level of equity including consideration of additional equity issuances pursuant to our at-the-marketequity issuance program. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projectedoccupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust’s current stock price, the capital resourcesrequired for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of theTrust’s current balance of revolving credit facility borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capitalresource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust’s growth.On March 27, 2015, we entered into a $185 million revolving credit agreement (“Credit Agreement”) which was amended on May 24, 2016 to, amongother things, increase the borrowing capacity to $250 million. The amended Credit Agreement, which is scheduled to mature in March, 2019, includes a $40million sub limit for letters of credit and a $20 million sub limit for 70 swingline/short-term loans. The Credit Agreement also provides a one-time option to extend the maturity date for an additional one year period, and anoption to increase the total facility borrowing capacity up to an additional $50 million, subject to lender agreement. Borrowings under the Credit Agreementare guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in andliens on all equity interests in the Trust’s wholly-owned subsidiaries. Borrowings made pursuant to the Credit Agreement will bear interest, at our option, atone, two, three, or six month LIBOR plus an applicable margin ranging from 1.50% to 2.00% or at the Base Rate plus an applicable margin ranging from0.50% to 1.00%. The Credit Agreement defines “Base Rate” as the greatest of: (a) the administrative agent’s prime rate; (b) the federal funds effective rateplus 1/2 of 1%, and; (c) one month LIBOR plus 1%. A commitment fee of 0.20% to 0.40% (depending on our total leverage ratio) will be charged on theaverage unused portion of the revolving credit commitments. The margins over LIBOR, Base Rate and the commitment fee are based upon our ratio of debt tototal capital. At December 31, 2016, the applicable margin over the LIBOR rate was 1.625%, the margin over the Base Rate was 0.625%, and the commitmentfee was 0.25%.At December 31, 2016, we had $201.5 million of outstanding borrowings and $2.7 million of letters of credit outstanding against our revolving creditagreement. The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was $201.5 million at December 31, 2016. Wehad $45.8 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of December 31, 2016. There are nocompensating balance requirements. The average amount outstanding under our revolving credit agreement (which as amended in May, 2016 to anincreased borrowing capacity of $250 million, as discussed above) was $164.2 million in 2016, with a corresponding effective interest rate, includingcommitment fees, of 2.3%. The average amount outstanding under our revolving credit agreement was $114.3 million in 2015 with a corresponding effectiveinterest rate, including commitment fees, of 2.1%. The average amount outstanding under our previous revolving credit agreement (which was replaced inMarch, 2015, as discussed above), was $104.6 million in 2014 with a corresponding effective interest rate, including commitment fees, of 2.4%. The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions andother investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenantsregarding the Trust’s ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of totalunsecured debt to total unencumbered asset value, and minimum net worth, as well as customary events of default, the occurrence of which may trigger anacceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants at December 31, 2016. We also believe thatwe would remain in compliance 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 2016 Tangible net worth $125,000 $167,462 Total leverage < 60 % 48.6%Secured leverage < 30 % 18.1%Unencumbered leverage < 60 % 50.3%Fixed charge coverage> 1.50x 3.6x 71 As indicated on the following table, we have fifteen mortgages, all of which are non-recourse to us, included on our consolidated balance sheet as ofDecember 31, 2016 (amounts in thousands): Facility Name OutstandingBalance(in thousands)(a.) InterestRate MaturityDateSummerlin Hospital Medical Office Building III floating rate mortgage loan (b.) $10,384 3.88% March, 2017Peace Health fixed rate mortgage loan (b.) 20,309 5.64% April, 2017Auburn Medical II floating rate mortgage loan (b.) 6,726 3.37% April, 2017Medical Center of Western Connecticut fixed rate mortgage loan (b.) 4,535 6.00% June, 2017Summerlin Hospital Medical Office Building II fixed rate mortgage loan (b.) 11,092 5.50% October, 2017Phoenix Children’s East Valley Care Center fixed rate mortgage loan (b.) 6,202 5.88% December, 2017Centennial Hills Medical Office Building floating rate mortgage loan 10,040 3.88% January, 2018Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan 4,231 3.88% February, 2018Rosenberg Children’s Medical Plaza fixed rate mortgage loan 8,146 4.85% May, 2018Vibra Hospital-Corpus Christi fixed rate mortgage loan 2,723 6.50% July, 2019700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 6,248 4.54% June, 2022BRB Medical Office Building fixed rate mortgage loan 6,316 4.27% December, 2022Desert Valley Medical Center fixed rate mortgage loan 5,081 3.62% January, 20232704 North Tenaya Way fixed rate mortgage loan 7,137 4.95% November, 2023Tuscan Professional Building fixed rate mortgage loan 4,992 5.56% June, 2025Total, excluding net debt premium and net financing fees 114,162 Less net financing fees (381) Plus net debt premium 436 Total mortgage notes payable, non-recourse to us, net $114,217 (a.)All mortgage loans require monthly principal payments through maturity and either fully amortize or include a balloon principal payment uponmaturity.(b.)This loan is scheduled to mature within the next twelve months, at which time we will decide whether to refinance pursuant to a new mortgage loan orby utilizing borrowings under our Credit Agreement.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 $115.7 million as of December 31, 2016. We consider these to be “Level 2” in the fair value hierarchy as outlined in the authoritativeguidance for disclosures in connection with debt instruments. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has noimpact on interest incurred or cash flow.At December 31, 2015, we had fourteen mortgages, all of which were non-recourse to us, included in our consolidated balance sheet. The combinedoutstanding balance of these fourteen mortgages was $110.3 million (excluding net debt premium of $298,000 and net of net financing fees of $398,000 atDecember 31, 2015), and had a combined fair value of approximately $112.4 million at December 31, 2015. We consider these to be “Level 2” in the fairvalue hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments. 72 As of December 31, 2016, our aggregate consolidated scheduled debt repayments (including mortgages) are as follows (amounts in thousands): 2017 $61,115 2018 23,043 2019 (a.) 205,251 2020 1,292 2021 1,356 Later 23,605 Total $315,662 (a.)Includes repayment of $201.5 million of outstanding borrowings under the terms of our $250 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, 2016, no payments have been made to us by thecounterparties pursuant to the terms of these caps which expired in January, 2017. During the second quarter of 2016, we entered into an interest rate cap on the total notional amount of $30 million whereby we paid a premium of$115,000. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.50% and one-month LIBOR if one-monthLIBOR rises above 1.50% during the term of the cap. This interest rate cap became effective in January, 2017, coinciding with the expiration of the above-mentioned interest rate caps and expires in March, 2019. During the third quarter of 2016, we entered into an additional interest rate cap agreement on a total notional amount of $30 million whereby we paida premium of $55,000. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.5% and one-month LIBOR if one-month LIBOR rises above 1.5% during the term of the cap. This interest rate cap became effective in October, 2016 and expires in March, 2019. (6) DIVIDENDS AND EQUITY ISSUANCE PROGRAMDividends:During each of the last three years, dividends were declared and paid by us as follows: •2016: $2.60 per share of which $2.00 per share was ordinary income and $.60 per share was a return of capital distribution. •2015: $2.56 per share of which $2.17 per share was ordinary income and $.39 per share was a return of capital distribution. •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).Equity Issuance Program:During the second quarter of 2016, we recommenced our at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we maysell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of approximately $23.3 million to or through Merrill Lynch,Pierce, Fenner and Smith, Incorporated (“Merrill Lynch”), as sales agent and/or principal. The common shares were offered pursuant to the RegistrationStatement filed with the Securities and Exchange Commission, which became effective during the fourth quarter of 2015.Pursuant to the ATM Program, during the twelve months ended December 31, 2016, there were 249,016 shares issued at an average price of $55.30 pershare (all of which were issued during the second quarter), which generated approximately $13.2 million of cash net proceeds (net of approximately$558,000, consisting of compensation of $344,000 to Merrill Lynch, as well as $214,000 of other various fees and expenses). As of December 31, 2016, wehad approximately $9.5 million of gross proceeds still available for issuance under the program. Since inception of this ATM program through December 31,2016, we have issued 829,916 shares at an 73 average price of $48.77 per share, which generated approximately $38.8 million of net proceeds (net of approximately $1.7 million, consisting ofcompensation of $1.0 million to Merrill Lynch as well as $680,000 of other various fees and expenses). We have, and intend, to use the proceeds generatedpursuant to the ATM program to reduce amounts outstanding under our revolving credit agreement. After such repayment of debt, we may re-borrow fundsunder our revolving credit agreement for general operating purposes, including working capital, capital expenditures, acquisitions, dividend payments andthe refinance of third-party debt.There were no shares issued pursuant to an ATM program during 2015. During 2014, pursuant to an ATM equity issuance program in effect at thattime, which is now expired, we issued 426,187 shares at an average price of $47.51 per share, which generated approximately $19.5 million of net proceeds,approximately $1.1 million of which were received in early January, 2015 (net of approximately $700,000, consisting of compensation of $506,000 toMerrill Lynch, as well as $195,000 of other various fees and expenses). (7) INCENTIVE PLANSDuring 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 which was amended and restated in 2016 (the “2007 Plan”). An aggregate of 125,000 shares wereauthorized for issuance under this plan and a total of 77,285 shares, net of cancellations, have been issued pursuant to the terms of this plan, 57,825 of whichhave vested as of December 31, 2016. At December 31, 2016 there are 47,715 shares remaining for issuance under the terms of the 2007 Plan.During 2016, there were 9,730 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 $56.34 per share ($548,188 in the aggregate). These restricted shares are scheduled to vest in June of 2018(the second anniversary of the date of grant).During 2015, there were 9,730 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 $47.75 per share ($464,608 in the aggregate). These restricted shares are scheduled to vest in June of 2017(the second anniversary of the date of grant).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 vested in June of 2016 (the secondanniversary of the date of grant).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 $481,000, $427,000 and $399,000 during 2016, 2015 and 2014, respectively. Theremaining expenses associated with these grants is approximately $485,000 and will be recorded over the remaining weighted average vesting period foroutstanding restricted Shares of Beneficial Interest of approximately one year at December 31, 2016.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 remained exercisable, in accordance with the terms of the outstanding agreements. All stock options were granted with an exerciseprice equal 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, andexpired in ten years. DERs on outstanding awards were earned in amounts equal to the cash or stock dividends declared subsequent to the date of grant. As ofDecember 31, 2016, there were no options outstanding under the 1997 Plan. The net expense recorded in connection with the DERs did not have a materialimpact on our consolidated financial statements during each of the years ended December 31, 2016, 2015 and 2014.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, provided for thecurrent payment of dividend equivalents in the years in which dividends were declared and paid or, if later, when the related options became vested. Therewere no DERs were outstanding at December 31, 2016. DERs with respect to 23,000 shares and 36,000 shares were outstanding at December 31, 2015 and2014, respectively. In December of 2016, 2015 and 2014, DERs which were vested and accrued as of each respective date, were paid to officers and Trusteesof the Trust amounting to approximately $30,000, $75,000 and $94,000, respectively. 74 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, 2014 40,000 $35.65 $36.53/$30.06Exercised (4,000) 33.07 $30.06/$34.07Balance, January 1, 2015 36,000 $35.94 $34.90/$36.53Exercised (13,000) 34.90 $34.90/$34.90Balance, January 1, 2016 23,000 $36.53 $36.53/$36.53Exercised (23,000) 36.53 $36.53/$36.53Outstanding options vested and exercisable as of December 31, 2016 — N/A N/A During 2016, there were 23,000 stock options exercised with a total in-the-money value of $520,420. During 2015, there were 13,000 stock optionsexercised with a total in-the-money value of $154,500. During 2014, there were 4,000 stock options exercised with a total in-the-money value of$44,160. There are no options outstanding at December 31, 2016. (8) SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATESIn accordance with the Financial Accounting Standards Board’s (“FASB”) standards and guidance relating to accounting for investments and realestate ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity method of accounting. The third-partymembers 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.In the Consolidated Statements of Cash Flows, distributions and equity in net income are presented net as cash flows from operatingactivities. Cumulative distributions received exceeding cumulative equity in earnings represent returns of investments and are classified as cash flows frominvesting activities in the Consolidated Statements of Cash Flows.At December 31, 2016, we have non-controlling equity investments or commitments in five jointly-owned LLCs/LPs which own MOBs. As ofDecember 31, 2016, we accounted for these LLCs/LPs on an unconsolidated basis pursuant to the equity method since they are not variable interest entitiesand we do not have a controlling voting interest. The majority of these entities are joint-ventures between us and non-related parties that manage and holdminority ownership interests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet itsoperating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financialsupport required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but notlimited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our solediscretion, additional cash fundings are typically advanced as equity or member loans. These entities maintain property insurance on the properties.Effective February 1, 2016, we purchased an additional 10% ownership interest in the Arlington Medical Properties, LLC from the third-partyminority member for approximately $4.8 million in cash, subject to certain agreed upon terms and conditions. Including this additional ownership interest,we currently own 85% of this LLC which is accounted for on an unconsolidated basis pursuant to the equity method.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. 75 Name of LLC/LP Ownershipprior tominorityinterestpurchase Property Owned by LLC Effective DateDVMC Properties 90% Desert Valley Medical Center August 1, 2014Santa Fe Scottsdale 90% Santa Fe Professional Plaza August 1, 2014PCH Medical Properties 85% Rosenberg Children’s Medical Plaza August 1, 2014Sierra Medical Properties 95% Sierra San Antonio Medical Plaza August 1, 2014PCH Southern Properties 95% Phoenix Children’s East Valley Care Center August 1, 20143811 Bell Medical Properties 95% North Valley Medical Plaza August 1, 2014 The following property table represents the five LLCs or LPs in which we own a noncontrolling interest and were accounted for under the equitymethod as of December 31, 2016: Name of LLC/LP Ownership Property Owned by LLCSuburban Properties 33% St. Matthews Medical Plaza IIBrunswick Associates (a.) 74% Mid Coast Hospital MOBArlington Medical Properties (b.) 85% Saint Mary’s Professional Office 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 $8.6 million, which is non-recourse to us, outstanding as of December 31, 2016.(b.)We have funded $5.2 million in equity as of December 31, 2016 and are committed to invest an additional $623,000. During the fourth quarter of2015, we advanced this LLC a member loan, the funds of which were utilized to repay its $22.8 million outstanding third-party mortgage loan on itsscheduled maturity date. The member loan has an interest rate of 5.29% and is scheduled to mature in January, 2018. Additionally, pursuant to theterms and conditions of an agreement executed in February, 2016, we purchased an additional 10% of the ownership interest in this LLC from theexisting third-party member for approximately $4.8 million in cash, thereby increasing our ownership interest to 85%.(c.)We have funded $2.8 million in equity as of December 31, 2016, and are committed to fund an additional $149,000. This building is on the campus ofa UHS hospital and has tenants that include subsidiaries of UHS. This LP has a third-party term loan of $14.4 million, which is non-recourse to us,outstanding as of December 31, 2016(d.)We have committed to invest up to $2.5 million in equity and debt financing and are committed to invest an additional $369,000. This LP has a third-party term loan of $5.3 million, which is non-recourse to us, outstanding as of December 31, 2016.Below are the combined statements of income for the LLCs/LPs accounted for under the equity method at December 31, 2016, 2015 and 2014. Thedata for the year ended December 31, 2014 includes the financial results for the six above-mentioned LLCs in which we purchased the minority ownershipinterests in August, 2014 for the period of January through July of 2014 (during which they were accounted for under the equity method). For the Year Ended December 31, 2016 2015 2014(b.) (amounts in thousands) Revenues $15,252 $14,347 $17,292 Operating expenses 5,439 5,605 6,769 Depreciation and amortization 2,554 2,398 2,968 Interest, net 2,565 2,578 4,261 Net income $4,694 $3,766 $3,294 Our share of net income (a.) $4,456 $2,536 $2,428 (a.)Our share of net income during 2016, 2015 and 2014, includes interest income earned by us on various advances made to LLCs of approximately $1.2million, $200,000 and $834,000, 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 North Valley Medical Plaza) on a consolidated basis as ofAugust 1, 2014. Prior to August 1, 2014, the financial results of these entities were 76 accounted for under the equity method on an unconsolidated basis. The year ended December 31, 2014 includes the financial results of the sixmentioned LLCs for seven months ended July 31, 2014. Below are the combined balance sheets for the five LLCs that were accounted for under the equity method as of December 31, 2016 and 2015: December 31, 2016 2015 (amounts in thousands) Net property, including CIP $60,970 $61,668 Other assets 4,598 5,264 Total assets $65,568 $66,932 Other liabilities $3,334 $2,538 Mortgage notes payable, non-recourse to us 28,367 28,895 Advances payable to us (a.) 21,638 22,489 Equity 12,229 13,010 Total liabilities and equity $65,568 $66,932 Our share of equity in and advances to LLCs reflected as: Investments in LLCs $13,955 $9,108 Advances to LLCs 21,638 22,489 Investments in and advances to LLCs before amounts included inaccrued expenses and other liabilities 35,593 31,597 Amounts included in accrued expenses and other liabilities (1,862) (1,105)Our share of equity in and advances to LLCs, net $33,731 $30,492 (a.)Consists of a 5.29% member loan which is scheduled to mature in January, 2018. As of December 31, 2016, 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): 2017 $5,727 2018 445 2019 466 2020 484 2021 13,582 2022 and thereafter 7,663 Total $28,367 Mortgage Loan Balance (a.)Name of LLC/LP 12/31/2016 12/31/2015 Maturity DateFTX MOB Phase II (4.75% fixed rate mortgage loan) $5,301 $5,427 August, 2017 (b.)Grayson Properties (5.034% fixed rate mortgage loan) 14,438 14,670 September, 2021Brunswick Associates (3.64% fixed rate mortgage loan) 8,628 8,798 December, 2024 $28,367 $28,895 (a.)All mortgage loans require monthly principal payments through maturity and include a balloon principal payment upon maturity. (b.)This loan is scheduled to mature within the next twelve months, at which time it will be refinanced pursuant to: (i) a new third-party mortgageloan; (ii) a member loan extended from us to the LLC, or; (iii) equity contributions to the LLC by us and the third-party member. Funds requiredfrom us to the LLC for either the member loan or our share of an equity contribution would likely be borrowed under our Credit Agreement.Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold non-controlling ownership interests, thethird-party member and the Trust, at any time, potentially subject to certain conditions, have the right to make an offer (“Offering Member”) to the othermember(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member(“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member(“Offer to Purchase”) at the 77 equivalent 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 REPORTINGOur 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 performing properties not meeting our long-term investment objectives. The proceeds of sales are typically reinvested in newdevelopments or acquisitions, which we believe will meet our planned rate of return. It is our intent that all healthcare and human service facilities will beowned or developed for investment purposes. Our revenue and net income are generated from the operation of our investment portfolio.Our portfolio is located throughout the United States, however, we do not distinguish or group our operations on a geographical basis for purposes ofallocating resources or measuring performance. We review operating and financial data for each property on an individual basis; therefore, we define anoperating segment as our individual properties. Individual properties have been aggregated into one reportable segment based upon their similarities 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) 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts) Revenues $16,226 $16,461 $16,801 $17,593 $67,081 Net income $4,428 $4,523 $3,818 $4,446 $17,215 Total basic earnings per share $0.33 $0.34 $0.28 $0.33 $1.28 Total diluted earnings per share $0.33 $0.34 $0.28 $0.33 $1.28 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (amounts in thousands, except per share amounts) Revenues $16,202 $16,049 $15,686 $16,013 $63,950 Net income before gains $3,696 $3,262 $3,639 $4,352 $14,949 Gain on property exchange — 8,742 — — $8,742 Net income $3,696 $12,004 $3,639 $4,352 $23,691 Total basic earnings per share $0.28 $0.90 $0.27 $0.33 $1.78 Total diluted earnings per share $0.28 $0.90 $0.27 $0.33 $1.78 78 Schedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2016(amounts in thousands) Gross amount at Date of which carried Completion of Initial Cost at end of period Accumulated Construction, Description Encumbrance(c.) Land Building&Improv. Adjustmentsto Basis (a.) Land Building &Improvements CIP Total Depreciationas of Dec.31,2016 Acquisitionor Significantimprovement DateAcquired AverageDepreciableLifeInland Valley Regional Medical Center Wildomar, California — $2,050 $10,701 $14,596 $2,050 $25,297 $27,347 $12,596 2007 1986 43 YearsMcAllen Medical Center McAllen, Texas — 4,720 31,442 10,189 6,281 40,070 46,351 26,276 1994 1986 42 YearsWellington Regional Medical Center West Palm Beach, Florida — 1,190 14,652 17,370 1,663 31,549 33,212 18,410 2006 1986 42 YearsHealthSouth Deaconess Rehabilitation Hospital Evansville, Indiana — 500 6,945 1,062 500 8,007 8,507 5,475 1993 1989 40 YearsKindred Chicago Central Hospital Central Chicago, Illinois — 158 6,404 1,838 158 8,242 8,400 8,242 1993 1986 25 YearsFamily Doctor’s Medical OfficeBuilding Shreveport, Louisiana — 54 1,526 494 54 2,020 2,074 997 1991 1995 45 YearsKelsey-Seybold Clinic at King'sCrossing Kingwood, Texas — 439 1,618 878 439 2,496 2,935 1,352 1995 1995 45 YearsProfessional Buildings at King'sCrossing Kingwood, Texas — 439 1,837 251 439 2,088 9 2,536 1,008 1995 1995 45 YearsChesterbrook Academy Audubon, Pennsylvania — 307 996 — 307 996 1,303 456 1996 1996 45 YearsChesterbrook Academy New Britain, Pennsylvania — 250 744 — 250 744 994 343 1991 1996 45 YearsChesterbrook Academy Uwchlan, Pennsylvania — 180 815 — 180 815 995 374 1992 1996 45 YearsChesterbrook Academy Newtown, Pennsylvania — 195 749 — 195 749 944 345 1992 1996 45 YearsThe Southern Crescent Center (b.) Riverdale, Georgia — 1,130 5,092 (2,271) 1,130 2,821 3,951 2,419 1994 1996 45 YearsThe Southern Crescent Center II (b.) Riverdale, Georgia — — — 4,981 806 4,175 4,981 2,278 2000 1998 35 YearsThe Cypresswood Professional Center Spring, Texas — 573 3,842 813 573 4,655 5,228 2,770 1997 1997 35 Years701 South Tonopah Building Las Vegas, Nevada — — 1,579 68 — 1,647 1,647 1,077 1999 1999 25 YearsMedical Center of Western Connecticut Danbury, Connecticut 4,535 1,151 5,176 544 1,151 5,720 6,871 3,349 2000 2000 30 YearsVibra Hospital of Corpus Christi Corpus Christi, Texas 2,723 1,104 5,508 — 1,104 5,508 6,612 1,400 2008 2008 35 YearsApache Junction Medical Plaza Apache Junction, AZ — 240 3,590 1,159 240 4,749 4,989 1,009 2004 2004 30 YearsAuburn Medical Office Building II Auburn, WA 6,726 — 10,200 176 — 10,376 10,376 1,716 2009 2009 36 YearsBRB Medical Office Building Kingwood, Texas 6,316 430 8,970 32 430 9,002 9,432 1,471 2010 2010 37 YearsCentennial Hills Medical Office Building Las Vegas, NV 10,040 — 19,890 1,299 — 21,189 86 21,275 3,733 2006 2006 34 YearsDesert Springs Medical Plaza Las Vegas, NV — 1,200 9,560 1,081 1,200 10,641 11,841 2,175 1998 1998 30 Years700 Shadow Lane & Goldring MOBs Las Vegas, NV 6,248 400 11,300 3,012 400 14,312 288 15,000 2,742 2003 2003 30 YearsSpring Valley Hospital MOB I Las Vegas, NV — — 9,500 709 — 10,209 22 10,231 1,865 2004 2004 35 Years 79Schedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2016 (continued)(amounts in thousands) Gross amount at Date of which carried Completion of Initial Cost at end of period Accumulated Construction, Description Encumbrance(c.) Land Building&Improv. Adjustmentsto Basis (a.) Land Building &Improvements CIP Total Depreciationas of Dec. 31,2016 Acquisitionor Significantimprovement DateAcquired AverageDepreciableLifeSpring Valley Hospital MOB II Las Vegas, NV — — 9,800 488 — 10,288 10,288 1,860 2006 2006 34 YearsSummerlin Hospital MOB I Las Vegas, NV — 460 15,440 824 460 16,264 113 16,837 3,282 1999 1999 30 YearsSummerlin Hospital MOB II Las Vegas, NV 11,092 370 16,830 1,275 370 18,105 53 18,528 3,523 2000 2000 30 YearsSummerlin Hospital MOB III Las Vegas, NV 10,384 — 14,900 2,137 — 17,037 17,037 2,698 2009 2009 36 YearsEmory at Dunwoody Building Dunwoody, GA — 782 3,455 — 782 3,455 4,237 658 2011 2011 35 YearsForney Medical Plaza Forney, TX — 910 11,960 55 910 12,015 1 12,926 2,565 2011 2011 35 YearsLake Pointe Medical Arts Building Rowlett, TX — 1,100 9,000 31 1,100 9,031 1 10,132 1,687 2011 2011 35 YearsTuscan Professional Building Irving, TX 4,992 1,100 12,525 244 1,100 12,769 13,869 2,176 2011 2011 35 YearsPeace Health Medical Clinic Bellingham, WA 20,309 1,900 24,910 — 1,900 24,910 26,810 4,201 2012 2012 35 YearsNorthwest Texas Professional Office Tower Amarillo, TX — — 7,180 — — 7,180 7,180 967 2012 2012 35 YearsWard Eagle Office Village Farmington Hills, MI — 220 3,220 — 220 3,220 3,440 406 2013 2013 35 Years5004 Poole Road MOB Denison, TX — 96 529 — 96 529 625 63 2013 2013 35 YearsDesert Valley Medical Center (d.) Phoenix, AZ 5,081 2,280 4,624 400 2,280 5,024 1 7,305 506 1996 1996 30 YearsHanover Emergency Center Mechanicsville, VA — 1,300 6,224 — 1,300 6,224 7,524 490 2014 2014 35 YearsHaas Medical Office Park Ottumwa, IA — — 3,571 — — 3,571 3,571 222 2015 2015 35 YearsMission Free-standing Emergency Department Mission, TX — 1,441 4,696 1,441 4,696 6,137 301 2015 2015 35 YearsNorth Valley Medical Plaza (d.) Phoenix, AZ — 930 6,929 60 930 6,989 360 8,279 652 2010 2010 30 YearsNorthwest Medical Center at Sugar Creek Bentonville, AR — 1,100 2,870 — 1,100 2,870 3,970 270 2014 2014 35 YearsThe Children’s Clinic at Springdale Springdale, AR — 610 1,570 — 610 1,570 2,180 172 2014 2014 35 YearsRosenberg Children’s Medical Plaza (d.) Phoenix, AZ 8,146 — 23,302 34 — 23,336 23,336 1,897 2001 2001 35 YearsPhoenix Children’s East (d.) Valley Care Center Phoenix, AZ 6,202 1,050 10,900 — 1,050 10,900 11,950 884 2006 2006 35 YearsPalmdale Medical Plaza (d.) Palmdale, CA — — 10,555 1,701 — 12,256 12,256 1,175 2008 2008 34 YearsPiedmont-Roswell Physician Center Sandy Springs, GA — 2,338 2,128 — 2,338 2,128 4,466 151 2015 2015 30 Years 80Schedule IIIUniversal Health Realty Income TrustReal Estate and Accumulated Depreciation — December 31, 2016 (continued)(amounts in thousands) Gross amount at Date of which carried Completion of Initial Cost at end of period Accumulated Construction, Description Encumbrance(c.) Land Building&Improv. Adjustmentsto Basis (a.) Land Building &Improvements CIP Total Depreciationas of Dec.31,2016 Acquisitionor Significantimprovement DateAcquired AverageDepreciableLifePiedmont-Vinings PhysicianCenter Vinings, GA — 1,348 2,418 — 1,348 2,418 3,766 166 2015 2015 30 YearsSanta Fe Professional Plaza (d.) Scottsdale, AZ — 1,090 1,960 312 1,090 2,272 36 3,398 236 1999 1999 30 YearsSierra San Antonio Medical Plaza (d.) Fontana, CA — — 11,538 206 — 11,744 9 11,753 1,074 2006 2006 30 YearsVista Medical Terrace & Sparks MOB (d.) Sparks, NV 4,231 — 9,276 569 — 9,845 28 9,873 1,280 2008 2008 30 YearsWeslaco Free-standing Emergency Dept Weslaco ,TX — 1,749 4,879 — 1,749 4,879 6,628 321 2015 2015 35 YearsChandler Corporate Center III Chandler, AZ — 2,328 14,131 — 2,328 14,131 16,459 352 2016 2016 35 YearsFrederick Crestwood MOB Frederick, MD — 2,258 18,973 — 2,258 18,973 21,231 216 2016 2016 35 YearsMadison Professional Office Building Madison, AL — 2,296 6,411 — 2,296 6,411 8,707 215 2016 2016 35 YearsTenaya Medical Office Building Las Vegas, NV 7,137 3,032 10,602 — 3,032 10,602 13,634 44 2016 2016 35 YearsHenderson Medical Plaza (e.) Henderson, NV — — — — — — 9,464 9,464 2017 TOTALS $114,162 $48,798 $459,942 $66,617 $51,638 $523,719 $10,471 $585,828 $138,588 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.Consists of outstanding balances as of December 31, 2016 on third-party debt that is non-recourse to us.d.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.e.Henderson Medical Plaza is scheduled to be completed and opened during the first quarter of 2017. 81 UNIVERSAL HEALTH REALTY INCOME TRUSTNOTES TO SCHEDULE IIIDECEMBER 31, 2016(amounts in thousands)(1) RECONCILIATION OF REAL ESTATE PROPERTIESThe following table reconciles the Real Estate Properties from January 1, 2014 to December 31, 2016: 2016 2015 2014 Balance at January 1, $511,657 $486,589 $395,669 Impact of consolidation of eight LLCs (a.) — — 84,064 Additions (b.) 14,186 4,972 3,298 Acquisitions 60,031 24,568 13,674 Disposals/Divestitures (46) (4,472) (10,116)Balance at December 31, $585,828 $511,657 $486,589 (2) RECONCILIATION OF ACCUMULATED DEPRECIATIONThe following table reconciles the Accumulated Depreciation from January 1, 2014 to December 31, 2016: 2016 2015 2014 Balance at January 1, $121,161 $106,480 $97,921 Disposals/Divestitures (9) (1,568) (5,859)Depreciation expense 17,436 16,249 14,413 Other — — 5 Balance at December 31, $138,588 $121,161 $106,480 (a.)During 2014, the Trust purchased the minority ownership interests held by third-party members in eight LLCs (January and August, 2014) inwhich we previously held noncontrolling majority ownership interests. As a result of these minority ownership purchases, the Trust and oursubsidiaries now own 100% of each of these LLCs and the financial results are included in our consolidated financial statements. (b.)Includes $9.5 million of CIP related to Henderson Medical Plaza, which is scheduled to be completed and opened during the first quarter of2017. 82 Exhibit Index Exhibit No. Exhibit10.2 Agreement dated December 1, 2016, to renew Advisory Agreement dated as of December 24, 1986 between Universal Health Realty IncomeTrust 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 the Sarbanes-Oxley Act of 2002.101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Extension Label Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 83Exhibit 10.2 December 1, 2016 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 AdvisoryAgreement between Universal 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, 2017, upon thesame terms and conditions. Please acknowledge UHS of Delaware’s acceptance of this offer by signing in the space provided below andreturning one copy of this letter to me. 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 21Subsidiaries of Registrant (2016)Jurisdiction 3811 Bell Medical Properties, LLCDelaware5004 Pool Road Properties, LPTexas73 Medical Building, LLCConnecticut653 Town Center Investments, LLCArizona653 Town Center Phase II, LLCArizonaApaMed Properties, LLCArizonaArlington Medical Properties, LLCArizonaAuburn Medical Properties II, LLCDelawareBanburry Medical Properties, LLCDelawareBRB/E Building One, LLCTexasBrunswick Associates, LLCNew YorkCentennial Medical Properties, LLCDelawareCimarron Medical Properties, LLCTexasCobre Properties, LLCDelawareCypresswood Investments, L.PGeorgiaDeerval Properties, LLCArizonaDesMed, LLCArizonaDTX Medical Properties, LLCTexasDVMC Properties, LLCArizonaEagle Medical Properties, LLCMichiganForney Deerval, LLCTexasForney Willetta, LLCTexasFTX Healthcare GP, LLCTexasFTX MOB Phase II, LPTexasGold Shadow Properties, LLCArizonaGrayson Properties, LPTexasGulph InvestmentsMarylandHanover Medical Properties, LLCVirginiaHNV Medical Properties, LLCNevadaJuniper Medical Properties, LLCMadison Station Medical Properties, LLCArizonaAlabamaNSHE TX Bay City, LLCTexasNSHE TX Cedar Park, LLCTexasNTX Healthcare Properties, LLCTexasNWTX Medical Properties, LLCTexasOneida Medical Properties, LPTexasOsage Medical Properties, LLCArkansasOttumwa Medical Properties, LLCIowaPalmdale Medical Properties, LLCDelawarePaseo Medical Properties II, LLCArizonaPAX Medical Holdings, LLCDelawarePCH Medical Properties, LLCArizonaPCH Southern Properties, LLCDelawareRiverdale Realty, LLCGeorgiaSanta Fe Scottsdale, LLCArizonaSaratoga Hospital Properties, LPTexasSheffield Properties, LLCGeorgiaShiloh Medical Properties, LLCArkansasSierra Medical Properties, LLCArizonaSparks Medical Properties, LLCDelawareSpring Valley Medical Properties, LLCArizonaSpring Valley Medical Properties II, LLCDelawareSuburban Properties, LLCKentuckyTuscan Medical Properties, LLCDelawareUHT TRS, LLCDelawareUHT/Ensemble Properties I, LLCDelawareWilletta Medical Properties, LLCArizona  Exhibit 23.1 Consent of Independent Registered Public Accounting FirmThe Board of TrusteesUniversal Health Realty Income Trust:We consent to the incorporation by reference in the registration statements (Nos. 333-211903, 333‑143944 and 333-57815) on Form S-8 and in the registration statements (Nos. 333-208264 and 333-81763) on Form S-3 of Universal Health Realty Income Trust andsubsidiaries of our reports dated February 28, 2017, with respect to the consolidated balance sheets of Universal Health Realty IncomeTrust and subsidiaries as of December 31, 2016 and 2015, 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, 2016, the related financialstatement schedule III, real estate and accumulated depreciation-December 31, 2016, and the effectiveness of internal control overfinancial reporting as of December 31, 2016, which reports appear in the December 31, 2016 annual report on Form 10‑K of UniversalHealth Realty Income Trust.(signed) KPMG LLPPhiladelphia, PennsylvaniaFebruary 28, 2017 Exhibit 31.1CERTIFICATION - Chief Executive OfficerI, Alan B. Miller, certify that:1. I have reviewed this annual report on Form 10-K of Universal Health Realty Income Trust;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervisionto ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of 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: February 28, 2017 /s/ Alan B. Miller President and ChiefExecutive Officer Exhibit 31.2CERTIFICATION - Chief Financial OfficerI, Charles F. Boyle, certify that:1. I have reviewed this annual report on Form 10-K of Universal Health Realty Income Trust;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervisionto ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of 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: February 28, 2017 /s/ Charles F. Boyle Vice President andChief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2016 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. Miller President and Chief Executive OfficerFebruary 28, 2017 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 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Universal Health Realty Income Trust (the “Trust”) on Form 10-K for the year ended December 31, 2016, 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. Boyle Vice President and Chief Financial OfficerFebruary 28, 2017 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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