Universal Health Realty Income Trust

UHT

Universal Health Realty Income Trust

2020 
ANNUAL REPORT

Location of Properties

UHT has 72 investments in twenty states.

MEDICAL OFFICE BUILDINGS/CLINICS

ACUTE CARE HOSPITALS

BEHAVIORAL HEALTH CARE HOSPITAL

SUBACUTE HOSPITALS

AMBULATORY CARE

REHABILITATION HOSPITAL

CHILDCARE CENTERS

Properties by Type

Medical Office 
Buildings/Clinics
71%

Acute Care Hospitals
16%

Dividends Paid

Childcare Centers
1%

Rehabilitation
1%

Behavioral
5%

Ambulatory Care
4%

Sub -Acute
2%

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

1986

1996

2006

2020

ON THE COVER: CLIVE BEHAVIORAL HEALTH, CLIVE, IOWA

34 years of Increasing Dividends

Dear Fellow Shareholders:

Although we faced unprecedented challenges resulting from the COVID-19 pandemic, I
am pleased to report that 2020 was a successful year for Universal Health Realty Income Trust
and we have emerged as financially strong as ever. Reinforcing the stability provided by the
essential nature of the services provided in the medical office and other healthcare properties
in our portfolio, tenants representing approximately 99% of our occupied square footage had
paid their rent by year end. The robust leasing activity experienced during 2020, and into the
first quarter of 2021, has enabled us to not only retain most of our existing tenant base, but to
also lease additional space that had previously been vacant.

During 2020, and every other year since our inception thirty-four years ago, we have
increased our annual dividend to a currently paid annualized rate of $2.78 per share. In a year
when many other companies experienced significant financial challenges, we are proud to
report that our 2020 funds from operations increased 5% to $46.2 million, or $3.36 per diluted
share.

During 2020, we continued to grow our portfolio as we completed the development of
two new properties and acquired a third. At the end of 2020, we completed construction on
Clive Behavioral Health Hospital, a 100-bed behavioral health care facility in Clive, Iowa.
The facility’s tenant, a joint venture between Universal Health Services, Inc. and Catholic
Health Initiatives-Iowa Corporation, has taken occupancy under the terms of a 20 year, triple
net lease. In addition, the Texoma Medical Plaza II was also completed during the fourth
quarter of 2020. This 75,000 square foot multi-tenant medical office building is the second
multi-tenant medical office building located on the campus of the Texoma Medical Center in
Denison, Texas. The property is 61% leased and leasing activity for the remaining space is
strong. Late in the year, we also acquired a 9,100 square foot medical building located in
Escanaba, Michigan which is 100% occupied by a leading kidney care provider, Fresenius
Medical Care, pursuant to the terms of a lease with a remaining term of approximately 14
years at the time of acquisition.

We are pleased with the diversified portfolio we have assembled consisting of 72
properties located in twenty states. Our portfolio includes acute and behavioral health care
hospitals, medical office buildings, freestanding emergency departments and childcare centers.

As we look forward to 2021, we plan to diligently continue our long and successful track
record of disciplined, focused management, selectively developing and acquiring high quality
assets while preserving our solid balance sheet, maintaining access to capital and providing
our shareholders with a secure dividend stream.

Thank you for your ongoing support and confidence in the management team.

Sincerely,

Alan B. Miller
Chairman of the Board and
Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

Commission File No. 1-9321
UNIVERSAL HEALTH REALTY INCOME TRUST
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)
Universal Corporate Center
367 South Gulph Road
P.O. Box 61558
King of Prussia, Pennsylvania
(Address of principal executive offices)

23-6858580
(I.R.S. Employer
Identification Number)

19406-0958
(Zip Code)

Registrant’s telephone number, including area code: (610) 265-0688

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Shares of beneficial interest, $0.01 par value

Trading Symbol(s)
UHT

Name of each exchange on which registered
New 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 È 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 È
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 12 months (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 È No ‘
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).

Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer È Accelerated filer ‘

Non-accelerated filer ‘ Smaller reporting company ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 401(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. È
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ‘ No È
Aggregate market value of voting shares and non-voting shares held by non-affiliates as of June 30, 2020: $1.0 billion (For the
purpose of this calculation only, all members of the Board of Trustees are deemed to be affiliates). Number of shares of beneficial
interest outstanding of registrant as of January 31, 2021: 13,771,298.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for our 2021 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2020 (incorporated by reference under Part III).

UNIVERSAL HEALTH REALTY INCOME TRUST
2020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART I

Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Item 3
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . .
Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16 Form 10-K Summary

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

1
10
26
27
32
32

32
35
37
59
61
61
61
65

65
65

65
65
65

66
68

69

This Annual Report on Form 10-K is for the year ended December 31, 2020. This Annual Report modifies
and supersedes documents filed prior to this Annual Report. Information that we file with the Securities and
Exchange Commission (the “SEC”) in the future will automatically update and supersede information contained
in this Annual Report. In this Annual Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty
Income Trust and its subsidiaries.

As disclosed in this Annual Report, including in Part I, Item 1.-Relationship with Universal Health Services,
Inc. (“UHS”), a wholly-owned subsidiary of UHS (UHS of Delaware, Inc.) serves as our Advisor pursuant to the
terms of an annually renewable Advisory Agreement dated December 24, 1986, and as amended and restated as
of January 1, 2019. Our officers are all employees of UHS through its wholly-owned subsidiary, UHS of
Delaware, Inc. In addition, three of our hospital facilities are leased to wholly-owned subsidiaries of UHS, one of
our hospital facilities is leased to a joint venture between a wholly-owned subsidiary of UHS and a third party,
and subsidiaries of UHS are tenants of eighteen medical office buildings (“MOBs”) or free-standing emergency
departments, that are either wholly or jointly-owned by us. Any reference to “UHS” or “UHS facilities” in this
report is referring to Universal Health Services, Inc.’s subsidiaries, including UHS of Delaware, Inc.

In this Annual Report, the term “revenues” does not include the revenues of the unconsolidated limited
liability companies in which we have various non-controlling equity interests ranging from 33% to 95%. As of
December 31, 2020, we had investments in five jointly-owned LLCs/LPs. We currently account for our share of
the income/loss from these investments by the equity method (see Note 8 to the Consolidated Financial
Statements included herein).

ITEM 1. Business

General

PART I

We are a real estate investment trust (“REIT”) which commenced operations in 1986. We invest in health
care and human service related facilities currently including acute care hospitals, behavioral health care hospitals,
specialty hospitals, free-standing emergency departments, childcare centers and medical/office buildings. As of
February 25, 2021, we have seventy-two real estate investments or commitments located in twenty states in the
United States consisting of: (i) seven hospital facilities including three acute care, one behavioral health care, one
rehabilitation (currently vacant) and two specialty hospitals (one of which are currently vacant); (ii) fifty-seven
medical/office buildings; (iii) four free-standing emergency departments (“FEDs”), and; (iv) four preschool and
childcare centers.

Available Information

We have our principal executive offices at Universal Corporate Center, 367 South Gulph Road, King of
Prussia, PA 19406. Our telephone number is (610) 265-0688. Our website is located at http://www.uhrit.com.
Copies of the annual, quarterly and current reports we file with the SEC, and any amendments to those reports,
are available free of charge on our website. Our filings are also available to the public at the website maintained
by the SEC, www.sec.gov. Additionally, we have adopted governance guidelines, a Code of Business Conduct
and Ethics applicable to all of our officers and directors, a Code of Ethics for Senior Officers and charters for
each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee
of the Board of Trustees. These documents are also available free of charge on our website. Copies of such
reports and charters are available in print to any shareholder who makes a request. Such requests should be made
to our Secretary at our 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 or waivers of any provision of our Code of
Ethics for Senior Officers by promptly posting this information on our website. The information posted on our
website 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 New York Stock Exchange in 2020. Additionally, contained in
Exhibits 31.1 and 31.2 of this Annual Report are our CEO’s and CFO’s certifications regarding the quality of our
public disclosure under Section 302 of the Sarbanes-Oxley Act of 2002.

Overview of Facilities

As of February 25, 2021, we have investments in seventy-two 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) (M) . . . . . . . . . . . . . Wildomar, CA

Acute Care

McAllen Medical Center (A) . . . . . . . . . . .

McAllen, TX

Acute Care

Wellington Regional Medical

Center (A) . . . . . . . . . . . . . . . . . . . . . . . W. Palm Beach, FL

Acute Care

Kindred Hospital Chicago

Central (B) (N) . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .

Corpus Christi, TX (F)
Evansville Rehabilitation Hospital,

Chicago, IL
Corpus Christi, TX

Sub-Acute Care
Sub-Acute Care

LLC (G) . . . . . . . . . . . . . . . . . . . . . . . . .

Evansville, IN

Rehabilitation

Family Doctor’s Medical Office

Bldg. (B) . . . . . . . . . . . . . . . . . . . . . . . .

Shreveport, LA

Professional Buildings at Kings Crossing

Building A (B) . . . . . . . . . . . . . . . . . . . . Kingwood, TX
Building B (B) . . . . . . . . . . . . . . . . . . . . Kingwood, TX

MOB

MOB
MOB

1

100%

100%

100%

100%
100%

100%

100%

100%
100%

Universal Health Services,
Inc.
Universal Health Services,
Inc.
Universal Health Services,
Inc.

Kindred Healthcare, Inc.
—

—
Christus Health Northern
Louisiana

—
—

Facility Name

Location

Type of Facility

Ownership

Guarantor

. . . . . . . . New Britain, PA

Chesterbrook Academy (B) . . . . . . . . . . . . Audubon, PA
Chesterbrook Academy (B) (O)
Chesterbrook Academy (B) (P) . . . . . . . . . Newtown, PA
Chesterbrook Academy (B) . . . . . . . . . . . . Uwchlan, PA
Riverdale, GA
Southern Crescent Center I (B) . . . . . . . . .
Riverdale, GA
Southern Crescent Center, II (D) . . . . . . . .
Louisville, KY
St. Matthews Medical Plaza II (C) . . . . . .
Desert Valley Medical Center (E) . . . . . . .
Phoenix, AZ
Cypresswood Professional Center (B)

Preschool & Childcare
Preschool & Childcare
Preschool & Childcare
Preschool & Childcare
MOB
MOB
MOB
MOB

8101 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8111 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Desert Springs Medical Plaza (D) . . . . . . .
701 South Tonopah Bldg. (A) . . . . . . . . . .
Santa Fe Professional Plaza (E) . . . . . . . . .
Summerlin Hospital MOB I (D) . . . . . . . .
Summerlin Hospital MOB II (D)
. . . . . . .
Danbury Medical Plaza (B) . . . . . . . . . . . . Danbury, CT
Mid Coast Hospital MOB (C) . . . . . . . . . .
Rosenberg Children’s Medical

Spring, TX
Spring, TX
Las Vegas, NV
Las Vegas, NV
Scottsdale, AZ
Las Vegas, NV
Las Vegas, NV

Brunswick, ME

Plaza (E)

. . . . . . . . . . . . . . . . . . . . . . . .

Phoenix, AZ

Gold Shadow (D)

MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB

MOB

700 Shadow Lane MOB . . . . . . . . . . . .
2010 & 2020 Goldring MOBs . . . . . . . .

Apache Junction Medical Plaza (E)
Spring Valley Medical Office

MOB
MOB
. . . . . Apache Junction, AZ MOB

Las Vegas, NV
Las Vegas, NV

Building (D) . . . . . . . . . . . . . . . . . . . . . .

Las Vegas, NV

Spring Valley Hospital Medical Office

Building II (D) . . . . . . . . . . . . . . . . . . . .
. . .

Sierra San Antonio Medical Plaza (E)
Phoenix Children’s East Valley Care

Las Vegas, NV
Fontana, CA

Center (E)

. . . . . . . . . . . . . . . . . . . . . . .

Phoenix, AZ

Centennial Hills Medical Office

Building (D) . . . . . . . . . . . . . . . . . . . . . .
Palmdale Medical Plaza (D) . . . . . . . . . . .
Summerlin Hospital Medical Office

Las Vegas, NV
Palmdale, CA

Las Vegas, NV
Sparks, NV
Sparks, NV

Building III (D) . . . . . . . . . . . . . . . . . . .
Vista Medical Terrace (D) . . . . . . . . . . . . .
The Sparks Medical Building (D) . . . . . . .
Auburn Medical Office Building II (E) . . . Auburn, WA
Texoma Medical Plaza (H) . . . . . . . . . . . . Denison, TX
BRB Medical Office Building (E) . . . . . . . Kingwood, TX
3811 E. Bell (E) . . . . . . . . . . . . . . . . . . . . .
Lake Pointe Medical Arts Building (E) . . .
Forney Medical Plaza (E) . . . . . . . . . . . . .
Tuscan Professional Building (E) . . . . . . .
Emory at Dunwoody Building (E)
PeaceHealth Medical Clinic (E) . . . . . . . .
Forney Medical Plaza II (C) . . . . . . . . . . .
Northwest Texas Professional Office

Phoenix, AZ
Rowlett, TX
Forney, TX
Irving, TX

. . . . . . Atlanta, GA

Bellingham, WA
Forney, TX

Tower (E) . . . . . . . . . . . . . . . . . . . . . . . . Amarillo, TX
5004 Poole Road MOB (A) . . . . . . . . . . . . Denison, TX
Ward Eagle Office Village (E) . . . . . . . . .

Farmington Hills,
MI
Springdale, AR

The Children’s Clinic at Springdale (E) . .
The Northwest Medical Center at Sugar

Creek (E) . . . . . . . . . . . . . . . . . . . . . . . .

Bentonville, AR

Hanover Emergency Center (E)
South Texas ER at Weslaco (A) . . . . . . . . Weslaco, TX
South Texas ER at Mission (A) . . . . . . . . . Mission, TX
Haas Medical Office Park (E) . . . . . . . . . . Ottumwa, IA
Piedmont—Roswell Physician

. . . . . . . . Mechanicsville, VA

MOB

MOB
MOB

MOB

MOB
MOB

MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB

MOB
MOB

MOB
MOB

MOB
FED
FED
FED
MOB

Center (E)

. . . . . . . . . . . . . . . . . . . . . . .

Sandy Springs, GA

MOB

Piedmont—Vinings Physician

Center (E)

. . . . . . . . . . . . . . . . . . . . . . . Vinings, GA

Madison Professional Office

Building (E) . . . . . . . . . . . . . . . . . . . . . . Madison, AL
Chandler Corporate Center III (E) . . . . . . .
Chandler, AZ
Frederick Crestwood MOB (E) . . . . . . . . .
Frederick, MD
Las Vegas, NV
2704 North Tenaya Way (E) . . . . . . . . . . .
Henderson Medical Plaza (D) . . . . . . . . . . Henderson, NV

MOB

MOB
MOB
MOB
MOB
MOB

2

100%
100%
100%
100%
100%
100%
33%
100%

100%
100%
100%
100%
100%
100%
100%
100%
74%

100%

100%
100%
100%

100%

100%
100%

100%

100%
100%

100%
100%
100%
100%
95%
100%
100%
100%
100%
100%
100%
100%
95%

100%
100%

100%
100%

100%
100%
100%
100%
100%

100%

100%

100%
100%
100%
100%
100%

SEG, Incorporated
SEG, Incorporated
SEG, Incorporated
SEG, Incorporated
—
—
—
—

—
—
—
—
—
—
—
—
—

—

—
—
—

—

—
—

—

—
—

—
—
—
—
—
—
—
—
—
—
—
—
—

—
—

—
—

—
—
—
—
Regional Hospital Partners

—

—

—
—
—
—
—

Facility Name

Location

Type of Facility

Ownership

Guarantor

Health Center at Hamburg (E) . . . . . . . . . . Hamburg, PA
Las Palmas Del Sol Emegency

Center-West (E) . . . . . . . . . . . . . . . . . . .

El Paso, TX

Beaumont Medical Sleep Center

Building (E) . . . . . . . . . . . . . . . . . . . . . .

Southfield, MI

Bellin Health Family Medicine Center

(E) (I) . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .

Clive Behavioral Health (D) (J)

Escanaba, MI

Clive, IA

Texoma Medical Plaza II (H) (K) . . . . . . . Denison, TX
Sand Point Medical Properties (L) . . . . . .

MOB

FED

MOB

MOB

Behavioral Health
MOB

Escanaba, MI

MOB

100%

100%

100%

100%

100%
95%

100%

—

—

—

—
Universal Health Services,
Inc. and Catholic Health
Initiatives-Iowa, Corp.

—
Fresenius Medical Care
Holdings, Inc.

(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 non-controlling

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

or jointly owned by 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 lease on this facility expired on June 1, 2019. The hospital is vacant and being marketed for a new tenant.
(G) The lease on this facility expired on May 31, 2019. The hospital is vacant and being marketed for a new tenant.
(H) 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.

(I) This property was acquired during the fourth quarter of 2019.
(J) Construction on this UHS-related hospital facility was substantially completed in December 2020. This property is leased to a joint
venture between a wholly-owned subsidiary of UHS and Catholic Health Initiatives-Iowa, Corp. A wholly-owned subsidiary of UHS
acted as project manager for the construction of the hospital.

(K) Construction on this property was substantially completed in December 2020. The master lease commenced on December 11, 2020.
(L) This property was acquired in late December 2020.
(M) A wholly-owned subsidiary of UHS has notified us it is considering terminating the existing lease on Southwest Healthcare System,
Inland Valley Campus upon the scheduled expiration of the current term on December 31, 2021. UHS is currently evaluating potential
substitution properties, with a fair market value substantially equal to the fair market value of Southwest Healthcare System, Inland
Valley campus, and is expected to submit its proposal to us during the first quarter of 2021. All transaction with UHS must be approved
by a majority of our Independent Trustees.

(N) The existing lease with Kindred Hospital Chicago Central is scheduled to expire on December 31, 2021. We can provide no assurance
that the lease on this facility, which in 2020 and 2019 did not generate sufficient operating income to cover its rent due to us, will be
renewed, or renewed at existing lease rates, upon maturity.

(O) The lease term on this facility was extended for ten years from its scheduled June 30, 2022 expiration, through June 30, 2032.
(P) The lease term on this facility was extended for ten years from its scheduled June 30, 2021 expiration, through June 30, 2031.

Other Information

Included in our portfolio at December 31, 2020 are seven hospital facilities (one of which was substantially
completed in late December, 2020) with an aggregate investment of $162.4 million as of December 31, 2020.
Included in our portfolio at December 31, 2019 were six hospital facilities with an aggregate investment of
$130.4 million. The leases with respect to the hospital facilities (two of which expired during 2019) comprised
approximately 24%, 26% and 25% of our consolidated revenues in 2020, 2019 and 2018, respectively. The leases
on two hospital facilities expired during 2019 and were not renewed and the facilities remain vacant. The
combined revenues generated from these leases that expired in 2019 comprised approximately 2% of our
consolidated revenues during each of the years ended December 31, 2018 and 2017. As of January 1, 2021,
leases on five of our seven hospital facilities (two of which are currently vacant) have fixed terms with an
average of 5.8 years remaining and include renewal options ranging from zero to five, five or ten-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 EBITDAR divided 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 our investors as a measure of

3

the operating performance of a hospital facility. EBITDAR, which is used as an indicator of a facility’s estimated
cash flow generated from operations (before rent expense, capital additions and debt service), is used by us in
evaluating a facility’s financial viability and its ability to pay rent. For the four occupied hospital facilities
(excluding the newly constructed behavioral health hospital) owned by us at the end of 2020, the combined
weighted average Coverage Ratio was approximately 10.3 (ranging from -0.6 to 23.5). For the four occupied
hospital facilities owned by us at the end of 2019, the combined weighted average Coverage Ratio was
approximately 8.7 (ranging from -1.6 to 20.9). For the six occupied hospital facilities owned by us at the end of
2018, the combined weighted average Coverage Ratio was approximately 7.0 (ranging from -0.7 to 17.1). The
Coverage Ratio for individual facilities varies.

Pursuant to the terms of the leases for our hospital facilities, free-standing emergency departments, some
single-tenant MOBs and the preschool and childcare centers, each lessee, including subsidiaries of UHS, is
responsible for building operations, maintenance, renovations and property insurance. We, or the LLCs in which
we have invested, are responsible for the building operations, maintenance and renovations of the remaining
MOBs, however, a portion, or in some cases all, of the expenses associated with the MOBs are passed on directly
to the tenants. Cash reserves may be established to fund required building maintenance and renovations at the
multi-tenant MOBs. Lessees are required to maintain all risk, replacement cost and commercial property
insurance policies on the leased properties and we, or the LLC in which we have invested, are also named
insureds on these policies. In addition, we, UHS or the LLCs in which we have invested, maintain property
insurance on all properties. For additional information on the terms of our leases, see “Relationship with
Universal Health Services, Inc.”

See our consolidated financial statements and accompanying notes to the consolidated financial statements
included in this Annual Report for our total 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 from certain subsidiaries of UHS and
immediately leasing the properties back to the respective subsidiaries. Most of the leases were entered into at the
time we commenced operations and provided for initial terms of 13 to 15 years with up 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 wholly-owned subsidiaries of UHS 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 a quarterly basis based upon a
computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital
leases with wholly-owned subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted
with one another.

The combined revenues generated from the leases on the three hospital facilities leased to wholly-owned
subsidiaries of UHS accounted for approximately 22% of our consolidated revenue for the five years ended
December 31, 2020 (approximately 22%, 22% and 21% for the years ended December 31, 2020, 2019 and 2018
respectively). In addition to these three UHS hospital facilities, we have nineteen properties consisting of
hospitals, MOBs, or free-standing emergency departments (“FEDs”), that are either wholly or jointly-owned by
us that include tenants which are subsidiaries or joint ventures of UHS. The aggregate revenues generated from
UHS-related tenants comprised approximately 32% of our consolidated revenue for the five years ended
December 31, 2020 (approximately 33%, 31% and 30% for the years ended December 31, 2020, 2019 and 2018,
respectively).

Pursuant

to the Master Lease Document by and among us and certain subsidiaries of UHS, dated
December 24, 1986 (the “Master Lease”), which governs the leases of all hospital properties with wholly-owned
subsidiaries of UHS, UHS has the option, among other things, to renew the leases at the lease terms described
below by providing notice to us at least 90 days prior to the termination of the then current term. UHS also has

4

the right to purchase the respective leased facilities from us at their appraised fair market value upon any of the
following: (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of
control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that UHS provides
notice to us of their intent to offer a substitution property/properties in exchange for one (or more) of the three
hospital facilities leased from us, should we be unable to reach an agreement with UHS on the properties to be
substituted. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilities during and
for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew
the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms
and conditions pursuant to any third-party offer.

The table below details the existing lease terms and renewal options for our three acute care hospitals

operated by wholly-owned subsidiaries of UHS:

Hospital Name

Annual
Minimum
Rent

End of
Lease Term

McAllen Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wellington Regional Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest Healthcare System, Inland Valley Campus . . . . . . . . . . . . . .

$5,485,000 December, 2026
$3,030,000 December, 2021
$2,648,000 December, 2021

(a) UHS has one 5-year renewal option at existing lease rates (through 2031).
(b) UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031).

Renewal
Term
(years)

5(a)
10(b)
10(b)

A wholly-owned subsidiary of UHS has notified us that it is considering terminating the existing lease on
Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current term on
December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased
property at its appraised fair market value at the end of the existing lease term. However, UHS has notified us
that they are planning to offer us potential substitution properties, with fair market value substantially equal to
that of Southwest Healthcare System, Inland Valley Campus, in exchange for the Inland Valley Campus. UHS is
expected to submit its proposal to us during the first quarter of 2021. Upon receipt, the proposal will be reviewed
and evaluated by management of the Trust as well as by our Board of Trustees. All transactions with UHS must
be approved by a majority of our Independent Trustees. We can provide no assurance that we will ultimately
agree on a property substitution with UHS in connection with the Inland Valley Campus property. Pursuant to the
terms of the lease on the Inland Valley Campus, we earned $4.4 million of lease revenue during the year ended
December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental) and $4.3 million during the year
ended December 31, 2019 ($2.6 million in base rental and $1.7 million in bonus rental).

Management cannot predict whether the leases with wholly-owned subsidiaries of UHS, which have
renewal options at existing lease rates or fair market value lease rates, 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 lease
rates, 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, our future 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 currently earned pursuant to these leases.

We are the lessee on twelve ground leases with subsidiaries of UHS (for consolidated and unconsolidated
investments). The remaining lease terms on the ground leases with subsidiaries of UHS range from
approximately 29 years to approximately 78 years. The annual aggregate lease payments expected on these
properties are approximately $486,000 for the year ended 2020 and $508,000 for each of the years ended 2021,
2022, 2023 and 2024, and an aggregate of $29.0 million thereafter. Please see Note 4 for further disclosure
around our lease accounting.

5

In late July, 2019 and September, 2019 we entered into two separate agreements which are each related to
wholly-owned subsidiaries of UHS in connection with newly constructed properties located in Clive, Iowa and
Denison, Texas. Both of these projected were substantially completed in December, 2020. Please see additional
disclosure in Note 3.

Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and
although as of December 31, 2020 we had no salaried employees, our officers do typically receive annual stock-
based compensation awards in the form of restricted stock or restricted stock units. In special circumstances, if
warranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may
also receive one-time compensation awards in the form of restricted stock and/or cash bonuses.

Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves
as Advisor to us under an advisory agreement dated December 24, 1986, and as amended and restated as of
January 1, 2019 (the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Advisor is obligated to
present an investment program to us, to use its best efforts to obtain investments suitable for such program
(although it is not obligated to present any particular investment opportunity to us), to provide administrative
services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by
the Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the
Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax
and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be
terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires
on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent
Trustees, that the Advisor’s performance has been satisfactory.

Our advisory fee for 2020, 2019 and 2018 was computed at 0.70% of our average invested real estate assets,
as derived from our consolidated balance sheet. Based upon a review of our advisory fee and other general and
administrative expenses, as compared to an industry peer group,
the advisory fee computation remained
unchanged for 2020, as compared to 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 other things,
accumulated depreciation, cash and cash equivalents, lease receivables, deferred charges and other assets. The
advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financial statements.
Advisory fees incurred and paid (or payable) to UHS amounted to $4.1 million during 2020, $4.0 million during
2019 and $3.8 million during 2018 and were based upon average invested real estate assets of $592 million,
$568 million and $544 million during 2020, 2019 and 2018, respectively.

Share Ownership: As of December 31, 2020 and 2019, UHS owned 5.7% 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 is required to file annual reports containing audited financial information
and quarterly reports containing unaudited financial information. Since the aggregate revenues generated from
UHS-related tenants comprised approximately 32% of our consolidated revenue for the five years ended
December 31, 2020 (approximately 33%, 31% and 30% for the years ended December 31, 2020, 2019 and 2018,
respectively), and since a subsidiary 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. Please see the heading “A substantial portion of our revenues
are dependent upon one operator. If UHS experiences financial difficulties, or otherwise fails to make payments
to us, or elects not to renew the leases on our three acute care hospitals, our revenues could be materially
reduced” under “Risk Factors” for more information.

6

Taxation

No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856
to 860 of the Internal Revenue Code of 1986, and intend to continue to remain so qualified. To qualify as a REIT,
we must meet certain organizational and operational requirements, including a requirement to distribute at least
90% of our annual REIT taxable income to shareholders. As a REIT, we generally will not be subject to federal,
state or local income tax on income that we distribute as dividends to our shareholders.

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 regular corporate rates” under “Risk Factors” for more information.

Competition

We compete for the acquisition, leasing and financing of health care related facilities. Our competitors
include, but are not limited to, other REITs, private investors and firms, 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
could result 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 by endowments and charitable
contributions and exempt from property, sales and income taxes. Such exemptions and support are not available
to certain 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 those available at our
facilities. Certain hospitals that are located in the areas served by our facilities are specialty hospitals that provide
medical, surgical and behavioral health services that may not be provided by the operators of our hospitals. The
increase in outpatient treatment and 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 competitive advantage. Typically, physicians are responsible for making
hospital admission decisions and for directing the course of patient treatment. The operators of our 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 and may continue to cause an increase in
salaries, wages and benefits expense in excess of the inflation rate. Our operators may experience difficulties
attracting and retaining qualified physicians, nurses and medical support personnel. We anticipate that our
operators, including UHS, will continue to encounter increased competition in the future that could lead to a
decline in patient volumes and harm their businesses, which in turn, 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. These properties are either directly or indirectly affected by the factors discussed
above as well as general real estate factors such as the supply and demand of office space and market rental rates.
To improve our competitive position, we anticipate that we will continue investing in additional healthcare
related facilities and leasing the facilities to qualified operators, perhaps including subsidiaries of UHS.

Regulation and Other Factors

During 2020, 2019 and 2018, 25%, 25% and 24%, respectively, of our revenues were earned pursuant to
leases with operators of acute care services hospitals and free-standing emergency departments (“FEDs”), the
majority of which are subsidiaries of UHS. A significant portion of the revenue earned by the operators of our
acute care hospitals and FEDs is derived from federal and state healthcare programs, including Medicare and
Medicaid (excluding managed Medicare and Medicaid programs).

7

Our acute care facilities and behavioral health care hospital, on which construction was completed in late
December, 2020, 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, in some cases, reduced levels of reimbursement for healthcare 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 or decrease 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 of our hospital facilities
are able to predict the effect of recent and future policy changes on our respective results of operations. In
addition, the uncertainty and fiscal pressures placed upon federal and state governments as a result of, among
other things, the funding requirements and other provisions of the Legislation, may affect the availability of
taxpayer funds for Medicare and Medicaid programs. In addition, possible repeal or replacement of the
Legislation may have significant impact on the reimbursement for healthcare services.

On December 14, 2018, a Texas Federal District Court deemed the Legislation to be unconstitutional in its
entirety. The Court concluded that the Individual Mandate is no longer permissible under Congress’s taxing
power as a result of the Tax Cut and Jobs Act of 2017 (“TCJA”) reducing the Individual Mandate’s tax to $0
(i.e.,
it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation
unconstitutional. The court also held that because the individual mandate is “essential” to the Legislation and is
inseverable from the rest of the law, the entire Legislation is unconstitutional. Because the court issued a
declaratory judgment and did not enjoin the law, the Legislation remains in place pending its appeal. The District
Court for the Northern District of Texas ruling was appealed to the U.S. Court of Appeals for the Fifth Circuit.
On December 18, 2019, the 5th Circuit Court of Appeals’ three-judge panel voted 2-1 to strike down the
Legislation individual mandate as unconstitutional. The 5th Circuit Court also sent the case back to the Texas
district court to determine which Legislation provisions should be stricken with the mandate. On March 2, 2020,
the U.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by the State of
California and the United States House of Representatives, asking the Supreme Court to review the ruling by the
5th Circuit Court of Appeals. Oral argument was heard on November 10, 2020, and a ruling is expected in 2021.
On February 10, 2021, the Department of Justice announced that it has withdrawn support for the challenge
before the Supreme Court. The Legislation will remain law while the case proceeds through the appeals process;
however, the case creates additional uncertainty as to whether any or all of the Legislation could be struck down,
which could have a material adverse effect on hospitals. If the rates paid or the scope of services covered by
government payors are reduced, there could be a material adverse effect on the business, financial position and
results of operations of the operators of our hospital facilities, and in turn, ours.

In addition, the healthcare industry is required to comply with extensive and complex laws and regulations
at the federal, state and local government levels relating to, among other things: hospital billing practices and
prices for services; relationships with physicians and other referral sources; adequacy of medical 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, by hospitals with an emergency department, of patients
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 judicial interpretation. In the future, it is possible that different interpretations or
enforcement of these laws and regulations could subject the current or past practices of our operators to
allegations of impropriety or illegality or could require them to make changes in their facilities, equipment,
personnel, services, capital expenditure programs and operating expenses. Although UHS and other operators of
their policies, procedures and practices comply with governmental
our hospitals and FEDs believe that
regulations, no assurance can be given that they will not be subjected to additional governmental inquiries or
actions, or that they would not be faced with sanctions, fines or penalties if so subjected. Even if they were to

8

ultimately prevail, a significant governmental inquiry or action 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 and certified under the Medicare program. The effect of maintaining
certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. The operators
of our hospital facilities believe that the facilities are in material compliance with applicable federal, state, local
and other relevant regulations and standards. However, should any of our hospital facilities lose their deemed
certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be
unable to receive reimbursement from either of those programs and their business, and in turn, ours, could be
materially adversely affected.

The various factors and government regulation related to the healthcare industry, such as those outlined

above, affect us because:

(i) The financial ability of lessees to make rent payments to us may be affected by governmental regulations
such as licensure, certification for participation 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 by the amount of reimbursement such lessees receive from the
government.

A significant portion of the revenue earned by the operators of our acute care hospitals, behavioral health
care hospital and FEDs is derived from federal and state healthcare programs, including Medicare and Medicaid.
Under the statutory framework of the Medicare and Medicaid programs, many of the general acute care
operations are subject to administrative rulings, interpretations and discretion that may affect payments made
under either or both of such programs as well as by other third party payors. The federal government makes
payments to participating hospitals under its Medicare program based on various formulas. For inpatient services,
the operators of our acute care hospitals are subject to an inpatient prospective payment system (“IPPS”). Under
IPPS, hospitals are paid a predetermined fixed payment 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 that particular diagnosis. These rates are based upon historical national average costs and do not
consider the actual costs incurred by a hospital in providing care. The MS-DRG rates are adjusted annually based
on geographic region and are weighted based upon a statistically normal distribution of severity.

For outpatient services, acute care hospitals are paid under an outpatient prospective payment system
(“PPS”) according to ambulatory procedure codes. 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 and special reimbursement rates.

Our three acute care hospitals, behavioral health care facility and two FEDs operated by subsidiaries of
UHS, as well as two FEDs and one sub-acute care hospital facility operated by unaffiliated third-parties are
located in Texas, Florida, California, Virginia, Illinois and Iowa. The majority of these states have reported
significant budget deficits that have resulted in reductions of Medicaid funding at various times during the last
few years and which could adversely affect future levels of Medicaid reimbursement received by certain
operators of our facilities, including the operators of our hospital facilities. We can provide no assurance that
reductions to Medicaid revenues earned by operators of certain of our facilities, particularly our hospital
operators in the above-mentioned states, will not have a material adverse effect on the future operating results of
those operators which, in turn, could have a material adverse effect on us.

9

Executive Officers of the Registrant

Name

Age

Position

Alan B. Miller . . . . . . . . . . . . . . . . . .

Charles F. Boyle . . . . . . . . . . . . . . . .

Cheryl K. Ramagano . . . . . . . . . . . . .

Timothy J. Fowler . . . . . . . . . . . . . . .

83

61

58

65

Chairman of the Board, Chief Executive Officer and President

Vice President and Chief Financial Officer

Vice President, Treasurer and Secretary

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 in February, 2003. He had previously served as our President until 1990.
Mr. Miller is currently Executive Chairman of the Board of UHS and previously served as Chairman of the
Board and Chief Executive Officer of UHS since its inception in 1978 through December 31, 2020. He
previously held the title of President of UHS as well, until 2009 when Marc D. Miller was elected as President of
UHS. Mr. Alan B. Miller is the father of Marc D. Miller, who was elected to our Board of Trustees in December,
2008 and also serves as President and Chief Executive Officer of UHS and a member of the Board of Directors
of UHS. Marc D. Miller previously served as President of UHS from 2009 through December 31, 2020.

Mr. Charles F. Boyle was appointed our Vice President and Chief Financial Officer in 2003 and had served
as our Vice President and Controller since 1991. 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 its Controller. 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. Ramagano has 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 had served 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 in 1993.

ITEM 1A. Risk Factors

We are subject to numerous known and unknown risks, many of which are described below and elsewhere
in this Annual Report. Any of the events described below could have a material adverse effect on our business,
financial condition and results of operations. Additional risks and uncertainties that we are not aware of, or that
we currently deem to be immaterial, could also impact our business and results of operations.

Risks Related to the COVID-19 Pandemic

COVID-19 and other pandemics, epidemics, or public health threats may adversely affect the business of

our tenants, our business, and our results of operations and financial condition.

We are subject to risks associated with public health threats and epidemics, including the health concerns
relating to the COVID-19 pandemic. In March 2020, the World Health Organization declared the COVID-19
outbreak a pandemic and the federal government declared COVID-19 a national emergency. As a result of
various policies implemented by the federal and state governments, and varying by individual state, many
non-essential businesses in the nation were closed for varying time periods. We believe that by June 30, 2020,
substantially all of our tenants had resumed operations of their businesses.

Although COVID-19 has not had a material adverse impact on our results of operations through
December 31, 2020, we believe that the potentially adverse impact that the pandemic may have on the future

10

operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of which
are beyond our, or our tenants’, ability to control or predict. Such factors include, but are not limited to, the
length of time and severity of the spread of the pandemic; the volume of cancelled or rescheduled elective
procedures and the volume of COVID-19 patients treated by the operators of our hospitals and other healthcare
facilities; measures our tenants are taking to respond to the COVID-19 pandemic; the impact of government and
administrative regulation,
including travel bans and restrictions, shelter-in-place or stay-at-home orders,
quarantines, the promotion of social distancing, business shutdowns and limitations on business activity; changes
in patient volumes at our tenants’ hospitals and other healthcare facilities due to patients’ general concerns
related to the risk of contracting COVID-19 from interacting with the healthcare system; the impact of stimulus
on the health care industry and our tenants; changes in patient volumes and payer mix caused by deteriorating
macroeconomic conditions (including increases in uninsured and underinsured patients as the result of business
closings and layoffs); potential disruptions to clinical staffing and shortages and disruptions related to supplies
required for our tenants’ employees and patients, including equipment, pharmaceuticals and medical supplies,
particularly personal protective equipment, or PPE; potential increases to expenses incurred by our tenants
related to staffing, supply chain or other expenditures; the impact of our indebtedness and the ability to refinance
such indebtedness on acceptable terms; disruptions in the financial markets and the business of financial
institutions as the result of the COVID-19 pandemic which could impact our ability to access capital or increase
associated borrowing costs; and changes in general economic conditions nationally and regionally in the markets
our properties are located resulting from the COVID-19 pandemic, including increased unemployment and
underemployment levels and reduced consumer spending and confidence. Since the underlying businesses in
each of our properties are operated by the tenants, we can provide no assurance that the businesses will continue
to operate in the future or stay current with their lease obligations.

Bonus rents earned by us on the three acute care hospitals leased to wholly-owned subsidiaries of Universal
Health Services, Inc., are computed based upon a computation that compares each hospital’s current quarter
revenue to the corresponding quarter in the base year, we could therefore experience significant declines in future
bonus rental revenue earned on these properties should those hospitals experience significant declines in patient
volumes and revenues. These hospitals believe that, to the extent that they experience revenue declines and
increased expenses resulting from the COVID-19 pandemic, as ultimately measured over the life of the
pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”).

Certain factors may result in the inability or unwillingness on the part of some of our tenants to make timely
payment of their rent to us at current levels or to seek to amend or terminate their leases which, in turn, would
have an adverse effect on our occupancy levels and our revenue and cash flow and the value of our properties,
and potentially, our ability to maintain our dividend at current levels. Due to COVID-19 restrictions and its
impact on the economy, we may experience a decrease in prospective tenants which could unfavorably impact
the volume of new leases, as well as the renewal rate of existing leases. The COVID-19 pandemic could also
impact our indebtedness and the ability to refinance such indebtedness on acceptable terms, as well as risks
associated with disruptions in the financial markets and the business of financial institutions as the result of the
COVID-19 pandemic which could impact us from a financing perspective; and changes in general economic
conditions nationally and regionally in the markets our properties are located resulting from the COVID-19
pandemic. Decreases in cash flows and results of operations may have an impact on the inputs and assumptions
used in significant accounting estimates, including potential impairments of intangible and long-lived assets.

There is a high degree of uncertainty regarding the implementation and impact of the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program and Health
Care Enhancement Act (“PPPHCE Act”), which could impact the total amount and types of assistance and
benefits our tenants will receive.

Recent legislation, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
and the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”), has provided grant

11

funding to hospitals and other healthcare providers to assist them during the COVID-19 pandemic. There is a
high degree of uncertainty surrounding the implementation of the CARES Act and the PPPHCE Act, and the
federal government may consider additional stimulus and relief efforts, but we are unable to predict whether
additional stimulus measures will be enacted or their impact. There can be no assurance as to the total amount of
financial and other types of assistance our tenants will receive under the CARES Act and the PPPHCE Act, and it
is difficult to predict the impact of such legislation on our tenants’ operations or how they will affect operations
of our tenants’ competitors. Moreover, we are unable to assess the extent to which anticipated negative impacts
on our tenants (and, in turn, us) arising from the COVID-19 pandemic will be offset by amounts or benefits
received or to be received under the CARES Act and the PPPHCE Act.

Risks Related to the Regulatory Environment

The revenues and results of operations of the tenants of our hospital facilities, including UHS, and our
medical office buildings, are significantly affected by payments received from the government and other third-
party payors.

The operators of our hospital facilities, FEDs 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, in some cases,
reduced levels of reimbursement for health care 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 or decrease program payments, as well as affect the cost of providing service to patients and the timing
of payments to facilities. Our tenants are unable to predict the effect of recent and future policy changes on their
operations.

Our three acute care hospitals and two FEDs operated by subsidiaries of UHS, as well as two FEDs and one
sub-acute care hospital facility operated by unaffiliated third parties are located in Texas, Florida, California,
Virginia and Illinois. The majority of these states have reported significant budget deficits that have resulted in
reductions of Medicaid funding at various times during the last few years and which could adversely affect future
levels of Medicaid reimbursement received by certain operators of our facilities, including the operators of our
hospital facilities. We can provide no assurance that reductions to Medicaid revenues earned by operators of
certain of our facilities, particularly our hospital operators in the above-mentioned states, will not have a material
adverse effect on the future operating results of those operators which, in turn, could have a material adverse
effect on us. In addition, the uncertainty and fiscal pressures placed upon federal and state governments as a
result of, among other things, the funding requirements and other provisions of the Patient Protection and
Affordable Care Act, may affect the availability of taxpayer funds for Medicare and Medicaid programs. If the
rates paid or the scope of services covered by government payors are reduced, there could be a material adverse
effect on the business, financial position and results of operations of the operators of our hospital facilities, and in
turn, ours.

In addition to changes in government reimbursement programs, the ability of our hospital operators to
negotiate favorable contracts with private payors, including managed care organizations, significantly affects the
revenues and operating results of those facilities. Private payors,
including managed care organizations,
increasingly are demanding that hospitals accept lower rates of payment. Our hospital operators expect continued
third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement
amounts received from third party payors could have a material adverse effect on the financial position and
results of operations of our hospital operators.

12

Reductions or changes in Medicare and Medicaid 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 months sequestration cuts mandated under the Budget Control Act of 2011. The
postponed sequestration cuts include a 2% annual reduction over ten years in Medicare spending to providers.
Medicaid is exempt from sequestration. In order to offset the cost of the legislation, the 2012 Act reduces
payments to other providers 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 program
remain 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 (“the Act”), was signed into law. In addition, on February 15, 2014, Public
Law 113-082 was enacted. The 2012 Act and subsequent federal legislation achieves new savings by extending
sequestration for mandatory programs – including Medicare – for another three years, through 2027. The
Consolidated Appropriations Act, 2021 (“CAA”) eliminated the 2% reduction in Medicare payments from
sequestration through March 31, 2021.

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 a downward
adjustment in annual base payment increases. These reductions are meant to recoup what Medicare authorities
consider to be “overpayments” to hospitals that occurred as a result of the transition to Medicare Severity
Diagnosis Related Groups. The reduction in Medicaid DSH payments was expected to save $4.2 billion over 10
years. This provision has been delayed several times, most recently under the CAA, which further delays the
DSH payment reduction from 2024 through 2027. During the reduction period, state Medicaid DSH allotments
from federal funds will be reduced by $8 billion annually. We cannot predict the effect these payment policies
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 President Obama signed into law the Patient Protection and Affordable Care Act (the
“Legislation”). The Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which
contains a number of amendments to the Legislation, was signed into law on March 30, 2010. Two primary goals
of the Legislation, combined with the Reconciliation Act (collectively referred to as the “Legislation”), are to
provide for increased access to coverage for healthcare and to reduce healthcare-related expenses.

Although it was expected that the Legislation would result in a reduction in uninsured patients in the U.S.,
which would reduce the operators’ of our facilities’ expense from uncollectible accounts receivable,
the
Legislation made a number of other changes to Medicare and Medicaid 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 net reduction in
Medicare and Medicaid payments to hospitals totaling $155 billion over 10 years. The Legislation revises
reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high quality
care and contains a number of incentives and penalties under these programs to achieve these goals. The
Legislation provided for decreases in the annual market basket update for federal fiscal years 2010 through 2019,
a productivity offset to the market basket update beginning October 1, 2011 for Medicare Part B reimbursable
items and services and beginning October 1, 2012 for Medicare 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 are scheduled to begin in 2024.
The Legislation implements a value-based purchasing program, which will reward the delivery of efficient care.

13

Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such
hospitals will include those with excessive 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 sections of 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 Medicaid funding. Therefore, states can choose to accept or not to participate without risking the loss of
federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid programs
without the threat of loss of federal funding. The Centers for Medicare and Medicaid Services (“CMS”) has
granted section 1115 demonstration waivers providing for work and community engagement requirements for
certain Medicaid eligible individuals. It is anticipated this will lead to reductions in coverage, and likely increases
in uncompensated care for the operators of our facilities, in states where these demonstration waivers are granted.

The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid
reimbursement are scheduled to take effect over a number of years. The impact of the Legislation on healthcare
providers will be subject to implementing regulations, interpretive guidance and possible future legislation or
legal challenges. Certain Legislation provisions, such as that creating the Medicare Shared Savings Program
create uncertainty in how healthcare may be reimbursed by federal programs in the future. Thus, at this time, we
cannot predict the impact of the Legislation on the future reimbursement of our hospital operators and we can
provide no assurance that the Legislation will not have a material adverse effect 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, including the federal Anti-Kickback Statute and the False Claims Act, making it
easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers.
While Congress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a
person is not required 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, the Legislation also provides that any claims for items or
services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil
False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of
60 days is subject to the federal civil False Claims Act, although certain final regulations implementing this
statutory requirement remain pending. The Legislation also expands the Recovery Audit Contractor program to
Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare
providers that violate applicable 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, we anticipate 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 delay elements of implementation or
funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate
outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are
unknown. Legislation has already been enacted that has eliminated the penalty for failing to maintain health
coverage that was part of the original Legislation. In addition, Congress has considered legislation that would, if
enacted, in material part (i) eliminate the large employer mandates to obtain or provide health insurance
coverage, respectively; (ii) permit insurers to impose a surcharge up to 30 percent on individuals who go
uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of
health insurance, with a phase-out of tax credits according to income level; (iv) expand health savings accounts;
(v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition
federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would
allow such state to define essential health benefits differently from federal standards and that would allow certain
commercial health plans to take health status,
in setting
premiums.

including pre-existing conditions,

into account

14

In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions.
President Biden is expected to undertake executive actions that will strengthen the Legislation and may reverse
the policies of the prior administration. The Trump Administration had directed the issuance of final rules
(i) enabling the formation of association health plans that would be exempt from certain Legislation requirements
such as the provision of essential health benefits; (ii) expanding the availability of short-term, limited duration
health insurance, (iii) eliminating cost-sharing reduction payments to insurers that would otherwise offset
deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal
poverty level; (iv) relaxing requirements for state innovation waivers that could reduce enrollment in the
individual and small group markets and lead to additional enrollment in short-term, limited duration insurance
and association health plans; and (v) incentivizing the use of health reimbursement accounts by employers to
permit employees to purchase health insurance in the individual market. The uncertainty resulting from these
Executive Branch policies has led to reduced Exchange enrollment in 2018 and 2019 and is expected to further
worsen the individual and small group market risk pools in future years. It is also anticipated that these and future
policies may create additional cost and reimbursement pressures on hospitals.

It remains unclear what portions of the Legislation may remain, or what any replacement or alternative
programs may be created by any future legislation. Any such future repeal or replacement may have significant
impact on the reimbursement for healthcare services generally and may create reimbursement for services
competing with the services offered by the operators of our hospitals. Accordingly, there can be no assurance that
the adoption of any future federal or state healthcare reform legislation will not have a negative financial 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.

On December 14, 2018, a Texas Federal District Court deemed the Legislation to be unconstitutional in its
entirety. The Court concluded that the Individual Mandate is no longer permissible under Congress’s taxing
power as a result of the Tax Cut and Jobs Act of 2017 (“TCJA”) reducing the Individual Mandate’s tax to $0
(i.e.,
it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation
unconstitutional. The court also held that because the individual mandate is “essential” to the Legislation and is
inseverable from the rest of the law, the entire Legislation is unconstitutional. Because the court issued a
declaratory judgment and did not enjoin the law, the Legislation remains in place pending its appeal. The District
Court for the Northern District of Texas ruling was appealed to the U.S. Court of Appeals for the Fifth Circuit.
On December 18, 2019, the 5th Circuit Court of Appeals’ three-judge panel voted 2-1 to strike down the
Legislation individual mandate as unconstitutional. The 5th Circuit Court also sent the case back to the Texas
district court to determine which Legislation provisions should be stricken with the mandate. On March 2, 2020,
the Supreme Court agreed to hear two consolidated cases, filed by the State of California and the United States
House of Representatives, asking the Supreme Court to review the ruling by the U.S. Court of Appeals for the 5th
Circuit decision and to review whether, if the mandate is unconstitutional, it can be separated from the rest of the
Legislation. Oral argument was heard on November 10, 2020, and a ruling is expected in 2021. On February 10,
2021, the Department of Justice announced that it has withdrawn support for the challenge before the Supreme
Court. The Legislation will remain law while the case proceeds through the appeals process; however, the case
creates additional uncertainty as to whether any or all of the Legislation could be struck down, which creates
operational risk for the health care industry. We cannot predict the effect of the elimination of the individual
mandate tax penalty, the final result and effect of the California v. Texas case. While the results of the 2020
elections potentially reduce the risk of the Legislation being eliminated in whole or in part, the continued
uncertainties regarding implementation of the Legislation create unpredictability for the strategic and business
planning efforts of health care providers, which in itself constitutes a risk.

Under the Legislation, hospitals are required to make public a list of their standard charges, and effective
January 1, 2019, CMS has required that this disclosure be in machine-readable format and include charges for all
hospital items and services and average charges for diagnosis-related groups. On November 27, 2019, CMS
published a final rule on “Price Transparency Requirements for Hospitals to Make Standard Charges Public.”
This rule took effect on January 1, 2021 and requires all hospitals to also make public their payor-specific

15

negotiated rates, minimum negotiated rates, maximum negotiated rates and cash for all items and services,
including individual items and services and service packages, that could be provided by a hospital to a patient.
Failure to comply with these requirements may result in daily monetary penalties.

As part of the CAA, Congress passed legislation aimed at preventing or limiting patient balance billing in
certain circumstances. The CAA addresses surprise medical bills stemming from emergency services,
out-of-network ancillary providers at in-network facilities, and air ambulance carriers. The legislation prohibits
surprise billing when out-of-network emergency services or out-of-network services at an in-network facility are
provided, unless informed consent is received. In these circumstances providers are prohibited from billing the
patient for any amounts that exceed in-network cost-sharing requirements. The legislation requires implementing
regulations within a year of enactment.

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 of care will increasingly affect the results of operations of our hospitals and
other healthcare facilities and may negatively impact their revenues if they are unable to meet expected quality
standards. The Legislation contains a number of provisions intended to promote value-based purchasing in
federal healthcare programs. Medicare now requires providers to report certain quality measures in order to
receive full reimbursement increases for inpatient and outpatient procedures that were previously awarded
automatically. In addition, hospitals that meet or exceed certain quality performance standards will receive
increased reimbursement payments, and hospitals that have “excess readmissions” for specified conditions will
receive reduced reimbursement. Furthermore, Medicare no 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 previous year will receive reduced Medicare reimbursements. The Legislation also
prohibits the use of federal funds under the Medicaid program to reimburse providers for treating 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 hospitals to report quality data, and several of these payers will not reimburse
hospitals for certain preventable adverse events. We expect value-based purchasing programs,
including
programs that condition reimbursement on patient outcome measures, to become more common and to involve a
higher percentage of reimbursement 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 could negatively impact their revenues if they are
unable to meet quality standards established by both governmental and private payers.

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 and substantial changes (sometimes applied retroactively) resulting from
legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. The
ultimate timing or effect of these changes cannot be predicted. Government regulation may have a dramatic
effect on our operators’ costs of doing business and the amount of reimbursement received by both government
and other third-party payors. The failure of any of our operators to comply with these laws, requirements and
regulations could adversely affect their ability to meet their obligations to us. These regulations include, among
other items: hospital billing practices and prices for service; relationships with physicians and other referral
sources; adequacy of medical care; 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 medical

16

records; the screening, stabilization and transfer, by hospitals with an emergency department, of patients who
have emergency medical conditions; certification, licensure and accreditation of our facilities; operating policies
and procedures, and; construction or expansion of facilities and services.

If our operators fail to comply with applicable laws and regulations, they could be subjected to liabilities,
including criminal penalties, civil penalties (including the loss of their licenses to operate one or more facilities),
and exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state
health care programs. The imposition of such penalties could jeopardize that operator’s ability to make lease or
mortgage payments to us 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 the amount 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 governmental regulations, 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 of regulatory or judicial interpretation. In the future, it is possible that different interpretations or
enforcement of these laws and regulations could subject
their current 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 the above laws, regulations or rules could have a material adverse
effect upon them, and in turn, us.

U.S. federal tax reform legislation now and in the future could affect REITs, both positively and

negatively, in ways that are difficult to anticipate.

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), signed into law on December 22, 2017, made
significant changes to corporate and individual tax rates and the calculation of taxes. While the 2017 Tax Act has
not had a significant direct impact on us, it may impact us indirectly as our tenants and the jurisdictions in which
we do business as well as the overall investment thesis for REITs may be impacted both positively and
negatively. Additionally,
impact of the 2017 Tax Act depends on future interpretations and
regulations that may be issued by federal tax authorities, as well as changes in state and local taxation in response
to the 2017 Tax Act, and it is possible that such future interpretations, regulations and other changes could
adversely impact us.

the overall

UHS and its subsidiaries are subject to pending legal actions, purported stockholder class actions,

governmental investigations and regulatory actions.

UHS and its subsidiaries are subject to pending legal actions, governmental investigations and regulatory
actions. Since UHS comprised approximately 33%, 31% and 30% of our consolidated revenues for the years
ended December 31, 2020, 2019 and 2018, 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 of Universal Health
Services, Inc.’s Forms 10-K and 10-Q, as publicly filed with the Securities and Exchange Commission. These
filings are the sole responsibility of UHS and are not incorporated by reference herein.

Defending itself against the allegations in the lawsuits and governmental investigations, or similar matters
and any related publicity, could potentially entail significant costs and could require significant attention from
UHS management and UHS’ reputation could suffer significantly. UHS has stated that it is unable to predict the
outcome of these matters or to reasonably estimate the amount or range of any such loss; however, the outcome
of these lawsuits and the related investigations, publicity and news articles that have been published concerning
these matters, could have a material adverse effect on their business, financial condition, results of operations
and/or cash flows.

17

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 successful claims and other actions are
brought against UHS in the future, there could be a material adverse impact on their financial position, results of
operations and liquidity, which in turn could have a material adverse effect on us.

In particular, government investigations, as well as qui tam and stockholder 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 monetary
payments and corporate integrity agreements, each of which could have a material adverse effect on UHS’s
business, financial condition, results of operations and/or cash flows, which in turn could have a material adverse
effect on us.

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 other types of commercial
operations and other types of real estate. The replacement of any tenant or operator could be delayed by the
regulatory approval process of 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. If we 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 to successor liability or require us to indemnify subsequent operators to whom we might transfer the
operating rights and licenses, all of which may materially adversely affect our business, results of operations, and
financial condition.

Risks Related to Business Operations

Increased competition in the health care industry has resulted in lower revenues and higher costs for our

operators, including UHS, and may affect our revenues, property values and lease renewal terms.

The healthcare industry is highly competitive and competition among hospitals and other health care
providers for patients and physicians has intensified in recent years. In most geographical areas in which our
facilities are operated, there are other facilities that provide services comparable to those offered by our facilities.
In addition, some competing facilities are owned by tax-supported governmental agencies or by nonprofit
corporations and may be supported by endowments and charitable contributions and exempt from property, sales
and income taxes. Such exemptions and support are not available to certain 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 those available at our facilities. Certain hospitals that are located in the
areas served by our facilities are specialty hospitals that provide medical, surgical and behavioral health services
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 competing facilities, including certain facilities operated by UHS but the real
property of which is not owned by us. Such competition is experienced in markets including, but not limited to,
McAllen, Texas, the site of our McAllen Medical Center, a 370-bed acute care hospital, and Riverside County,
California, the site of our Southwest Healthcare System-Inland Valley Campus, a 130-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

18

admission decisions and for directing the course of patient treatment. Since the operators of our facilities also
compete with other health care providers, they may experience difficulties in recruiting and retaining qualified
hospital management, nurses and other medical personnel.

We anticipate that our operators, including UHS, will continue to encounter increased competition in the
future that could lead to a decline in patient volumes and harm their businesses, which in turn, could harm our
business.

A substantial portion of our revenues are dependent upon one operator. If UHS experiences financial
difficulties, or otherwise fails to make payments 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, 2020, lease payments from UHS comprised approximately 33% of our
consolidated revenues. In addition, as of December 31, 2020, subsidiaries of UHS leased three of the six hospital
facilities owned by us with terms expiring in 2021 and 2026. We cannot assure you that UHS will continue to
satisfy its obligations to us or renew existing leases upon their scheduled maturity. In addition, if subsidiaries of
UHS exercise their options to purchase the respective three leased hospitals, or two leased FEDs, upon expiration
of the lease terms, our future 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 currently earned pursuant to the leases on the facilities.
The failure 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, our revenues 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. Please see Note 4 to the
consolidating financial statements – Lease Accounting, for additional
information related to a potential
transaction with a wholly-owned subsidiary of UHS in connection with Southwest Healthcare System, Inland
Valley Campus.

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”), a wholly-owned subsidiary of UHS, has served as our Advisor. Pursuant
to our Advisory Agreement, as amended and restated effective January 1, 2019, the Advisor is obligated to
present an investment program to us, to use its best efforts to obtain investments suitable for such program
(although it is not obligated to present any particular investment opportunity to us), 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
of December 31, 2020, we had no salaried employees although our officers do typically receive annual stock-
based compensation awards in the form of restricted stock. In special circumstances, if warranted and deemed
appropriate by the Compensation Committee of the Board of Trustees, our officers may also 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 and advisory services provided to us by our Advisor and UHS could not be replicated by
contracting with unrelated third parties or by being self-advised without considerable cost increases. We believe
that these relationships have been beneficial to us in the past, but we cannot guarantee that they will not become
detrimental 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 with UHS and its subsidiaries, in the future, our business dealings may not
be on the same or as favorable terms as we might achieve with a third party with whom we do not have such a
relationship. Disputes may arise between us and UHS that we are unable to resolve or the resolution of these
disputes may not be as favorable to us as a resolution we might achieve with a third party.

We hold non-controlling equity ownership interests in various joint-ventures.

For the year ended December 31, 2020, 11% of our consolidated and unconsolidated revenues were
generated by five jointly-owned LLCs/LPs in which we hold non-controlling equity ownership interests ranging

19

from 33% to 95%. Our level of investment and lack of control exposes us to potential losses of our investments
and revenues. Although our ownership arrangements have been beneficial to us in the past, we cannot guarantee
that they will continue to be beneficial in the future.

Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold
non-controlling ownership interests, the third-party member and the Trust, 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 (“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
ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the
Offering Member at the equivalent proportionate Transfer Price. 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 about purchasing 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 not be 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, our ability 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 require us to find new operators.

Our financial position and our ability to make distributions to our shareholders may be adversely affected by
financial difficulties experienced by any of our major tenants, including bankruptcy, insolvency or a general
downturn in the business. We are exposed to the risk that our operators may not be able to 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 or reorganization. An operator in bankruptcy
may be able to restrict our ability to collect unpaid rents or interest during the bankruptcy proceeding.

Real estate ownership creates risks and liabilities that may result in unanticipated losses or expenses.

Our business is subject to risks associated with real estate acquisitions and ownership, including:

•

•

•

•

•

•

general liability, property and casualty losses, some of which may be uninsured;

the illiquid nature of real estate and the real estate market that impairs our ability to purchase or sell our
assets rapidly to respond to changing economic conditions;

real estate market factors, such as the supply and demand of office space and market rental rates,
changes in interest rates as well as an increase in the development of medical office condominiums in
certain markets;

costs that may be incurred relating to maintenance and repair, and the need to make expenditures due to
changes in governmental regulations, including the Americans with Disabilities Act;

environmental hazards at our properties for which we may be liable, including those created by prior
owners or occupants, existing tenants, mortgagors or other persons, and;

defaults and bankruptcies by our tenants.

In addition to the foregoing risks, we cannot predict whether the leases on our properties, including the
leases on the hospitals leased to subsidiaries of UHS, which have options to purchase the respective leased

20

facilities at the end of the lease or renewal terms at the appraised fair market value, will be renewed at their
current rates or fair market value lease rates at the end of the lease terms in 2021 or 2026. Please see Note 4 to
the consolidated financial statements – Lease Accounting, for additional information related to a potential
transaction with a wholly-owned subsidiary of UHS in connection with Southwest Healthcare System, Inland
Valley Campus. If the leases are not renewed, we may be required to find other 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
less favorable 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 the respective 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 a hospital,
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, in part, upon the financial performance of the facility during the final years of
the lease term.

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 we have 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 to qualify as a REIT may
subject us to income tax liabilities, including federal income tax at regular corporate rates. The additional income
tax incurred may significantly reduce the cash flow available for distribution to shareholders and for debt service.
In addition,
if disqualified, we might be barred from qualification as a REIT for four years following
disqualification. Also, if disqualified, we will not be allowed a deduction for distributions to stockholders in
computing 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 taxes on any undistributed income, tax on income from some activities
conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Any of these taxes
would decrease cash available for the payment of our debt obligations.

Dividends paid by REITs generally do not qualify for reduced tax rates.

In general, dividends (qualified) paid by a U.S. corporation to individual U.S. shareholders are subject to
Federal income tax at a maximum rate of 20% for 2020 (subject to certain additional taxes for certain taxpayers).
In contrast, since we are a REIT, our distributions to individual U.S. shareholders are not eligible 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 37% for 2020 (subject to certain additional taxes for certain taxpayers). The differing treatment of
dividends received from REITs and other corporations might cause individual investors to view an investment in
REITs as less attractive relative to other corporations, which might negatively affect the value of our shares.

Should we be unable to comply with the strict income distribution requirements applicable to REITs
utilizing only cash generated by operating activities, 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 at least 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 also be subject to a 4% excise tax
on this undistributed income. To meet the distribution requirements necessary to achieve the tax benefits
associated with qualifying 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 a dilutive effect on the future dividends and share

21

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, the nature and diversification of our assets, the amounts we distribute to
our stockholders and the ownership of our stock. We may be unable to pursue investments that would be
otherwise advantageous to us in order to satisfy the source-of-income, asset-diversification or distribution
requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to
make certain attractive investments.

Significant potential liabilities and rising insurance costs and availability may have an adverse effect on

the operations of our operators, which may negatively impact their ability to meet their obligations to us.

As is typical in the healthcare industry, in the ordinary course of business, our operators, including UHS, are
subject to medical malpractice lawsuits, product liability lawsuits, class action lawsuits and other legal actions.
Some of these actions may involve large claims, as well as significant defense costs. If their ultimate liability for
professional and general
if such policy
limitations should be partially 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 on the operations of our operators and, in turn, us.

liability claims could change materially from current estimates,

Property insurance rates, particularly for earthquake insurance in California, have also continued to increase.
Our tenants and operators, including UHS, may be unable to fulfill their insurance, indemnification and other
obligations to us under their leases and mortgages and thereby potentially expose us to those risks. In addition,
our tenants and operators may be unable to pay their lease or mortgage payments, which could potentially
decrease our revenues and increase our collection and litigation costs. Moreover, to the extent we are required to
foreclose on the affected facilities, our revenues from those facilities could be reduced or eliminated for an
extended period of time. In addition, we may in some circumstances be named as a defendant in litigation
involving the actions of our operators. Although we have no involvement in the activities of our operators and
our standard leases generally require our operators to carry insurance to cover us in certain cases, a significant
judgment against us in such litigation could exceed our and our operators’ insurance coverage, which would
require us to make payments to cover the judgment.

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 of our 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 personnel could
significantly undermine our management expertise and our operators’ ability to provide efficient, quality health
care services at our facilities, which could harm their business, and in turn, harm our business.

Increasing investor interest in our sector and consolidation at the operator or REIT level could increase

competition and reduce 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 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 which 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 spreads over our cost of our capital, which would hurt our growth. Increased competition makes it

22

more challenging for us to identify and successfully capitalize on opportunities 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 healthcare facilities at favorable prices or if we are unable to finance
acquisitions on commercially favorable terms, our business, results of operations and financial condition 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 generally required to conform a property to healthcare use, such as upgrading electrical,
gas and plumbing infrastructure, are costly and at times tenant-specific. A new or replacement operator or tenant
may require different features in a property, depending on that operator’s or tenant’s particular operations. If a
current operator 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 secure another operator or tenant. Also, if the property needs to be
renovated to accommodate multiple operators or tenants, we may incur substantial expenditures before we are
able to re-lease the space. These expenditures or renovations may materially adversely affect our business, results
of operations and financial condition.

A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative

impacts.

We and UHS rely extensively on our information technology (“IT”) systems to manage clinical and
financial data, communicate with our patients, payors, vendors and other third parties and summarize and analyze
operating results. In addition, UHS has made significant investments in technology to adopt and utilize electronic
health records and to become a meaningful user of health information technology pursuant to the American
Recovery and Reinvestment Act of 2009. Our IT systems are subject to damage or interruption from power
outages, facility damage, computer and telecommunications failures, computer viruses, security breaches
including credit card or personally identifiable information breaches, vandalism,
theft, natural disasters,
catastrophic events, human error and potential cyber threats, including malicious codes, worms, phishing attacks,
denial of service attacks, ransomware and other sophisticated cyber-attacks, and our disaster recovery planning
cannot account for all eventualities. As cyber criminals continue to become more sophisticated through evolution
of their tactics, techniques and procedures, we have taken, and will continue to take, additional preventive
measures to strengthen the cyber defenses of our networks and data. However, if any of our systems are
damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or
replace them, and may experience loss or corruption of critical data such as protected health information or other
data subject to privacy laws and proprietary business information and interruptions or disruptions and delays in
our ability to perform critical functions, which could materially and adversely affect our businesses and results of
operations and could result in significant penalties or fines, litigation, loss of customers, significant damage to
our reputation and business, and other losses. In addition, our future results of operations, as well as our
loss, or misappropriation of public health
reputation, could be adversely impacted by theft, destruction,
information, other confidential data or proprietary business information.

In September, 2020, UHS experienced an information technology security incident which led UHS to
suspend user access to its information technology applications related to operations located in the United States.
While its information technology applications were offline, patient care was delivered safely and effectively at its
facilities across the country utilizing established back-up processes, including offline documentation methods.
UHS has investigated the nature and potential
impact of the security incident and engaged third-party
information technology and forensic vendors to assist. No evidence of unauthorized access, copying or misuse of
any patient or employee data has been identified to date. Promptly after the incident, its information technology
applications were restored at its acute care and behavioral health hospitals, as well as at the corporate level,

23

thereby re-establishing connections to all major systems and applications, including electronic medical records,
laboratory and pharmacy systems and its hospitals resumed normal operations.

Risks Related to the Market Conditions and Liquidity

A worsening of the economic and employment conditions in the United States could materially affect our
business and future results of operations of the 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 the number of people unemployed and/or uninsured. Our operators’
patient volumes, revenues and financial results depend significantly on the universe of patients with health
insurance, which to a large extent is dependent on the employment status of individuals in certain markets. A
worsening of economic conditions may result in a higher unemployment rate which will likely increase the
number of individuals without health insurance. As a result, the operators of our facilities may experience a
decrease in patient volumes. Should that occur, it may result in decreased occupancy rates at our medical office
buildings as well as a reduction in the revenues earned by the operators of our hospital facilities which would
unfavorably impact our future bonus rentals (on the UHS hospital 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 availability and terms of capital to fund the growth of our business when needed.

To retain our status as a REIT, we are required to distribute 90% of our taxable income to shareholders and,
therefore, we generally cannot use income from operations to fund our growth. Accordingly, our growth strategy
depends, in part, upon our ability to raise additional capital at reasonable costs to fund new investments. We
believe we will be able to raise additional debt and equity capital at reasonable costs to refinance our debts
(including third-party debt held 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 these
uncertainties, 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 as borrowings 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 could make us more vulnerable to competitive pressures. Our ability
to meet existing and future debt obligations depends upon our future performance and our ability to secure
additional financing on satisfactory terms, each of which is subject to financial, business and other factors that
are beyond our control. Any failure 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 on acceptable terms or within an acceptable time. Our inability to obtain
financing on terms acceptable to us could have a material unfavorable impact on our results of operations,
financial condition and liquidity.

The LIBOR calculation method may change, and LIBOR is expected to be phased out after 2021.

Our Credit Agreement permits interest on borrowings to be calculated based on LIBOR. On July 27, 2017,
the United Kingdom Financial Conduct Authority (the “FCA”) announced that it will no longer require banks to

24

submit rates for the calculation of LIBOR after 2021. The phase-out of LIBOR may result in the establishment of
one or more alternative benchmark rates, but at this time it is uncertain what alternative benchmark rates would
replace LIBOR. In the meantime, actions by the FCA, other regulators, or law enforcement agencies may result
in changes to the method by which LIBOR is calculated. At this time, it is not possible to predict the effect of any
such changes or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere.

Catastrophic weather and other natural events, whether caused by climate change or otherwise, could

result in damage to our properties.

Many of our properties are located in areas susceptible to revenue loss, cost increase, or damage caused by
severe weather conditions or natural disasters such as wildfires, hurricanes, earthquakes, tornadoes and floods.
We could experience losses to the extent that such damages exceed insurance coverage, cause an increase in
insurance premiums, and/or a decrease in demand for properties located in such areas. In the event that climate
change causes such catastrophic weather or other natural events to increase broadly or in localized areas, such
costs and damages could increase above historic expectations. In addition, changes in federal and state legislation
and regulation on climate change could result in increased capital expenditures to improve energy efficiency of
our existing properties and could require us to spend more on development and redevelopment properties without
a corresponding increase in revenue.

Risks Related to Our Securities

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 include certain of the risks discussed herein, our financial condition,
performance and prospects, the market for similar securities issued by REITs, demographic changes, 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 (whether caused by climate change or otherwise), the level of
seasonal illnesses, changes in general conditions in the economy, financial markets or overall interest rate
environment, or other developments affecting the health care industry.

When interest rates increase, our common stock may decline in price.

Our common stock, like other dividend stocks, is sensitive to changes in market interest rates. In response to
changing interest rates the price of our common stock may behave like a long-term fixed-income security and,
compared to shorter-term instruments, may have more volatility. A wide variety of market factors can cause
interest rates to rise, including central bank monetary policy, an uptick in inflation and changes in general
economic conditions. The risks associated with increasing rates are intensified given that interest rates have been
near historic lows but may be expected to increase in the future, with unpredictable effects on the markets and on
the price of our common stock. Consequential effects of a general rise in interest rates may hamper our access to
capital markets, affect the liquidity of our underlying investments in real estate, and, by extension, limit
management’s effective range of responses to changing tenant circumstances or in answer to investment
opportunities. Limited operational alternatives may further hinder our ability to maintain or increase our
dividend, and the market price of our common stock may experience further declines as the result.

Ownership limitations and anti-takeover provisions in our declaration of trust and bylaws and under
Maryland law and in our leases with UHS may delay, defer or prevent a change in control or other
transactions that could provide shareholders with a take-over premium. We are subject to significant anti-
takeover provisions.

In order to protect us against the risk of losing our REIT status for federal income tax purposes, our
declaration of trust permits our Trustees to redeem shares acquired or held in excess of 9.8% of the issued and

25

outstanding shares of our voting stock and, which in the opinion of the Trustees, would jeopardize our 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 right of redemption may have the effect of delaying, deferring or preventing a
change in control of our company and could adversely affect our shareholders’ ability to realize a premium over
the market price for the shares of our common stock.

Our declaration of trust authorizes our Board of Trustees to issue additional shares of common and preferred
stock and to establish the preferences, rights and other terms of any series of preferred stock that we issue.
Although our Board of Trustees has no intention to do so at the present time, it could establish a series of
preferred stock that could delay, defer or prevent a transaction or a change in control that might involve the
payment of a premium over the 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 the freestanding emergency departments leased to subsidiaries of UHS,
includes a change of control provision. The change of control provision grants UHS the right, upon one month’s
notice should a change of control of the Trust occur, to purchase any or all of the leased hospital properties at
their appraised fair market 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 revenue currently 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 could adversely affect the market price of our securities and prevent
shareholders from receiving a take-over premium.

Item 1B. Unresolved Staff Comments

None.

26

ITEM 2. Properties

The following table shows our investments in hospital facilities leased to UHS and other non-related parties and also
provides information related to various properties in which we have significant investments, some of which are accounted for
by the equity method. The capacity in terms of beds (for the hospital facilities) and the five-year occupancy levels are based
on information provided by the lessees.

Hospital Facility Name and
Location

Type of
facility

Number
of
available
beds @
12/31/2020

Average Occupancy(1)

2020

2019

2018

2017

2016

Minimum
rent(6)

End of
initial
or
renewed
term

Renewal
term
(years)

% of RSF
under
lease with
guaranteed
escalators

Range of
guaranteed
escalation

Lease Term

Southwest Healthcare System:
Inland Valley Campus(2)(5)(7)

Wildomar, California

McAllen Medical
Center(3)(5)(7)
McAllen, Texas

Acute Care

Acute Care

130

370

63% 63% 59% 62% 64% $2,648,000

2021

50% 50% 44% 45% 47% 5,485,000

2026

Wellington Regional Medical

Acute Care

155

62% 62% 59% 57% 55% 3,030,000

2021

Center(4)(5)(7)
West Palm Beach, Florida

Evansville Rehabilitation

Hospital
Evansville, Indiana(8)

Corpus Christi

Corpus Christi, Texas(9)
Kindred Hospital Chicago

Central(10)
Chicago, Illinois

Clive Behavioral Health(5)(11)

Clive, Iowa

Specialty

Specialty

0

0

—

—

—

—

75% 73% 75%

46% 50% 51%

0

0

—

—

Specialty

68

27% 27% 35% 39% 46% 1,550,000

2021

Behavioral
Health
Care

100

N/A N/A N/A N/A N/A

2,540,929

2040

10

5

10

—

—

—

50

0%

0%

0%

—

—

0%

—

—

—

—

—

—

100%

3%

Facility Name and Location

Spring Valley MOB I(5)
Las Vegas, Nevada
Spring Valley MOB II(5)
Las Vegas, Nevada

Summerlin Hospital MOB I(5)

Las Vegas, Nevada

Summerlin Hospital MOB II(5)

Las Vegas, Nevada

Summerlin Hospital MOB III(5)

Las Vegas, Nevada

Rosenberg Children’s Medical Plaza

Phoenix, Arizona

Centennial Hills MOB(5)
Las Vegas, Nevada

PeaceHealth Medical Clinic
Bellingham, Washington

Lake Pointe Medical Arts Building

Rowlett, Texas

Chandler Corporate Center III

Chandler, Arizona

Frederick Crestwood MOB
Frederick, Maryland

Henderson Union Village MOB(5)

Henderson, Nevada

Northwest Texas Professional Office

Tower Amarillo, Texas

Midcoast Hospital MOB Brunswick,

Maine

Texoma Medical Plaza(5)

Denison, Texas

Auburn Medical Office Buidling II

Auburn, Washington

Type
of
facility
MOB

MOB

MOB

MOB

MOB

Average Occupancy(1)

2020

2019

2017
94% 85% 81% 72% 72% $ 966,000

2016

2018

Minimum
rent(6)

71% 63% 71% 85% 85% 1,059,000

83% 78% 72% 65% 64% 1,336,000

77% 80% 79% 80% 78% 1,245,000

84% 86% 99% 100% 100% 1,620,000

MOB

100% 100% 100% 99% 99% 2,251,000

MOB

81% 77% 75% 75% 73% 1,562,000

MOB

100% 100% 100% 100% 100% 2,578,000

MOB

MOB

96% 96% 95% 100% 100%

836,000

92% 92% 92% 92% 92% 1,229,000

MOB

100% 100% 100% 100% 100% 1,696,000

MOB

52% 38% 37% 24% —

1,289,000

MOB

100% 100% 100% 100% 100%

976,000

MOB

100% 100% 100% 100% 100% 1,475,000

MOB

100% 100% 100% 100% 100% 1,750,000

MOB

90% 87% 81% 84% 90% 1,210,000

27

Lease Term

End of
initial
or
renewed
term
2021-
2029
2021-
2030
2021-
2028
2021-
2027
2021-
2027
2021-
2028
2021-
2035
2021

2021-
2029
2027

2026-
2030
2022-
2031
2022-
2023
2021-
2026
2021-
2030
2022-
2030

Renewal
term
(years)
Various

Various

Various

Various

Various

Various

Various

20

Various

Various

Various

Various

Various

Various

Various

Various

% of RSF
under
lease with
guaranteed
escalators

Range of
guaranteed
escalation

91%

95%

83%

75%

88%

100%

79%

100%

95%

92%

100%

63%

100%

100%

100%

90%

2%-3%

2%-3%

2%-3%

2%-3%

2%-3%

2%-3%

2%-3%

1%

3%

2%

3%-4%

2%-3%

2%-3%

2%

3%

2%-3%

N/A – Not applicable.

(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, 2020. Average available beds is the number of beds which are actually in service at any given time for immediate patient use with
the necessary equipment and staff available for patient care. A hospital may have appropriate licenses for more beds than are in service for a
number of reasons, including lack of demand, incomplete construction and anticipation of future needs. The average occupancy rate of a hospital
is affected by a number of factors, including the number of physicians using the hospital, changes in the number of beds, the composition and size
of the population of the community in which the hospital is located, general and local economic conditions, variations in local medical and
surgical practices and the degree of outpatient use of the hospital services. Average occupancy rate for the multi-tenant medical office buildings is
based on the occupied square footage of each building, including any applicable master leases.
In July, 2002, the operations of Inland Valley Regional Medical Center (“Inland Valley”) were merged with the operations of Rancho Springs
Medical Center (“Rancho Springs”), an acute care hospital located in California and also operated by UHS, the real estate assets of which are not
owned by us. Inland Valley, our lessee, was merged into Universal Health Services of Rancho Springs, Inc. The merged entity is now doing
business as Southwest Healthcare System (“Southwest Healthcare”). As a result of merging 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 own the 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. Since
the 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 amended during 2002 to exclude from the bonus rent calculation the estimated net revenues generated at the Rancho
Springs campus (as calculated pursuant to a percentage based allocation 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 underlying value 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 occupancy rates shown for this facility for all
years were based on the combined number of beds occupied at the Inland Valley and Rancho Springs campuses. Please see above in Relationship
with UHS, for additional disclosure regarding UHS’s notification to us that it is considering terminating the existing lease on Southwest
Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current lease term on December 31, 2021. UHS is planning to
offer us potential substitution properties, with fair market value substantially equal to that of Southwest Healthcare System, Inland Valley
Campus, in exchange for the Inland Valley Campus. UHS is expected to submit its proposal to us during the first quarter of 2021. Upon receipt,
the proposal will be reviewed and evaluated by management of the Trust as well as by our Board of Trustees. All transactions with UHS must be
approved by a majority of our Independent Trustees. We can provide no assurance that we will ultimately agree on a property substitution with
UHS in connection with the Inland Valley Campus property.

(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, the Heart Hospital began operating under the same license as McAllen Medical Center (which has 370 available beds as of
December 31, 2020). The net revenues of the combined operations included revenues generated by the Heart Hospital, the real property of which
is not owned by us. Accordingly, the McAllen Medical Center lease was amended during 2001 to exclude from the bonus rent calculation, the
estimated net revenues generated at the Heart Hospital (as calculated pursuant to a percentage based allocation determined at the time of the
merger). During 2000, UHS purchased the South Texas Behavioral Health Center, a behavioral health care facility located in McAllen, 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 the real 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 merged into the operating license of McAllen Medical Center/McAllen Heart Hospital. There was no amendment to the
McAllen Medical Center lease related to the operations of the 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 235-bed facility located in Edinburg, Texas, were merged into one 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 its net
revenues are distinct and excluded from the bonus rent calculation. In 2015, the newly constructed South Texas ER at Weslaco and South Texas
ER at 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 to STHS. The average occupancy rates reflected above are
based upon the combined occupancy and combined number of beds at McAllen Medical Center and McAllen Heart Hospital. 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 of
McAllen Medical Center. Base rental commitments and the guarantee by UHS under the original lease continue for the remainder of the lease
terms.
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 the Wellington 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 the property 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 beds reflected above.

(4)

(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 are subsidiaries of UHS or jointly owned by a subsidiary of UHS.
(6) Minimum rent amounts contain impact of straight-line rent adjustments, if applicable.
(7) See above in Relationship with UHS, regarding, among other things, UHS’s purchase option, right of first refusal and change 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 of
December 31, 2020 amounting to: $11.9 million for Southwest Healthcare System-Inland Valley Campus; $16.3 million for McAllen Medical
Center, and; $10.9 million for Wellington Regional Medical Center.

(8) The lease on this facility expired on May 31, 2019 and the property remains vacant. We are marketing the property for lease to new tenants.
(9) The lease on this facility expired on June 1, 2019 and the property is remains vacant. We are marketing the property for lease to new tenants.
(10) The existing lease on this facility is scheduled to expire on December 31, 2021. We can provide no assurance that the lease on this facility, which
for the years ended December 31, 2020 and 2019, did not generate sufficient operating income to cover its rent due to us, will be renewed, or
renewed at existing lease rates, upon maturity. The lessee has a purchase option which is exercisable, subject to certain terms and conditions, at
the expiration of each 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 believe the fair market value of the facility exceeds the $158,000 net book value as of December 31,
2020. The lessee also has a first refusal to purchase right which, if applicable and subject to certain terms and conditions, grants the lessee the
option to purchase the property at the same terms and conditions as an accepted third-party offer.

(11) This newly constructed UHS-related hospital was substantially completed in December of 2020 and received a temporary certificate of occupancy
on December 31, 2020. The lease on this facility, which is triple net and has an initial term of 20 years with five, 10-year renewal options, was
executed with a joint-venture between a wholly-owned subsidiary of UHS and Catholic Health Initiatives-Iowa, Corp. and commenced on
December 31, 2020.

28

Leasing Trends at Our Significant Medical Office Buildings

During 2020, we had a total of 39 new or renewed leases related to the medical office buildings indicated
above, in which we have significant investments, some of which are accounted for by the equity method. These
leases comprised approximately 30% of the aggregate rentable square feet of these properties (21% related to
renewed leases and 9% related to new leases). Rental rates, tenant improvement costs and rental concessions vary
from property 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. In connection with lease renewals executed during 2020, the
weighted-average rental rates, as compared to rental rates on the expired leases, decreased by approximately 1%
during 2020. The weighted-average tenant improvement costs associated with these new or renewed leases was
approximately $18 per square foot during 2020. The weighted-average leasing commissions on the new and
renewed leases commencing during 2020 was approximately 3% 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 2020 was approximately 0.9% of the future
aggregate base rental revenue over the lease terms. Rent abatements were, or will be, recognized in our results of
operations under the straight-line method over the lease term regardless of when payments are due.

Set forth is information detailing the rentable square feet (“RSF”) associated with each of our properties as
of December 31, 2020 and the percentage of RSF on which leases expire during the next five years and
thereafter. For the MOBs that have scheduled lease expirations during 2021 of 10% or greater (of RSF), we have
included information regarding estimated market rates relative to lease rates on the expiring leases.

Hospital Investments:

McAllen Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wellington Regional Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest Healthcare System—Inland Valley . . . . . . . . . . . . . . . . . . . .
Kindred Hospital Chicago Central
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Clive Behavioral Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Evansville, IN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corpus Christi, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-total Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Medical Office Buildings:

Goldshadow—2010—2020 Goldring MOB’s (c.) . . . . . . . . . . . . . . . . .
Goldshadow—700 Shadow Lane MOB (a.) . . . . . . . . . . . . . . . . . . . . . .
Texoma Medical Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Matthews Medical Plaza II
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Desert Springs Medical Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peace Health Medical Clinic (c.)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Centennial Hills Medical Office Building (a.) . . . . . . . . . . . . . . . . . . . .
Summerlin Hospital Medical Office Building II (c.) . . . . . . . . . . . . . . .
Summerlin Hospital Medical Office Building I (a.) . . . . . . . . . . . . . . . .
Chandler Corporate Center III
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3811 E. Bell (a.)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Henderson Union Village MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summerlin Hospital Medical Office Building III (c.) . . . . . . . . . . . . . . .
Texoma Medical Plaza II
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Coast Hospital MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
North West Texas Professional Office Tower
Rosenberg Children’s Medical Plaza . . . . . . . . . . . . . . . . . . . . . . . . . . .
Frederick Crestwood MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Palmdale Medical Plaza (d.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sierra San Antonio Medical Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . .
Spring Valley Medical Office Building (a.) . . . . . . . . . . . . . . . . . . . . . .
Spring Valley Medical Office Building II (a.) . . . . . . . . . . . . . . . . . . . .
Southern Crescent Center II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Desert Valley Medical Center (a.)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tuscan Professional Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lake Pointe Medical Arts Building (b.) . . . . . . . . . . . . . . . . . . . . . . . . .
Forney Medical Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vista Medical Terrace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2704 N. Tenaya Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southern Crescent Center I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auburn Medical Office Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BRB Medical Office Building (d.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cypresswood Professiona Center—8101 . . . . . . . . . . . . . . . . . . . . . . . .

Available
for Lease
Jan. 1,
2021

Percentage of RSF with lease expirations

2021

2022

2023

2024

2025

2026
and
Later

0%
0%
0%
0%
0%
100%
100%
13%

12%
47%
0%
0%
33%
0%
21%
25%
17%
8%
33%
37%
12%
47%
0%
0%
0%
0%
44%
27%
9%
5%
39%
0%
2%
5%
19%
59%
0%
58%
10%
25%
100%

0%
100%
100%
100%
0%
0%
0%
42%

0%
0%
0%
0%
0%
0%
0%
0%

0%
0%
0%
0%
0%
0%
0%
0%

0%
0%
0%
0%
0%
0%
0%
0%

0% 100%
0%
0%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
45%
0%

21%
7%
2% 26%
9%
23%
0%
0% 23%
6%
0%
24%
51%
6% 15%
2%
11% 15%
16%
0% 18% 46%
2% 18%
15%
0%
15% 26%
1%
10%
0%
0%
0%
0%
0%
100%
25%
6%
6%
17%
18%
7%
15%
5%
4%
0%
40% 11%
9%
7% 20%
6%
5%
36%
92%
0%
0%
0%
0%
0%
30%
4%
7% 10%
2%
14%
57%
0%
3%
0%
0%
3%
12%
0%
21% 18%
26% 11%
53%
0%
0%
0%
0%
0%
96%
0%
0%
0%
4%
0%
0%
0%
0%
36%
0% 64%
0%
0%
51%
46%
0%
3%
0% 100%
0%
0%
0%
0%
10%
0%
9%
8%
0%
29%
5%
0%
32% 18%
13%
5%
29%
4%
18% 13%
12% 15%
33%
0%
0% 17%
19% 26%
0%
0% 22%
0%
0% 39%
4%
5% 10%
37%
13% 31%
15%
0%
3%
4%
24% 52%
13%
5%
7%
15%
33% 22%
21%
0%
0%
19%
5%
36%
0%
7%
4%
9%
5% 16%
0%
0%
0%
0% 100%
0%
0%
0%
0%
42%
0%
0%
10%
0%
0%
10%
0% 70%
5%
9%
0%
0%
0%
61%
0%
0%
0%
0%
0%
0%

Total
RSF

422,276
196,489
164,377
115,554
82,000
77,440
69,700
1,127,836

74,774
42,060
115,284
103,011
103,002
98,886
96,573
92,313
89,636
81,770
80,200
79,599
77,713
75,278
74,629
72,351
66,231
62,297
59,405
59,160
57,828
57,438
53,680
53,625
53,231
50,974
50,947
50,921
44,894
41,897
41,311
40,733
10,200

29

Cypresswood Professional Center—8111 . . . . . . . . . . . . . . . . . . . . . . . .
Danbury Medical Plaza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Sparks Medical Building (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Phoenix Children’s East Valley Care Center . . . . . . . . . . . . . . . . . . . . .
Forney Medical Plaza II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Madison Station MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Apache Junction Medical Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Santa Fe Professional Plaza (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional Bldg at King’s Crossing—Bldg A . . . . . . . . . . . . . . . . . . .
Professional Bldg at King’s Crossing—Bldg B . . . . . . . . . . . . . . . . . . .
Emory at Dunwoody Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Piedmont—Roswell Physicians Center . . . . . . . . . . . . . . . . . . . . . . . . . .
Bellin Health Family Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . .
Piedmont—Vinings Physicians Center . . . . . . . . . . . . . . . . . . . . . . . . . .
Ward Eagle Office Village . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Haas Medical Office Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health Center at Hamburg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northwest Medical Center at Sugar Creek . . . . . . . . . . . . . . . . . . . . . . .
Family Doctor’s MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beaumont Sleep Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
701 South Tonopah Building (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Children’s Clinic at Springdale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sand Point MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5004 Pool Road MOB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preschool and Childcare Centers:

Chesterbrook Academy—Audubon . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chesterbrook Academy—Uwchlan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chesterbrook Academy—Newtown . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chesterbrook Academy—New Britain . . . . . . . . . . . . . . . . . . . . . . . . . .

Free-Standing Emergency Departments:

Hanover Emergency Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Texas ER at Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Texas ER at Weslaco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Las Palmas Del Sol Emergency Center-West . . . . . . . . . . . . . . . . . . . . .

Total
RSF
29,882
36,141
35,127
30,960
30,507
30,096
26,901
24,896
11,528
12,790
20,366
19,927
18,600
16,790
16,282
15,850
15,400
13,696
12,050
11,556
10,747
9,761
9,128
4,400

8,300
8,163
8,100
7,998

22,000
13,578
13,578
9,395

Sub-total Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,766,344

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,894,180

Available
for Lease
Jan. 1,
2021
41%
46%
0%
0%
39%
0%
0%
0%
100%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%

0%
0%
0%
0%

0%
0%
0%
0%

16%

15%

Percentage of RSF with lease expirations

2023

2026
and
Later
2021
2022
2024
2025
44%
0% 10%
0%
0%
5%
54%
0%
0%
0%
0%
0%
13%
0% 21%
13% 23% 30%
0% 100%
0%
0%
0%
0%
25%
0%
0% 19% 17%
0%
0%
0%
0%
0% 100%
0%
35%
0% 18%
34% 13%
0%
0%
7%
0%
27% 30% 36%
0%
0%
0%
0%
0%
0%
0%
0% 11% 38% 33% 18%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0%
0%
0%
0% 100%
0%
0%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0% 21% 17% 62%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0%
0%
100%
0%
0% 100%
0%
0%
0%
0%
0% 100%
0%
0%
0%
0%
0%
0%
0%
0%
0% 100%

0%
0%
0%
0%

0%
0%
0%
0%

0%
0%
0%
0%

0%
0%
0%
0%

0%
0%
0%
0%

0% 100%
0% 100%
0%
0%

0%
0%
0% 100%
0% 100%

0% 100%
0%
0%
0%

0%
0% 100%
0% 100%
0% 100%

15% 12% 13%

23%

8%

9%

7%

5%

8%

6%

0%
0%
0%
0%

29%

34%

(a) The estimated market rates related to the 2021 expiring RSF are greater than the lease rates on the expiring leases by an average of

approximately 0% to 3%.

(b) The estimated market rates related to the 2021 expiring RSF are greater than the lease rates on the expiring leases by an average of

approximately 7%.

(c) The estimated market rates related to the 2021 expiring RSF are less than the lease rates on the expiring leases by an average of

approximately 0% to 5%.

(d) The estimated market rates related to the 2021 expiring RSF are less than the lease rates on the expiring leases by an average of

approximately 10%.

On a combined basis, based upon the aggregate revenues and square footage for the occupied hospital
facilities owned as of December 31, 2020 and 2019, the average effective annual rental per square foot was
$20.96 and $20.55,
respectively. On a combined basis, based upon the aggregate consolidated and
unconsolidated revenues and the estimated average occupied square footage for our MOBs, FEDs and childcare
centers owned as of December 31, 2020 and 2019, the average effective annual rental per square foot was $29.95
and $30.27, respectively. On a combined basis, based upon the aggregate consolidated and unconsolidated
revenues and estimated average occupied square footage for all of our occupied properties owned as of
December 31, 2020 and 2019, the average effective annual rental per square foot was $27.45 and $27.41,
respectively. The estimated average occupied square footage for 2020 was calculated by averaging the
unavailable rentable square footage on January 1, 2020 and January 1, 2021. The estimated average occupied
square footage for 2019 was calculated by averaging the unavailable rentable square footage on January 1, 2019
and January 1, 2020.

During 2020, one of the UHS-related hospitals (McAllen Medical Center) generated revenues that
comprised approximately 10% of our consolidated revenues. Additionally, none of the properties had book
values greater than 10% of our consolidated assets as of December 31, 2020. Including 100% of the revenues

30

generated at the properties owned by our unconsolidated LLCs, none of our unconsolidated LLCs had revenues
greater than 10% of the combined consolidated and unconsolidated revenues during 2020. Including 100% of the
book values of the properties owned by our unconsolidated LLCs, none of the properties had book values greater
than 10% of the consolidated and unconsolidated assets.

The following table sets forth the average effective annual rental per square foot for 2020, based upon

average occupied square feet for McAllen Medical Center:

Property

2020
Average
Occupied
Square
Feet

2020
Revenues

2020
Average
Effective
Rental
Per Square
Foot

McAllen Medical Center

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

422,276

$7,797,132

$18.46

The following table sets forth lease expirations for each of the next ten years for our properties as of

December 31, 2020.

Expiring
Square
Feet

Number
of
Tenants

Annual Rentals of
Expiring
Leases(1)

Percentage
of
Annual
Rentals(2)

Hospital properties
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

476,420
0
0
0
0
422,276
0
0
0
0
82,000

Subtotal-hospital facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

980,696

Other consolidated properties
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

404,201
289,433
335,179
164,783
184,946
180,966
182,366
29,375
27,779
102,963
68,153

Subtotal-other consolidated properties . . . . . . . . . . . . . . . . . .

1,970,144

3
0
0
0
0
1
0
0
0
0
1

5

104
68
66
35
35
26
15
6
5
8
6

374

$11,032,874
0
0
0
0
7,797,132
0
0
0
0
2,540,929

$21,370,935

$12,582,248
8,937,817
9,725,842
4,958,456
5,721,368
5,217,819
5,392,935
968,070
795,093
2,958,981
1,967,698

$59,226,327

12%
0%
0%
0%
0%
9%
0%
0%
0%
0%
3%

24%

14%
10%
11%
5%
6%
6%
6%
1%
1%
3%
2%

65%

31

Expiring
Square
Feet

Number
of
Tenants

Annual Rentals of
Expiring
Leases(1)

Percentage
of
Annual
Rentals(2)

Other unconsolidated properties (MOBs)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,026
36,233
12,641
40,228
49,846
81,353
12,331
9,318
0
65,583
25,873

Subtotal-other unconsolidated properties . . . . . . . . . . . . . . . .

351,432

7
10
4
8
7
10
4
2
0
6
1

59

$

596,102
1,160,061
445,069
1,308,654
1,498,332
2,424,534
434,159
293,625
0
1,898,858
245,460

$10,304,854

Total all properties at December 31, 2020 . . . . . . . . . . . . . .

3,302,272

438

$90,902,116

1%
1%
1%
1%
2%
3%
0%
0%
0%
2%
0%

11%

100%

(1) The annual rentals of expiring leases reflected above were calculated based upon each property’s 2020
average rental rate per occupied square foot applied to each property’s scheduled lease expirations (on a
square foot basis). These amounts include the data related to the unconsolidated LLCs/LPs in which we hold
various non-controlling ownership interests at December 31, 2020 and also includes the bonus rentals
earned on the UHS hospital facilities.

(2) The percentages of annual rentals reflected above were calculated based upon the annual rentals of expiring

leases (as reflected above) divided by the total annual rentals of expiring leases (as reflected above).

ITEM 3. Legal Proceedings

None

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

PART II

Equity Securities

Market Information

Our shares of beneficial interest are listed on the New York Stock Exchange under the symbol UHT.

Holders

As of January 31, 2021, there were approximately 295 shareholders of record of our shares of beneficial

interest.

Dividends

It is our intention to declare quarterly dividends to the holders of our shares of beneficial interest so as to
comply with applicable sections of the Internal Revenue Code governing REITs. Our revolving credit facility

32

limits our ability to increase dividends in excess of 95% of cash available for distribution, as defined in our
revolving credit agreement, unless additional distributions are required to be made so as to comply with
applicable sections of the Internal Revenue Code and related regulations governing REITs.

Equity Compensation

Refer to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, of this report for information regarding securities authorized for issuance under our equity
compensation plan.

33

Stock Price Performance Graph

The following graph compares our performance with that of the S&P 500 and a group of peer companies,
where performance has been weighted based on market capitalization. Companies in our peer group are as
follows: Healthpeak Properties, Inc. (previously known as HCP, Inc.), Omega Healthcare Investors, Inc.,
Welltower, Inc. (previously known as Health 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 group and the S&P 500 composite is based on the stock price or composite
index at the end of fiscal 2015.

Comparison of Cumulative Five Year Total Return

Universal Health Realty Income Trust

S&P 500 Index

Peer Group

2016

2017

2018

2019

2020

$300

$250

$200

$150

$100

$50

$0

2015

Company Name / Index

Universal Health Realty Income Trust . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Base
Period
Dec 15

$100
$100
$100

INDEXED RETURNS
Years Ending

Dec 16

Dec 17

Dec 18

Dec 19

Dec 20

$137.17
$111.96
$100.12

$163.00
$136.40
$ 98.59

$138.73
$130.42
$113.09

$273.21
$171.49
$140.63

$155.07
$203.04
$123.52

34

ITEM 6. Selected Financial Data

The following table contains our selected financial data for, or at the end of, each of the five years ended
December 31, 2020. You should read this table 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.

Operating Results:
Total revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Data:
Real estate investments, net of accumulated

depreciation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in LLCs, net of liabilities(1)(3) . . . . . . . .
Intangible assets, net of accumulated amortization . . .
Total assets(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total indebtedness, including debt premium(1)(4) . . .
Other Data:
Funds from operations . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by (used in):

(000s, except per share amounts)

2020

2019

2018

2017

2016

$ 78,010
$ 19,447

$ 77,163
$ 18,964

$ 76,210
$ 24,196

$ 72,348
$ 45,619

$ 67,081
$ 17,215

$443,801
1,258
11,742
494,009
295,095

$432,507
5,062
14,553
488,789
273,694

$437,730
2,760
17,407
483,756
261,281

$446,397
2,776
20,559
490,008
256,409

$447,240
33,731
23,815
524,750
315,717

$ 46,230

$ 44,024

$ 45,034

$ 42,228

$ 41,559

Operating activities . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . .

44,210
(27,208)
(17,370)

42,652
(16,472)
(25,106)

42,928
(7,959)
(33,320)

46,005
39,461
(86,009)

40,733
(74,834)
34,137

Per Share Data:
Basic earnings per share:

Total basic earnings per share(2) . . . . . . . . . . . . .

Diluted earnings per share:

Total diluted earnings per share(2)
Diluted funds from operations per share:

. . . . . . . . . . .

Total diluted funds from operations per share . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information
Weighted average number of shares outstanding—

$

$

$
$

1.42

1.41

3.36
2.760

$

$

$
$

1.38

1.38

3.20
2.720

$

$

$
$

1.76

1.76

3.28
2.680

$

$

$
$

3.35

3.35

3.10
2.640

$

$

$
$

1.28

1.28

3.09
2.600

basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,743

13,732

13,722

13,625

13,464

Weighted average number of shares and share

equivalents outstanding—diluted . . . . . . . . . . . . . . .

13,765

13,752

13,722

13,625

13,468

(1) As discussed in Note 1 “Summary of Significant Accounting Policies—Investments in Limited Liability
Companies”, our consolidated financial statements only include the accounts of our consolidated
investments.

(2) Net income and earnings per share during 2020 includes the unfavorable impact of the two hospital facility
vacancies that occurred as of June 1, 2019 and September 30, 2019, as discussed herein. Net income and
earnings per share during 2019 includes $2.0 million of net gains (net of related transaction costs) related to
sales of real estate assets. Net income and earnings per share during 2018 includes (i) $4.5 million of
hurricane recovery proceeds in excess of damaged property write-downs; (ii) $1.2 million of hurricane-
related business interruption insurance recovery proceeds (approximately $500,000 of which related to
2017), and; (iii) $1.7 million of revenue related to a lease termination agreement. Net income and earnings
per share during 2017 includes: (i) $2.0 million of hurricane recovery proceeds received in excess of
damaged property write-downs, and; (ii) a $27.2 million net gain (net of related transaction costs) recorded
in connection with the Arlington transaction, as previously disclosed.

35

(3)

In September 2019, as discussed in Note 3 to the consolidated financial statements—New Construction,
Acquisitions and Dispositions, we entered into an agreement whereby we own a 95% ownership interest in
Grayson Properties II LP, which developed, constructed, owns and operates the Texoma Medical Plaza II.
The core and shell of this MOB was substantially completed in December 2020. During 2020, a
construction loan was obtained by Grayson Properties II LP which has an outstanding balance of
$12.3 million as of December 31, 2020. Also in March, 2017, Arlington Medical Properties, LLC a formerly
jointly-owned LLC in which we held an 85% non-controlling ownership interest, sold the real estate assets
of St. Mary’s Professional Office Building which generated $57.3 million of net cash proceeds to us.
Investments in LLCs at December 31, 2016 includes a member loan issued to St. Mary’s Professional Office
Building, amounting to $21.6 million, which was repaid to us in 2017 when the real estate assets were sold.

(4) Excludes third-party debt that is non-recourse to us, incurred by unconsolidated LLCs in which we hold
various non-controlling equity interests as follows: $39.7 million as of December 31, 2020 (including the
$12.3 million construction loan obtained by Grayson Properties II LP, as mentioned above), $26.6 million as
of December 31, 2019, $27.3 million as of December 31, 2018, $27.8 million as of December 31, 2017 and
$28.4 million as of December 31, 2016. (See Note 8 to the consolidated financial statements).

Funds from operations (“FFO”) is a widely recognized measure of performance for Real Estate Investment
Trusts (“REITs”). We believe that FFO and FFO per diluted share, which are non-GAAP financial measures, are
helpful to our investors as measures of our operating performance. We compute FFO, in accordance with
standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which may not
be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT
definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO adjusts for the
effects of gains, such as gains on transactions during the periods presented. To the extent a REIT recognizes a
gain or loss with respect to the sale of incidental assets, such as the sale of land peripheral to operating properties,
the REIT has the option to exclude or include such gains and losses in the calculation of FFO. We have opted to
exclude gains and losses from sales of incidental assets in our calculation of FFO. FFO does not represent cash
generated from operating activities in accordance with GAAP and should not be considered to be an alternative
to net income determined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of
our financial performance determined in accordance with GAAP; (ii) an alternative to cash flow 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:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense:

2020

2019

(000s)

2018

2017

2016

$19,447

$18,964

$24,196

$ 45,619

$17,215

Consolidated investments . . . . . . . . . . . . . . . . . . . . . . .
Unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . .

25,581
1,202

25,870
1,141

24,337
1,036

24,598
1,240

22,493
1,851

Less gains:

Gains on sales of real estate assets . . . . . . . . . . . . . . . .
Gain on Arlington transaction . . . . . . . . . . . . . . . . . . . .
Hurricane insurance recovery proceeds in excess of

— (1,951)
—
—

—
—
— (27,196)

damaged property write-downs . . . . . . . . . . . . . . . . .

—

— (4,535)

(2,033)

—
—

—

Funds From Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares and equivalents

$46,230

$44,024

$45,034

$ 42,228

$41,559

outstanding—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,765

13,752

13,722

13,625

13,468

Funds From Operations per diluted share . . . . . . . . . . . . . . .

$

3.36

$

3.20

$

3.28

$

3.10

$

3.09

36

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a real estate investment trust (“REIT”) that commenced operations in 1986. We invest in healthcare
and human service related facilities currently including acute care hospitals, behavioral health care hospitals,
specialty hospitals, free-standing emergency departments, childcare centers and medical/office buildings. As of
February 25, 2021, we have seventy-two real estate investments or commitments in twenty states consisting of:

•

•

•

•

seven hospital facilities consisting of three acute care, one behavioral health care and three specialty
hospitals (two of which are currently vacant);

four free-standing emergency departments (“FEDs”);

fifty-seven medical/office buildings, including five owned by unconsolidated LLCs/LPs, and;

four preschool and childcare centers.

Forward Looking Statements

This report contains “forward-looking statements” that reflect our current estimates, expectations and
projections about our future results, performance, prospects and opportunities. Forward-looking statements
include, among other things, information concerning our possible future results of operations, business and
growth strategies, financing plans, expectations that regulatory developments or other matters will not have a
material adverse effect on our business or financial condition, our competitive position and the effects of
competition, the projected growth of the industry in which we operate, and the benefits and synergies to be
obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other
similar expressions 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 future tense,
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 the times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or our good faith belief with
respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in the statements. Such factors include, among other things, the following:

•

Future operations and financial results of our tenants, and in turn ours, will likely be materially
impacted by numerous factors and future developments related to COVID-19. Such factors and
developments include, but are not limited to, the length of time and severity of the spread of the
pandemic; the volume of cancelled or rescheduled elective procedures and the volume of COVID-19
patients treated by the operators of our hospitals and other healthcare facilities; measures our tenants
are taking to respond to the COVID-19 pandemic; the impact of government and administrative
regulation, including travel bans and restrictions, shelter-in-place or stay-at-home orders, quarantines,
the promotion of social distancing, business shutdowns and limitations on business activity; changes in
patient volumes at our tenants’ hospitals and other healthcare facilities due to patients’ general
concerns related to the risk of contracting COVID-19 from interacting with the healthcare system; the
impact of stimulus on the health care industry and our tenants; changes in patient volumes and payer
mix caused by deteriorating macroeconomic conditions (including increases in uninsured and
underinsured patients as the result of business closings and layoffs); potential disruptions to clinical
staffing and shortages and disruptions related to supplies required for our tenants’ employees and
patients, including equipment, pharmaceuticals and medical supplies, particularly personal protective
equipment, or PPE; potential increases to expenses incurred by our tenants related to staffing, supply
the impact of our indebtedness and the ability to refinance such
chain or other expenditures;

37

indebtedness on acceptable terms; disruptions in the financial markets and the business of financial
institutions as the result of the COVID-19 pandemic which could impact our ability to access capital or
increase associated borrowing costs; and changes in general economic conditions nationally and
regionally in the markets our properties are located resulting from the COVID-19 pandemic, including
higher sustained rates of unemployment and underemployment levels and reduced consumer spending
and confidence. There may be significant declines in future bonus rental revenue earned on our hospital
properties leased to subsidiaries of UHS to the extent that each hospital continues to experience
significant decline in patient volumes and revenues. These factors may result in the inability or
unwillingness on the part of some of our tenants to make timely payment of their rent to us at current
levels or to seek to amend or terminate their leases which, in turn, would have an adverse effect on our
occupancy levels and our revenue and cash flow and the value of our properties, and potentially, our
ability to maintain our dividend at current levels.

Due to COVID-19 restrictions and its impact on the economy, we may experience a decrease in
prospective tenants which could unfavorably impact the volume of new leases, as well as the renewal
rate of existing leases. The COVID-19 pandemic may delay our construction projects which could
result in increased costs and delay the timing of opening and rental payments from those projects,
although no such delays have yet occurred. The COVID-19 pandemic could also impact our
indebtedness and the ability to refinance such indebtedness on acceptable terms, as well as risks
associated with disruptions in the financial markets and the business of financial institutions as the
result of the COVID-19 pandemic which could impact us from a financing perspective; and changes in
general economic conditions nationally and regionally in the markets our properties are located
resulting from the COVID-19 pandemic. Recently, COVID-19 vaccinations have begun to be
administered and while we expect that administration of vaccines will assist in easing the number of
COVID-19 cases, the pace at which this is likely to occur is difficult to predict. Although COVID-19
has not had a material adverse impact on our financial results during 2020, we believe that
developments related to the COVID-19 pandemic may potentially have a material adverse impact on
our future financial results.

Recent legislation, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) and the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”), has
provided grant funding to hospitals and other healthcare providers to assist them during the COVID-19
pandemic. There is a high degree of uncertainty surrounding the implementation of the CARES Act
and the PPPHCE Act, and the federal government may consider additional stimulus and relief efforts,
but we are unable to predict whether additional stimulus measures will be enacted or their impact.
There can be no assurance as to the total amount of financial and other types of assistance our tenants
will receive under the CARES Act and the PPPHCE Act, and it is difficult to predict the impact of such
legislation on our tenants’ operations or how they will affect operations of our tenants’ competitors.
Moreover, we are unable to assess the extent to which anticipated negative impacts on our tenants (and,
in turn, us) arising from the COVID-19 pandemic will be offset by amounts or benefits received or to
be received under the CARES Act and the PPPHCE Act.

A substantial portion of our revenues are dependent upon one operator, UHS, which comprised
approximately 33%, 31% and 30% of our consolidated revenues for the years ended December 31,
2020, 2019 and 2018, respectively. We cannot assure you that subsidiaries of UHS will renew the
leases on our three acute care hospitals (two of which are scheduled to expire in December, 2021 and
one of which is scheduled to expire in December, 2026) and two FEDs at existing lease rates or fair
market value lease rates. In addition, if subsidiaries of UHS exercise their options to purchase the
respective leased hospital facilities and FEDs upon expiration of the lease terms or otherwise, our
future revenues and results of operations could decrease if we were unable to earn a favorable rate of
return on the sale proceeds received, as compared to the rental revenue currently earned pursuant to
these leases. Please see Note 4 to the consolidated financial statements – Lease Accounting, for

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additional information related to a potential transaction with a wholly-owned subsidiary of UHS in
connection with Southwest Healthcare System, Inland Valley Campus.

In certain of our markets, the general real estate market has been unfavorably impacted by increased
competition/capacity and decreases in occupancy 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 a national or state level to the operators of our facilities, including
UHS. No assurances can be given that the implementation of these new laws will not have a material
adverse effect on the business, financial condition or results of operations of our operators.

The potential indirect impact of the Tax Cuts and Jobs Act of 2017, signed into law on December 22,
2017, which makes significant changes to corporate and individual tax rates and calculation of taxes,
which could potentially impact our tenants and jurisdictions, both positively and negatively, in which
we do business, as well as the overall investment thesis for REITs.

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 for conflicts of interest.

Lost revenues resulting from the exercise of purchase options, lease expirations and renewals and other
transactions (see Note 4 to the consolidated financial statements – Lease Accounting for additional
disclosure related to lease expirations and subsequent vacancies that occurred during the second and
third quarters of 2019 on two hospital facilities.

Our ability to continue to obtain capital on acceptable terms, including borrowed funds, to fund future
growth of our business.

The outcome and effects of known and unknown litigation, government investigations, and liabilities
and other claims asserted against us, UHS or the other operators of our facilities. UHS and its
subsidiaries are subject to legal actions, purported shareholder class actions and shareholder derivative
cases, governmental investigations and regulatory actions and the effects of adverse publicity relating
to such matters. Since UHS comprised approximately 33% of our consolidated revenues during the
year ended December 31, 2020, and since a subsidiary of UHS is our Advisor, you are encouraged to
obtain and review the disclosures contained in the Legal Proceedings section of Universal Health
Services, Inc.’s Forms 10-Q and 10-K, as publicly filed with the Securities and Exchange Commission.
Those filings are the sole responsibility of UHS and are not incorporated by reference herein.

Failure of UHS or the other operators of our hospital facilities to comply with governmental
regulations related to the Medicare and Medicaid licensing 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 the deterioration in national, regional and local
economic and business conditions, including a further worsening of credit and/or capital market
conditions, which may adversely affect our ability to obtain capital which may be required to fund the
future growth of our business and refinance existing debt with near term maturities.

A continuation in the deterioration in general economic conditions which has resulted in increases in
the number of people unemployed and/or insured and likely increase the number of individuals without
health insurance; as a result, the operators of our facilities may experience declines in patient volumes
which could result in decreased occupancy rates at our medical office buildings.

A continuation of the worsening of the economic and employment conditions in the United States will
likely materially affect the business of our operators, including UHS, which will likely unfavorably
impact our future bonus rentals (on the UHS hospital facilities) and may potentially have a negative
impact on the future lease renewal terms and the underlying value of the hospital properties.

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Real estate market factors, including without limitation, the supply and demand of office space and
market rental rates, changes in interest rates as well as an increase in the development of medical office
condominiums in certain markets.

The impact of property values and results of operations of severe weather conditions, including the
effects of hurricanes.

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 comply with, existing laws and government regulations; unfavorable
changes in the levels and terms of reimbursement by third party payors or government programs,
including Medicare (including, but not limited to, the potential unfavorable impact of future reductions
to Medicare reimbursements and Medicaid reimbursements (most states have reported significant
budget deficits that have, in the past, resulted in the reduction of Medicaid funding to the operators of
our facilities, including UHS); demographic changes; the ability to enter into managed care provider
agreements on acceptable terms; an increase in uninsured and self-pay patients which unfavorably
impacts the collectability of patient accounts; decreasing in-patient admission trends; technological and
pharmaceutical improvements that may increase the cost of providing, or reduce the demand for, health
care, and; the ability to attract and retain qualified medical personnel, including physicians.

Pending limits for most federal agencies and programs aimed at reducing budget deficits by
$917 billion between 2012 and 2021, according to a report released by the Congressional Budget
Office. Among its other provisions, the law resulted in across-the-board cuts to discretionary, national
defense and Medicare spending on March 1, 2013, including Medicare payment reductions of up to
2% per fiscal year with a uniform percentage reduction across all Medicare programs. The Bipartisan
Budget Act of 2015, enacted on November 2, 2015, continued these 2% reductions to Medicare
reimbursement. The CARES Act suspended payment reductions between May 1 and December 31,
2020, in exchange for extended cuts through 2030. The CAA extended the suspension of payment
reductions until March 31, 2021. We cannot predict whether Congress will restructure the implemented
Medicare payment reductions or what other federal budget deficit reduction initiatives may be
proposed by Congress going forward. We also cannot predict the effect these enactments will have on
the operators of our properties (including UHS), and thus, our business.

An increasing number of legislative initiatives have been passed into law that may result in major
changes in the health care delivery system on a national or state level. Legislation has already been
enacted that has eliminated the penalty for failing to maintain health coverage that was part of the
original Patient Protection and Affordable Care Act and Healthcare and Education Reconciliation Act
of 2010 (collectively referred to as the “Legislation”). President Biden is expected to undertake
executive actions that will strengthen the Legislation and may reverse the policies of the prior
administration. The Trump Administration had directed the issuance of final rules (i) enabling the
formation of association health plans that would be exempt from certain Legislation requirements such
as the provision of essential health benefits; (ii) expanding the availability of short-term, limited
duration health insurance, (iii) eliminating cost-sharing reduction payments to insurers that would
otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below
250 percent of the federal poverty level; (iv) relaxing requirements for state innovation waivers that
could reduce enrollment in the individual and small group markets and lead to additional enrollment in
short-term, limited duration insurance and association health plans; (v) incentivizing the use of health
reimbursement arrangements by employers to permit employees to purchase health insurance in the
individual market, and; (vi) directing the issuance of federal rulemaking by executive agencies to
increase transparency of healthcare price and quality information. The uncertainty resulting from these
Executive Branch policies has led to reduced Exchange enrollment in 2018 and 2019 and is expected to
further worsen the individual and small group market risk pools in future years. It is also anticipated

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that these policies, to the extent that they remain as implemented, may create additional cost and
reimbursement pressures on hospitals, including ours. In addition, while attempts to repeal the entirety
of the Legislation have not been successful to date, a key provision of the Legislation was repealed as
part of the Tax Cuts and Jobs Act and on December 14, 2018, a federal U.S. District Court Judge in
Texas ruled the entire Legislation is unconstitutional. That ruling was stayed and has been appealed.
On December 18, 2019, the 5th Circuit Court of Appeals voted 2-1 to strike down the Legislation
individual mandate as unconstitutional and sent the case back to the U.S. District Court in Texas to
determine which Legislation provisions should be stricken with the mandate. On March 2, 2020, the
U.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by the
State of California and the United States House of Representatives, asking the Supreme Court to
review the ruling by the Fifth Circuit Court of Appeals. Oral argument was heard on November 10,
2020, and a ruling is expected in 2021. On February 10, 2021, the Department of Justice announced
that it has withdrawn support for the challenge before the Supreme Court. We are unable to predict the
final outcome of this matter which has caused greater uncertainty regarding the future status of the
Legislation. If all or any parts of the Legislation are ultimately found to be unconstitutional, it could
have a material adverse effect on the business, financial condition and results of operations of the
operators of our properties, and, thus, our business.

Under the Legislation, hospitals are required to make public a list of their standard charges, and
effective January 1, 2019, CMS has required that this disclosure be in machine-readable format and
include charges for all hospital items and services and average charges for diagnosis-related groups. On
November 27, 2019, CMS published a final rule on “Price Transparency Requirements for Hospitals to
Make Standard Charges Public.” This rule took effect on January 1, 2021 and requires all hospitals to
also make public their payor-specific negotiated rates, minimum negotiated rates, maximum negotiated
rates, and cash for all items and services, including individual items and services and service packages,
that could be provided by a hospital to a patient. Failure to comply with these requirements may result
in daily monetary penalties.

As part of the CAA, Congress passed legislation aimed at preventing or limiting patient balance billing
in certain circumstances. The CAA addresses surprise medical bills stemming from emergency
services, out-of-network ancillary providers at in-network facilities, and air ambulance carriers. The
legislation prohibits surprise billing when out-of-network emergency services or out-of-network
services at an in-network facility are provided, unless informed consent
is received. In these
circumstances providers are prohibited from billing the patient for any amounts that exceed in-network
cost-sharing requirements. The legislation requires implementing regulations within a year of
enactment.

There can be no assurance that if any of the announced or proposed changes described above are
implemented there will not be negative financial impact on the operators of our hospitals, which
material effects may include a potential decrease in the market for health care services or a decrease in
the ability of the operators of our hospitals to receive reimbursement for health care services provided
which could result in a material adverse effect on the financial condition or results of operations of the
operators of our properties, and, thus, our business.

Competition for properties include, but are not limited to, other REITs, private investors and firms,
banks and other companies, including UHS. In addition, we may face competition from other REITs
for our tenants.

The operators of our facilities face competition from other health care providers, including physician
owned facilities and other competing facilities, including certain facilities operated by UHS but the real
property of which is not owned by us. Such competition is experienced in markets including, but not
limited to, McAllen, Texas, the site of our McAllen Medical Center, a 370-bed acute care hospital, and
Riverside County, California, the site of our Southwest Healthcare System-Inland Valley Campus, a
130-bed acute care hospital.

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Changes in, or inadvertent violations of, tax laws and regulations and other factors than can affect
REITs and our status as a REIT.

The individual and collective impact of the changes made by the CARES Act on REITs and their
security holders are uncertain and may not become evident for some period of time; it is also possible
additional legislation could be enacted in the future as a result of the COVID-19 pandemic which may
affect the holders of our securities.

Should we be unable to comply with the strict income distribution requirements applicable to REITs,
utilizing only cash generated by operating 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/or partnership agreements of the four LLCs/LPs in which we continue to
hold non-controlling ownership interests, the third-party member and the Trust, 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 (“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 ownership interest of the Offering Member
at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent
proportionate Transfer Price. The closing of the transfer must occur within 60 to 90 days of the
acceptance by the Non-Offering Member.

Fluctuations in the value of our common stock.

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 results and financial condition, including the operating results of our
lessees and the facilities leased to subsidiaries of UHS, could differ materially from those expressed 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-looking statements to reflect actual results, changes in assumptions or changes in
other factors affecting forward-looking information, except as may be required by law. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this
cautionary statement.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make 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 financial statements, including the following:

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 accordance with
current accounting guidance, we account for our property acquisitions as acquisitions of assets, which requires
the capitalization of acquisition costs to the underlying assets and prohibits the recognition of goodwill or bargain
purchase gains. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting

42

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 assumed loans, or loan discounts, in the case of below
market assumed 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 replacement costs adjusted for physical and market obsolescence for the improvements. The fair
values of the tangible assets of an acquired property are also determined by valuing the property as if it were
vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on
management’s determination of the relative fair values of these assets. Management determines the as-if-vacant
fair value of a property based on assumptions that a market participant would use, which is similar to methods
used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in
the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer
of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and
unreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in
performing these analyses include an estimate of carrying costs during the expected lease-up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, management includes
real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected
lease-up periods based on current market demand. Management also estimates costs to execute similar leases
including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases
are amortized to expense over the 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-place lease values are recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts
to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a
market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal
to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial
term plus any below market fixed rate renewal periods. The capitalized above-market lease values are amortized
as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized
below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental
income 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 indicators may include a significant decrease in the market price of the property, a
change in the expected holding period for the property, a significant adverse change in 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 excess of 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 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 other factors. 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. The evaluation of anticipated cash flows is
highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital
requirements that could differ materially from actual results in future periods. Since cash flows on properties
considered 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 is recoverable, our strategy of holding properties over the long-term
directly decreases the likelihood of their carrying values not being recoverable and therefore requiring the
recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale

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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 to the income approach that is commonly
utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside broker opinions 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 to sell 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 significant changes
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. The assets and related liabilities of the property are classified
separately on the consolidated balance sheets for the most recent reporting period. Only those assets held for sale
that constitute a strategic shift or that will have a major effect on our operations are classified as discontinued
operations.

An other than temporary impairment of an investment in an unconsolidated LLC is recognized when the
carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of
the decline in value, including projected declines in cash flow. To the extent impairment has occurred, 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 the Internal Revenue Code of 1986, and intend to continue to remain so
qualified. To qualify as a REIT, we must meet certain organizational and operational requirements, including a
requirement to distribute at least 90% of our annual REIT taxable income to shareholders. As a REIT, we
generally will not be subject to federal, state or local income tax on income that we distribute as dividends to our
shareholders.

We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the
amount by which 85% of our ordinary income plus 95% of any capital gain income for the calendar year exceeds
cash distributions during the calendar year, as defined. No provision for excise tax has 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 purposes due 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 of provision for
investment losses.

Results of Operations

Year ended December 31, 2020 as compared to the year ended December 31, 2019:

For the year ended December 31, 2020, net income was $19.4 million as compared to $19.0 million during

2019. The $483,000 increase was primarily attributable to:

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$2.04 million decrease resulting from lease expirations on two hospital facilities located in Corpus
Christi, Texas, and Evansville, Indiana, that occurred on June 1, 2019 and September 30, 2019,
respectively (each facility has remained vacant since the respective date of lease expiration);

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$2.27 million increase resulting from a decrease in interest expense, primarily due to a decrease in our
average cost of borrowings under our revolving credit agreement, partially offset by an increase in our
average outstanding borrowings;

$1.95 million decrease resulting from gains recorded during 2019 related to the sale of the Kings
Crossing II MOB and the sale of a parcel of land;

$565,000 increase in bonus rentals earned on the three hospital facilities leased to subsidiaries of UHS;

$289,000 increase resulting from a decrease in depreciation and amortization expense, and;

$1.35 million of other combined net increases, including increased net income experienced at various
properties.

Total revenues increased $847,000, or 1.1%, during 2020 as compared to 2019. The increase was due to:
(i) an aggregate net increase of $1.71 million experienced at various properties; (ii) a $565,000 increase in the
bonus rentals; (iii) a $311,000 increase resulting from an MOB that was acquired during the fourth quarter of
2019, partially offset by; (iv) a $1.74 million decrease resulting from the revenues recorded during 2019 in
connection with two hospital facilities that had lease expirations and vacancies in June and September of 2019
(see Note 4 to the consolidated financial statements, Lease Accounting).

Included in our other operating expenses are expenses related to the consolidated medical office buildings
and two vacant hospital facilities (as discussed herein), which totaled $19.8 million and $19.1 million for the
years ended December 31, 2020 and 2019, respectively. Our operating expenses for 2020 and 2019 include
expenses associated with the lease expirations at two of our hospital facilities, which are currently vacant, of
approximately $677,000 and $370,000 in the aggregate for the years ended December 31, 2020 and 2019,
respectively. A large portion of the expenses associated with our consolidated medical office buildings is passed
on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses of
included in base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the
same period the related expenses are incurred and are included as tenant reimbursement revenue in our
consolidated statements of income.

Funds from operations (“FFO”) is a widely recognized measure of performance for Real Estate Investment
Trusts (“REITs”). We believe that FFO and FFO per diluted share, which are non-GAAP financial measures, are
helpful to our investors as measures of our operating performance. We compute FFO, as reflected on the attached
Supplemental Schedules, in accordance with standards established by the National Association of Real Estate
Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not
compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently
than we interpret the definition. FFO adjusts for the effects of gains, such as gains on transactions during the
periods presented. To the extent a REIT recognizes a gain or loss with respect to the sale of incidental assets,
such as the sale of land peripheral to operating properties, the REIT has the option to exclude or include such
gains and losses in the calculation of FFO. We have opted to exclude gains and losses from sales of incidental
assets in our calculation of FFO. FFO does not represent cash generated from operating activities in accordance
with GAAP and should not be considered to be an alternative to net income determined in accordance with
GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in
accordance with GAAP; (ii) an alternative to cash flow 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.

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Below is a reconciliation of our reported net income to FFO for 2020 and 2019 (in thousands):

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense on consolidated investments . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense on unconsolidated affiliates . . . . . . . . . . . . . . . . . . . .
Gains on sales of real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Funds From Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares outstanding—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019

$19,447
25,581
1,202
—

$46,230
13,765

$18,964
25,870
1,141
(1,951)

$44,024
13,752

Funds From Operations per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3.36

$

3.20

Our FFO increased $2.2 million, or $.16 per diluted share, during 2020 as compared to 2019 due to: (i) a
favorable impact of $2.3 million, or $.17 per diluted share, resulting from a decrease in interest expense,
primarily due to a decrease in our average cost of borrowings pursuant to our revolving credit agreement,
partially offset by an increase in our average outstanding borrowings; (ii) a favorable impact of $565,000, or $.04
per diluted share, resulting from an increase in bonus rentals; (iii) other combined net increases of $1.4 million,
or $.10 per diluted share, partially offset by; (iv) an unfavorable impact of $2.0 million, or $.15 per diluted share,
related to the above-mentioned vacancies at two of our hospitals as a result of lease expirations on June 1, 2019
and September 30, 2019 (excluding the related interest expense impact).

During 2020, we had a total of 39 new or renewed leases related to the medical office buildings as indicated
in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity
method. These leases comprised approximately 30% of the aggregate rentable square feet of these properties
(21% related to renewed leases and 9% related to new leases). During 2019, we had a total of 62 new or renewed
leases related to the medical office buildings, in which we have significant investments, some of which are
accounted for by the equity method. These leases comprised approximately 24% of the aggregate rentable square
feet of these properties (17% related to renewed leases and 7% related to new leases).

Rental rates, tenant improvement costs and rental concessions vary from property 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. In connection with lease renewals executed during each year, the weighted-average rental rates, as
compared to rental rates on the expired leases, decreased by approximately 1% during 2020 and remained
relatively unchanged during 2019. The weighted-average tenant improvement costs associated with new or
renewed leases was approximately $18 and $15 per square foot during 2020 and 2019, respectively. The
weighted-average leasing commissions on the new and renewed leases commencing during each year was
approximately 3% of base rental revenue over the term of the leases during 2020 and 2% of base rental revenue
over the term of the leases during 2019. The average aggregate value of the tenant concessions, generally
consisting of rent abatements, provided in connection with new and renewed leases commencing during each
year was approximately 0.9% and 0.4% of the future aggregate base rental revenue over the lease terms during
2020 and 2019, respectively. Rent abatements were, or will be, recognized in our results of operations under the
straight-line method over the lease term regardless of when payments are due.

Year ended December 31, 2019 as compared to the year ended December 31, 2018:

For the year ended December 31, 2019, net income was $19.0 million as compared to $24.2 million during

2018. The $5.2 million decrease was primarily attributable to:

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$4.5 million decrease resulting from the Hurricane Harvey related insurance recovery proceeds
received in excess of property damage write-offs recorded during 2018;

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•

•

$1.2 million decrease resulting from the Hurricane Harvey related business interruption insurance
recovery proceeds received recorded during 2018, including approximately $500,000 which related to
2017;

$1.7 million decrease resulting from the income recorded during 2018 in connection with a lease
termination agreement entered into during the second quarter of 2018 related to a single tenant MOB
located in Texas that terminated a lease that was scheduled to expire in July, 2020;

$2.0 million increase resulting from gains recorded during 2019 related to the sale of the Kings
Crossing II MOB and the sale of a parcel of land;

$600,000 increase related to a short-term lease on a hospital facility located in Evansville, Indiana
(lease term of June 1, 2019 through September 30, 2019), that was entered into at a substantially
increased lease rate as compared to the original lease which expired on May 31, 2019;

$434,000 decrease resulting from the June 1, 2019 expiration of a lease on a hospital facility located in
Corpus Christi, Texas;

$563,000 increase in bonus rental revenue related to the UHS hospital facilities, and;

$581,000 of other combined net decreases, including an increase in interest expense due primarily to
increases in our average outstanding borrowings, and average cost of borrowings, pursuant to our
revolving credit agreement.

Total revenues increased $1.0 million, or 1.3%, during 2019 as compared to 2018. The increase was due
primarily to: (i) a $563,000 increase in the bonus rental revenue generated on the UHS hospital facilities; (ii) a
$718,000 increase resulting from the increased rental rate in connection with a short-term lease covering the
period of June 1, 2019 through September 30, 2019 on a hospital facility located in Evansville, Indiana, that was
vacated on September 30, 2019 (see Note 4 to the consolidated financial statements, Lease Accounting), and;
(iii) a $428,000 decrease resulting from the June 1, 2019 lease expiration and tenant vacancy at a hospital facility
located in Corpus Christi, Texas, (see Note 4 to the consolidated financial statements, Lease Accounting).

Included in our other operating expenses are expenses related to the consolidated medical office buildings
and two vacant hospital facilities (as discussed herein), which totaled $19.1 million and $18.6 million for the
years ended December 31, 2019 and 2018, respectively. Our operating expenses for 2019 include expenses
associated with the lease expirations at
two of our hospital facilities, which are currently vacant, of
approximately $370,000 in the aggregate for the year ended December 31, 2019. A large portion of the expenses
associated with our consolidated medical office buildings is passed on directly to the tenants either directly as
tenant reimbursements of common area maintenance expenses of included in base rental amounts. Tenant
reimbursements for operating expenses are accrued as revenue in the same period the related expenses are
incurred and are included as tenant reimbursement revenue in our consolidated statements of income.

During 2019, we had a total of 62 new or renewed leases related to the medical office buildings as indicated
in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity
method. These leases comprised approximately 24% of the aggregate rentable square feet of these properties
(17% related to renewed leases and 7% related to new leases). During 2018, we had a total of 34 new or renewed
leases related to the medical office buildings, in which we have significant investments, some of which are
accounted for by the equity method. These leases comprised approximately 17% of the aggregate rentable square
feet of these properties (14% related to renewed leases and 3% related to new leases).

Rental rates, tenant improvement costs and rental concessions vary from property 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. In connection with lease renewals executed during each year, the weighted-average rental rates, as
compared to rental rates on the expired leases, remained relatively unchanged during 2019 and decreased 3%

47

during 2018. The weighted-average tenant improvement costs associated with new or renewed leases was
approximately $15 and $10 per square foot during 2019 and 2018, respectively. The weighted-average leasing
commissions on the new and renewed leases commencing during each year was approximately 2% of base rental
revenue over the term of the leases during 2019 and 4% of base rental revenue over the term of the leases during
2018. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in
connection with new and renewed leases commencing during each year was approximately 0.4% and 0.5% of the
future aggregate base rental revenue over the lease terms during 2019 and 2018, respectively. Rent abatements
were, or will be, recognized in our results of operations under the straight-line method over the lease term
regardless of when payments are due.

Below is a reconciliation of our reported net income to FFO for 2019 and 2018 (in thousands):

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense on consolidated investments . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense on unconsolidated affiliates . . . . . . . . . . . . . . . . . . . .
Hurricane insurance recovery proceeds in excess of damaged property write-downs . . . . . . .
Gains on sales of real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,964
25,870
1,141
—
(1,951)

$24,196
24,337
1,036
(4,535)
—

Funds From Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares outstanding—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .

$44,024
13,752

$45,034
13,722

Funds From Operations per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3.20

$

3.28

2019

2018

Our FFO decreased $1.0 million, or $.08 per diluted share, during 2019 as compared to 2018 due primarily
to: (i) a decrease of approximately $1.7 million, or $.12 per diluted share, resulting from a lease termination
agreement entered into during 2018 on a single-tenant medical office building located in Texas (this agreement
terminated a lease that was scheduled to expire in July, 2020); (ii) a decrease of approximately $500,000, or $.04
per diluted share, resulting from business interruption insurance recovery proceeds recorded during 2018 that
related to the period of August through December of 2017; (iii) an increase of approximately $400,000, or $.03
per diluted share, consisting of non-recurring repairs and remediation expenses incurred during 2018 at one of
our medical office buildings; (iv) an increase of approximately $563,000, or $.04 per diluted share, resulting
from an increase in bonus rent from UHS hospital facilities, and; (v) other combined net
increase of
approximately $275,000, or $.02 per diluted share.

Hurricane Harvey Impact

In late August 2017, five of our medical office buildings located in the Houston, Texas area, incurred
extensive water damage as a result of Hurricane Harvey. Until various times during the second quarter of 2018,
these properties were temporarily closed and non-operational as we continued to reconstruct and restore them to
operational condition. As of June 30, 2018, reconstruction on all of the occupied space in these properties had
been completed and operations had resumed.

During the first quarter of 2018, pursuant to the terms of a global settlement with our commercial property
insurance carrier, we received $5.5 million of additional insurance recovery proceeds bringing the aggregate
hurricane-related insurance recoveries to $12.5 million. The aggregate insurance recovery proceeds, which are
net of applicable deductibles, covered substantially all of the costs incurred related to the remediation, repair and
reconstruction of each of these properties as well business interruption recoveries for the lost income related to
each of these properties during the period they were non-operational.

Included in our financial results for the year ended December 31, 2018 are hurricane insurance recoveries of
approximately $4.5 million consisting of recovery proceeds in excess of the damaged property write-downs.
Additionally, during 2018, we recorded approximately $1.2 million of hurricane business interruption insurance

48

recoveries in connection with the damage sustained from Hurricane Harvey. Included in this amount, which
covered the period of late August, 2017 through the second quarter of 2018 (after satisfaction of the applicable
deductibles), was approximately $500,000 related to the period of August, 2017 through December, 2017.

Other Operating Results

Interest Expense:

Reflected below are the components of our interest expense which amounted to $8.3 million during 2020,
$10.5 million during 2019 and $10.0 million during 2018 (amounts in thousands):

Revolving credit agreement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate caps income, net
Interest rate swaps expense/(income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of fair value of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized interest on major projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019

2018

$4,608
2,600
—
737(b.)
765
(52)
(395)
—

$6,834
2,821
(288)(a.)

$ 7,551
2,701
(122)(a.)
(108)(c.) —
648
637
(50)
(52)
—
(74)
12
—

Interest expense, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,263

$10,533

$9,977

(a.) Represents interest paid to us by the counterparties pursuant to two interest rate caps with a combined

notional amount of $60 million, which expired in March 2019.

(b.) Represents net interest paid by us to the counterparties pursuant to three interest rates SWAPs with a

combined notional amount of $140 million.

(c.) Represents net interest paid to us by the counterparties pursuant to an interest rates SWAPs with a notional

amount of $50 million.

Interest expense decreased $2.27 million during 2020 to $8.26 million as compared to $10.53 million during
2019. The decrease was primarily due to: (i) a $2.9 million decrease in the interest expense on our revolving
credit agreement resulting from a decrease in our average cost of borrowings pursuant to our revolving credit
agreement (1.8% during 2020 as compared to 3.5% during 2019), partially offset by an increase in our average
outstanding borrowings ($219.1 million during 2020 as compared to $198.3 million during 2019); (ii) a $967,000
net increase in interest expense related to interest rate swaps/caps; (iii) a $101,000 decrease in mortgage interest
expense, resulting primarily from the repayment of a mortgage loan during the second quarter of 2019; (iv) a
$321,000 decrease in interest expense due to an increase in capitalized interest on major projects, due primarily
to the increased construction cost expenditures made during 2020 made in connection with the Clive Behavioral
Health facility, and; (v) a $128,000 increase due to an increase in amortization of financing fees.

Interest expense increased $556,000 during 2019 to $10.53 million as compared to $9.98 million during
2018. The increase was primarily due to: (i) a $717,000 increase in interest expense on our revolving credit
agreement resulting from an increase in our average cost of borrowings pursuant to our revolving credit
agreement (3.5% during 2019 as compared to 3.3% during 2018), as well as an increase in our average
outstanding borrowings ($198.3 million during 2019 as compared to $191.4 million during 2018); (ii) a $58,000
net increase in interest expense related to interest rate swaps/caps; (iii) a $120,000 decrease in mortgage interest
expense, resulting primarily from the repayment of a mortgage loans during 2018 and 2019, and; (iv) $99,000 of
other combined net decreases in interest expense.

COVID-19 Impact

The COVID-19 pandemic began to significantly impact the United States in mid-March, 2020. As a result
of various policies implemented by the federal and state governments, and varying by individual state, many
non-essential businesses in the nation were closed for varying time periods. We believe that by June 30, 2020,
substantially all of our tenants had resumed operations of their businesses.

49

Tenants representing approximately 99% of our occupied square footage have paid their rents through
December 31, 2020. Although COVID-19 has not had a material adverse impact on our results of operations
through December 31, 2020, we believe that the potentially adverse impact that the pandemic may have on our
future operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of
which are beyond our, or our tenants’, ability to control or predict. Since the underlying businesses in each of our
properties are operated by the tenants, we can provide no assurance that the businesses will continue to operate in
the future, or stay current with their lease obligations.

Since the bonus rents earned by us on the three acute care hospitals leased to wholly-owned subsidiaries of
Universal Health Services, Inc., are computed based upon a computation that compares each hospital’s current
quarter revenue to the corresponding quarter in the base year, we could experience significant declines in future
bonus rental revenue earned on these properties should those hospitals experience significant declines in patient
volumes and revenues. These hospitals believe that, to the extent that they experience revenue declines and
increased expenses resulting from the COVID-19 pandemic, as ultimately measured over the life of the
pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”). Our financial statements for the year ended December 31, 2020 include
bonus rental attributable to revenues recorded by these three hospitals in connection with CARES Act grants.

Throughout the common areas of many properties in our portfolio, we have implemented COVID-19 risk
mitigating actions such as, enhanced cleaning protocols including supplemental cleaning and sanitizing of high-
touch points, limiting points of entry at certain facilities, and coordinating with health care providers to assess or
screen patients prior to entering certain of our MOBs.

Disclosures Related to Certain Hospital Facilities

Please refer to Note 4 to the consolidated financial statements – Lease Accounting, for additional
information regarding certain of our hospital facilities including Southwest Healthcare System, Inland Valley
Campus; Evansville, Indiana; Corpus Christi, Texas, and; Kindred Hospital Chicago Central.

Effects of Inflation

Inflation has not had a material impact on our results of operations over the last three years. However, since
the healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures, as
are supply and other costs, we and the operators of our hospital facilities cannot predict the impact that future
economic conditions may have on our/their ability to contain future expense increases. Depending on general
economic and labor market conditions, the operators of our hospital facilities may experience unfavorable labor
market conditions, including a shortage of nurses which may cause an increase in salaries, wages and benefits
expense in excess of the inflation rate. Their ability to pass on increased costs associated with providing
healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have
been enacted that, in certain cases, limit their ability 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 of the 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 MOB leases require the tenant to pay an allocable share of operating expenses, including common
area maintenance costs, insurance and real estate taxes. These provisions 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.

50

Liquidity and Capital Resources

Year ended December 31, 2020 as compared to December 31, 2019:

Net cash provided by operating activities

Net cash provided by operating activities was $44.2 million during 2020 as compared to $42.7 million

during 2019. The $1.6 million net increase was attributable to:

• A favorable change of $2.5 million due to an increase in net income plus/minus the adjustments to
reconcile net income to net cash provided by operating activities (depreciation and amortization,
amortization related to above/below market leases, amortization of debt premium, amortization of
deferred financing costs, stock-based compensation and gains on sales of real estate assets), as discussed
above;

•

•

•

•

an unfavorable change of $710,000 in accrued expenses and other liabilities due to the timing of
disbursements;

a favorable change of $295,000 in lease receivables;

a favorable change of $182,000 in tenant reserves, deposits and deferred and prepaid rents, and;

other combined net unfavorable changes of $704,000.

Net cash used in investing activities

Net cash used in investing activities was $27.2 million during 2020 as compared to $16.5 million during 2019.

2020:

During 2020, $27.2 million of net cash was used in investing activities as follows:

spent $28.3 million for additions to real estate investments, including $22.2 million of construction costs
related to a newly constructed, 100-bed behavioral health care hospital located in Clive, Iowa, that was
substantially completed and received a temporary certificate of occupancy in late December, 2020, and
tenant improvements at various MOBs;

spent $3.2 million in equity investments in unconsolidated LLCs;

spent $2.3 million on the acquisition of the Sand Point Medical Properties building in late December
2020, as discussed in Note 3 to the consolidated financial statements – New Construction, Acquisitions
and Dispositions, and;

received $6.5 million of cash in excess of income from LLCs, including $5.2 million of cash proceeds
generated from a construction loan obtained by Grayson Properties II during the second quarter of 2020.

•

•

•

•

2019:

During 2019, $16.5 million of net cash was used in investing activities as follows:

•

•

•

spent $2.1 million to fund equity investments in unconsolidated LLCs/LPs;

spent approximately $12.3 million for capital additions to real estate investments, including $5.9 million
related to the construction of the above-mentioned facility located in Clive, Iowa, as well as tenant
improvements at various MOBs;

spent approximately $5.1 million to acquire the Bellin Health Family Medicine Center, as discussed in
Note 3 to the consolidated financial statements – New Construction, Acquisitions and Dispositions;

51

•

•

received $318,000 of cash distributions in excess of income received from our unconsolidated LLCs
($2.1 million of cash distributions received less $1.8 million of equity in income of unconsolidated
LLCs), and;

received approximately $2.8 million of combined cash proceeds from the sales of real estate assets
consisting of an MOB located in Kingwood, Texas, and a parcel of land.

Net cash used in financing activities

Net cash used in financing activities was $17.4 million during 2020, as compared to $25.1 million during

2019.

2020:

The $17.4 million of cash used in financing activities during 2020 consisted primarily of:

paid $38.0 million of dividends;

received $23.3 million of additional net borrowings on our revolving line of credit;

paid $1.9 million on mortgage notes payable that are non-recourse to us;

paid $467,000 of financing costs related to the revolving credit agreement, including amendment fees,
and;

paid $235,000 to repurchase shares of our common stock in connection with income tax withholding
obligations related to stock-based compensation.

•

•

•

•

•

2019:

The $25.1 million of cash used in financing activities during 2019 consisted of:

•

•

•

•

•

•

received $16.6 million of additional net borrowings on our revolving line of credit;

received $211,000 of net cash from the issuance of shares of beneficial interest;

paid $221,000 to repurchase shares of our common stock in connection with income tax withholding
obligations related to stock-based compensation;

paid $37.4 million of dividends;

paid $4.2 million on mortgage notes payable that are non-recourse to us, including the repayment of
$2.5 million related to a previously outstanding mortgage note payable on one property that was funded
utilizing borrowings under our revolving credit agreement, and;

paid $35,000 of financing costs.

Year ended December 31, 2019 as compared to December 31, 2018:

Net cash provided by operating activities

Net cash provided by operating activities was $42.7 million during 2019 as compared to $42.9 million

during 2018. The $275,000 decrease was attributable to:

•

an unfavorable change of approximately $1.6 million due to a decrease in net income plus/minus the
adjustments to reconcile net income to net cash provided by operating activities (depreciation and
amortization, amortization of debt premium, stock-based compensation, hurricane insurance recovery
proceeds in excess of damaged property write-downs and gains on sales of real estate assets), as
discussed above. This decrease was due primarily to $1.7 million of income recorded during 2018 in
connection a lease termination agreement on a single-tenant MOB located in Texas, that terminated a
lease that was scheduled to expire in July, 2020;

52

•

•

•

•

•

an unfavorable change of $1.8 million in tenant reserves, deposits and deferred and prepaid rents,
primarily resulting from cash received in 2018 from various tenants as reimbursement for their share of
the cost of certain tenant improvements;

a favorable change of $711,000 in lease and other receivables;

a favorable change of $299,000 in leasing costs paid;

a favorable change of $1.3 million in accrued expenses and other liabilities due to timing of
disbursements, and;

other combined net favorable changes of $796,000.

Net cash used in investing activities

Net cash used in investing activities was $16.5 million during 2019 as compared to $8.0 million during
2018. The factors contributing to the $16.5 million of net cash used in investing activities during 2019 are
detailed above.

2018:

During 2018, $8.0 million of net cash was used in investing activities as follows:

•

•

•

•

•

•

spent $820,000 to fund equity investments in various unconsolidated LLCs;

spent approximately $8.3 million for additions to real estate investments, consisting primarily of
hurricane related repairs at certain MOBs and tenant improvements at various MOBs;

spent approximately $4.1 million to acquire the Beaumont Medical Sleep Center Building, as discussed
in Note 3 to the consolidated financial statements – New Construction, Acquisitions and Dispositions;

spent $192,000 for hurricane related remediation expenses;

received $834,000 of cash distributions in excess of income received from our unconsolidated LLCs
($2.6 million of cash distributions received less $1.8 million of equity in income of unconsolidated
LLCs), and;

received approximately $4.5 million of hurricane insurance proceeds in excess of damaged property
write-downs.

Net cash used in financing activities

Net cash used in financing activities was $25.1 million during 2019, as compared to $33.3 million during
2018. The factors contributing to the $25.1 million of net cash used in financing activities during 2019 are
detailed above.

2018:

The $33.3 million of cash used in financing activities during 2018 consisted of:

•

•

•

•

received $15.4 million of additional net borrowings on our revolving line of credit;

received $13.0 million of proceeds related to a new mortgage note payable refinancing that are
non-recourse to us (these proceeds were utilized to repay outstanding borrowings under our revolving
credit facility);

received $229,000 of net cash from the issuance of shares of beneficial interest;

paid $36.8 million of dividends;

53

•

•

repaid $23.4 million on mortgage notes payable that are non-recourse to us (one of which was
subsequently refinanced with a new $13.0 million mortgage), and;

paid $1.7 million of financing costs related to the revolving credit agreement and a new mortgage note
payable that is non-recourse to us.

Additional cash flow and dividends paid information for 2020, 2019 and 2018:

As indicated on our consolidated statements of cash flows, we generated net cash provided by operating
activities of $44.2 million during 2020, $42.7 million during 2019 and $42.9 million during 2018. As also
indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense,
amortization related to above/below market leases, amortization of debt premium, amortization of deferred
financing costs, stock-based compensation, hurricane insurance recovery proceeds in excess of damaged property
write-downs (as applicable) and gains on sales of real estate assets (as applicable), are the primary differences
between our net income and net cash provided by operating activities for each year.

We declared and paid dividends of $38.0 million during 2020, $37.4 million during 2019 and $36.8 million
during 2018. During 2020, the $44.2 million of net cash provided by operating activities was approximately
$6.2 million greater than the $38.0 million of dividends paid during 2020. During 2019, the $42.7 million of net
cash provided by operating activities was approximately $5.2 million greater than the $37.4 million of dividends
paid during 2019. During 2018, the $42.9 million of net cash provided by operating activities was approximately
$6.1 million greater than the $36.8 million of dividends paid during 2018.

As indicated in the cash flows from investing activities and cash flows from financing activities sections of
the statements of cash flows, there were various 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 as investments 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 on the operating cash flow generated by our
properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of
real 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 we own 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 determining the amount of dividends to be paid each period. These
considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain
our REIT status; (ii) the current and projected operating results of our properties, including those owned in LLCs,
and; (iii) our future capital commitments and debt repayments, including those of our LLCs. Based upon the
information discussed above, as well as consideration of projections and forecasts of our future operating cash
flows, management and the Board of Trustees have determined that our operating cash flows have been sufficient
to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above
with consideration given to our projected future results of operations.

We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally
generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing
$350 million revolving credit agreement (which had $108.2 million of available borrowing capacity, net of
outstanding borrowings and letters of credit as of December 31, 2020); (ii) borrowings under or refinancing of
existing third-party debt pursuant
to mortgage loan agreements entered into by our consolidated and
unconsolidated LLCs/LPs; (iii) the issuance of equity pursuant to our at-the-market (“ATM”) equity issuance
program, 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 agreement and access to the capital markets provide us with sufficient capital resources to fund

54

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 of the 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 be able to obtain financing on acceptable terms or
within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material
unfavorable impact on our results of operations, financial condition and liquidity.

Credit facilities and mortgage debt

Management routinely monitors and analyzes the Trust’s capital structure in an effort to maintain the
targeted balance among capital resources including the level of borrowings pursuant to our $350 million
revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debt secured by the real
property of our properties and our level of equity including consideration of additional equity issuances pursuant
to our ATM equity issuance program. This ongoing analysis considers factors such as the current debt market
and interest rate environment, the current/projected occupancy and financial performance of our properties, the
current loan-to-value ratio of our properties, the Trust’s current stock price, the capital resources required for
anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis,
together with consideration of
revolving credit agreement borrowings,
non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize
when events such as refinancing of specific debt components occur or additional funds are required to finance the
Trust’s growth.

the Trust’s current balance of

In June 2020, we entered into the first amendment (the “First Amendment”) to the revolving credit
agreement (“Credit Agreement”), pursuant to which, among other things, an additional tranche of revolving
credit commitments in the amount of $50 million, designated as the “Revolving B Facility”, was established
thereby increasing the aggregate revolving credit commitment to $350 million from $300 million. The Credit
Agreement, as amended, which is scheduled to mature in March 2022, provides for a revolving credit facility in
an aggregate principal amount of $350 million, including a $40 million sublimit for letters of credit and a
$30 million sublimit for swingline/short-term loans. Borrowings under the Credit Agreement are guaranteed by
certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority
security interests in and liens on all equity interests in certain of the Trust’s wholly-owned subsidiaries. The
remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to
giving effect to the First Amendment, has been designated as the “Revolving A Facility”.

Borrowings made pursuant to the Revolving A Facility will bear interest, at our option, at one, two, three or
six-month LIBOR plus an applicable margin ranging from 1.10% to 1.35% or at the Base Rate plus an applicable
margin ranging from 0.10% to 0.35%. The Credit Agreement defines “Base Rate” as the greater 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 facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving A Facility
of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total
leverage ratio. At December 31, 2020, the applicable margin over the LIBOR rate was 1.20%, the margin over
the Base Rate was 0.20%, and the facility fee was 0.20%. The Credit Agreement also provides for options to
extend the maturity date and borrowing availability for two additional six-month periods for the Revolving A
Facility.

Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three or
six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an
applicable margin ranging from 0.85% to 1.10%. The 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%. The initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A
facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit
Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At

55

December 31, 2020, the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was
0.95% and the facility fee was 0.20%.

At December 31, 2020, we had $236.2 million of outstanding borrowings and $5.6 million of letters of
credit outstanding under our Credit Agreement. We had $108.2 million of available borrowing capacity, net of
the outstanding borrowings and letters of credit outstanding as of December 31, 2020. The carrying amount and
fair value of borrowings outstanding pursuant to the Credit Agreement was $236.2 million at December 31, 2020.
There are no compensating balance requirements. The average amount outstanding under our Credit Agreement
during the years ended December 31, 2020, 2019 and 2018 was $219.1 million, $198.3 million and
$191.4 million, respectively, with corresponding effective interest rates of 2.4%, 3.7% and 3.5%, respectively,
including commitment fees and interest rate swaps/caps. At December 31, 2019, we had $213.0 million of
outstanding borrowings outstanding against our revolving credit agreement and $87.0 million of available
borrowing capacity.

The Credit Agreement contains customary affirmative and negative covenants, including limitations on
certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and
dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding 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 total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as
well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding
under the Credit Agreement. We are in compliance with all of the covenants at December 31, 2020 and 2019. We
also believe that we would remain in compliance if, assuming that the majority of the potential new borrowings
will be used to fund investments, the full amount of our commitment was borrowed.

The following table includes a summary of the required compliance ratios at December 31, 2020 and 2019,
giving effect to the covenants contained in the Credit Agreements in effect on the respective dates (dollar
amounts in thousands):

Tangible net worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unencumbered leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed charge coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$125,000

$147,263

$125,000

$167,181

< 60%
< 30%
< 60%

> 1.50x

44.8%
8.6%
41.4%
4.7x

< 60%
< 30%
< 60%

> 1.50x

42.3%
9.1%
38.5%
4.0x

December 31, 2020

December 31, 2019

Covenant

UHT

Covenant

UHT

56

As indicated on the following table, we have various mortgages, all of which are non-recourse to us and are
not cross-collateralized, included on our consolidated balance sheet as of December 31, 2020 and 2019 (amounts
in thousands):

Facility Name

As of 12/31/2020

As of
12/31/2019

Interest
Rate

Maturity
Date

Outstanding
Balance
(in thousands)(a.)

Outstanding
Balance
(in thousands)

700 Shadow Lane and Goldring MOBs fixed rate

mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.54%

June, 2022

BRB Medical Office Building fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.27% December, 2022

Desert Valley Medical Center fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2704 North Tenaya Way fixed rate mortgage loan . .
Summerlin Hospital Medical Office Building III

3.62%
January, 2023
4.95% November, 2023

5,437

5,505

4,511
6,576

5,654

5,721

4,661
6,727

fixed rate mortgage loan . . . . . . . . . . . . . . . . . . . .

4.03%

April, 2024

13,043

13,196

Tuscan Professional Building fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.56%

June, 2025

Phoenix Children’s East Valley Care Center fixed

rate mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . .

3.95%

January, 2030

2,933

8,718

3,492

8,961

Rosenberg Children’s Medical Plaza fixed rate

mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.42% September, 2033

12,508

12,732

Total, excluding net debt premium and net financing
fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net financing fees . . . . . . . . . . . . . . . . . . . .
Plus net debt premium . . . . . . . . . . . . . . . . . . . .

Total mortgage notes payable, non-recourse to us,

net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,231
(477)
141

61,144
(594)
194

$58,895

$60,744

(a.) All mortgage loans require monthly principal payments through maturity and either fully amortize or

include a balloon principal payment upon maturity.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The
mortgages outstanding as of December 31, 2020 had a combined carrying value of approximately $59.2 million
and a combined fair value of approximately $62.0 million. At December 31, 2019, we had various mortgages, all
of which were non-recourse to us, included in our consolidated balance sheet. The combined outstanding balance
of these various mortgages was $61.1 million and these mortgages had a combined fair value of approximately
$63.1 million.

The fair value of our debt was computed based upon quotes received from financial institutions. We
consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosure in
connection with debt instruments. Changes in market rates on our fixed rate debt impacts the fair value of debt,
but it has no impact on interest incurred or cash flow.

57

Contractual Obligations:

The following table summarizes the schedule of maturities of our outstanding borrowing under our
revolving credit facility (“Credit Agreement”), the outstanding mortgages applicable to our properties recorded
on a consolidated basis and our other contractual obligations as of December 31, 2020 (amounts in thousands):

Debt and Contractual Obligation

Long-term non-recourse debt-fixed (a) (b)
. . . . . . . . . . . .
Long-term debt-variable (c) . . . . . . . . . . . . . . . . . . . . . . . .
Estimated future interest payments on debt outstanding as
. . . . . . . . . . . . . . . . . . . . . . .
Operating leases (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction commitments (f) . . . . . . . . . . . . . . . . . . . . . .
Equity and debt financing commitments (g) . . . . . . . . . . .

of December 31, 2020 (d)

Payments Due by Period (dollars in thousands)

Less
than 1
Year

Total

1-3 years

3-5 years

More
than
5 years

$ 59,231
236,200

$ 2,081
—

$ 24,089
236,200

$14,489
—

$18,572
—

16,779
27,361
12,097
362

5,710
480
12,097
362

4,761
960
—
—

1,835
960
—
—

4,473
24,961
—
—

Total contractual obligations . . . . . . . . . . . . . . . . . . . . . . .

$352,030

$20,730

$266,010

$17,284

$48,006

(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 an aggregate fair value of approximately $62.0 million as of
December 31, 2020. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has
no impact on interest
incurred or cash flow. Excludes $39.7 million of combined third-party debt
outstanding as of December 31, 2020, that is non-recourse to us, at the unconsolidated LLCs in which we
hold various non-controlling ownership interests (see Note 8 to the consolidated financial statements).
(c) Consists of $236.2 million of borrowings outstanding as of December 31, 2020 under the terms of our
$350 million Credit Agreement which matures on March 28, 2022. The amount outstanding approximates
fair value as of December 31, 2020.

(d) Assumes that all debt outstanding as of December 31, 2020, including borrowings under the Credit
Agreement, and the 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 of December 31, 2020. We have the
right to repay borrowings under the Credit Agreement at any time during the term of the agreement, without
penalty. Interest payments are expected to be paid utilizing cash flows from operating activities or
borrowings under our revolving Credit Agreement.

(e) Reflects our future minimum operating lease payment obligations outstanding as of December 31, 2020, as
discussed in Note 4 to the consolidated financial statements – Lease Accounting, in connection with ground
leases at fourteen of our consolidated properties.

(f) Consists of the remaining estimated construction costs of two new construction projects, consisting of a
100-bed behavioral health care facility located in Clive, Iowa, and a 75,000 rentable square foot MOB
located in Denison, Texas, both of which are were substantially completed in late 2020. We are required to
build these facilities pursuant to agreements with third parties.

(g) Consists of equity investment and debt financing commitments remaining in connection with our investment

at Forney Medical Plaza II.

Off Balance Sheet Arrangements

As of December 31, 2020 we are party to certain off balance sheet arrangements consisting of standby
letters of credit and equity and debt financing commitments. Our outstanding letters of credit at December 31,
2020 totaled $5.6 million related to Grayson Properties II. As of December 31, 2019, we did not have any off
balance sheet arrangements other than equity and debt financing commitments.

58

Acquisition and Divestiture Activity

Please see Note 3 to the consolidated financial statements for completed transactions.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risks Associated with Financial Instruments

LIBOR Transition

In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop
compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board
and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”)
which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to USD-LIBOR in
derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or
when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing
bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in
reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the
extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if
LIBOR were to remain available in its current form.

At December 31, 2020, we had contracts that are indexed to LIBOR, such as our unsecured revolving credit
facility and interest rate derivative. We are monitoring and evaluating the related risks, which include interest on
loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning
contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans,
securities, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued.
For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require
negotiation with the respective counterparty.

If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts
is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their
current form, interest rates on our current or future indebtedness may be adversely affected.

While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible
that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline
to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an
alternative reference rate will be accelerated and magnified.

Financial Instruments

In January 2020, we entered into an interest rate swap agreement on a total notional amount of $35 million
with a fixed interest rate of 1.4975% that we designated as a cash flow hedge. The interest rate swap became
effective on January 15, 2020 and is scheduled to mature on September 16, 2024. If the one-month LIBOR is
above 1.4975%, the counterparty pays us, and if the one-month LIBOR is less than 1.4975%, we pay the
counterparty, the difference between the fixed rate of 1.4975% and one-month LIBOR.

In March 2020, we entered into an interest rate swap agreement on a total notional amount of $55 million
with a fixed interest rate of 0.565% that we designated as a cash flow hedge. The interest rate swap became
effective on March 25, 2020 and is scheduled to mature on March 25, 2027. If the one-month LIBOR is above
0.565%, the counterparty pays us, and if the one-month LIBOR is less than 0.565%, we pay the counterparty, the
difference between the fixed rate of 0.565% and one-month LIBOR.

During the third quarter of 2019, we entered into an interest rate swap agreement on a total notional amount
of $50 million with a fixed interest rate of a 1.144%. that we designated as a cash flow hedge. The interest rate

59

swap became effective on September 16, 2019 and is scheduled to mature on September 16, 2024. If the
one-month LIBOR is above 1.144%, the counterparty pays us, and if the one-month LIBOR is less than 1.144%,
we pay the counterparty, the difference between the fixed rate of 1.144% and one-month LIBOR.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate
swaps is based on quotes from third parties. We consider those inputs to be “level 2” in the fair value hierarchy
as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging
activities. At December 31, 2020, the fair value of our interest rate swaps was a net liability of $3.8 million
which is included in accrued expenses and other liabilities on the accompanying consolidated balance sheet.
During the twelve months of 2020, we paid or accrued approximately $733,000 in net payments made to the
counterparty by us, adjusted for accruals, pursuant to the terms of the swaps (consisting of approximately
$824,000 in payments, adjusted for accruals, or accruals made to the counterparty by us, offset by approximately
$91,000 of payments paid to us by the counterparty). From inception of the swap agreements through
December 31, 2020, we paid or accrued approximately $626,000 in net payments made to the counterparty by us
pursuant to the terms of the swap (consisting of approximately $198,000 in payments or accruals made to us by
the counterparty, offset by approximately $824,000 of payments due to the counterparty from us). During the
twelve months of 2019, we received or accrued approximately $108,000 in payments made to us by the
counterparty pursuant to the terms of the swap entered into during the third quarter of 2019. Cash flow hedges
are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset
or a liability, with a corresponding amount recorded in accumulated other comprehensive income (“AOCI”)
within shareholders’ equity. Amounts are classified from AOCI to the income statement in the period or periods
the hedged transaction affects earnings.

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. This interest rate cap became effective in January, 2017
and expired in March 2019. In exchange for the premium payment, the counterparties agreed to pay us the
difference between 1.50% and one-month LIBOR if one-month LIBOR rises above 1.50% during the term of the
cap. From inception through the March, 2019 expiration, we received approximately $205,000 in payments made
to us by the counterparties ($61,000 of which was received during the first three months of 2019 and $144,000 of
which was received during 2018) pursuant to the terms of this cap.

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 paid a premium of $55,000. This interest rate cap became effective in
October, 2016 and expired in March, 2019. 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. From inception through the March, 2019 expiration, we received approximately $205,000 in
payments made to us by the counterparties ($61,000 of which was received during the first three months of 2019
and $144,000 of which was received during 2018) pursuant to the terms of this cap.

The sensitivity analysis related to our fixed and variable rate debt assumes current market rates with all
other variables held constant. As of December 31, 2020, the fair value and carrying-value of our debt is
approximately $298.2 million and $295.4 million, respectively. As of that date, the fair value exceeds the
carrying-value by approximately $2.8 million.

The table below presents information about our financial instruments that are sensitive to changes in interest
rates. The interest rate swaps include the $50 million swap agreement entered into during the third quarter of
2019, the $35 million swap agreement entered into in January 2020 and the $55 million swap agreement entered
into in March, 2020. For debt obligations, the amounts of which are as of December 31, 2020, the table presents
principal cash flows and related weighted average interest rates by contractual maturity dates.

60

(Dollars in thousands)

Long-term debt:
Fixed rate:

Maturity Date, Year Ending December 31

2021

2022

2023

2024

2025

Thereafter

Total

Debt(a) . . . . . . . . . . . . . . . . . . . . . .
Average interest rates . . . . . . . . . .

$2,081

$ 12,197

$11,892

$13,550

$939

$18,572

$ 59,231

4.3%

4.4%

4.4%

4.4% 4.3%

4.3%

4.3%

Variable rate:

Debt(b) . . . . . . . . . . . . . . . . . . . . . .
Average interest rates . . . . . . . . . .

Interest rate swaps:

$ — $236,200

$ — $ — $— $ — $236,200
—

—

—

1.4%

1.4% —

—

Notional amount

. . . . . . . . . . . . . .
Interest rates . . . . . . . . . . . . . .

$ — $ — $ — $85,000

$— $55,000

$140,000

—

—

—

1.320% —

0.565%

1.070%

(a) Consists of non-recourse mortgage notes payable.
(b)

(c)

Includes $236.2 million of outstanding borrowings under the terms of our $350 million revolving credit
agreement.
Includes a $50.0 million interest rate swap that became effective on September 16, 2019, and a $35 million
interest rate swap that became effective on January 15, 2020, both of which are scheduled to mature during
2024. Additionally, included is a $55 million interest rate swap that became effective on March 25, 2020,
which is scheduled to mature in 2027.

As calculated based upon our variable rate debt outstanding as of December 31, 2020 that is subject to
interest rate fluctuations, and giving effect to the above-mentioned interest rate swap, each 1% change in interest
rates would impact our net income by approximately $962,000.

ITEM 8.

Financial Statements and Supplementary Data

Our Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Changes in
Equity and Cash Flows, together with the reports of KPMG LLP, an independent registered public accounting
firm, are included elsewhere herein. Reference is made to the “Index to Financial Statements and Schedule.”

ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2020, under the supervision and with the participation of our management, including
the Trust’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we performed an evaluation
of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 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 concluded that our disclosure controls and procedures are effective to ensure that material
information is recorded, processed, summarized and reported by management on a timely basis in order to
comply with our disclosure obligations under the Securities and Exchange Act of 1934 and the SEC rules
thereunder.

Changes in Internal Control Over Financial Reporting

On January 1, 2019, we adopted ASC 842. In connection with our adoption of ASC 842, we did implement
changes to our internal controls relating to leases. These changes included the development of new policies,
enhanced contract review requirements and other ongoing monitoring activities. These controls were designed to
provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and
related disclosures.

61

There have been no changes in our internal control over financial reporting or in other factors during the
fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over our
financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using
the criteria established in Internal Control—Integrated Framework (2013),
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial
reporting is designed to provide reasonable assurance regarding 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 detect misstatements. Also, projections of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk that controls may 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, 2020, based on criteria established in Internal Control—Integrated
Framework (2013), issued by the COSO. The effectiveness of our internal control over financial reporting as of
December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated
in their report which is included herein.

62

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Trustees
Universal Health Realty Income Trust:

Opinion on Internal Control Over Financial Reporting

We have audited Universal Health Realty Income Trust and subsidiaries’ (the Company) internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019,
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, 2020, and the related notes and financial statement
schedule III (collectively,
the consolidated financial statements), and our report dated February 25, 2021
expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal 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 as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

63

Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

limitations,

Philadelphia, Pennsylvania
February 25, 2021

(signed) KPMG LLP

64

ITEM 9B. Other Information

None.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

There is hereby incorporated by reference the information to appear under the captions “Proposal No. 1”
(Election of Trustees), “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate
Governance” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2020. See also “Executive Officers of the Registrant” appearing in Item 1 hereof.

ITEM 11. Executive Compensation

There is hereby incorporated by reference information to appear under

the caption “Executive
Compensation” in our Proxy Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 2020.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

There is hereby incorporated by reference the information to appear under the caption “Security Ownership
of Certain Beneficial Owners and Management” in our Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2020.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

There is hereby incorporated by reference the information to appear under the captions “Certain
Relationships and Related Transactions” and “Corporate Governance” in our Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2020.

ITEM 14. Principal Accounting Fees and Services

There is hereby incorporated herein by reference the information to appear under the caption “Relationship
with Independent Registered Public Accounting Firm” in our Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2020.

65

ITEM 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report:

PART IV

(1) Financial Statements: See “Index to Financial Statements and Schedule”

(2) Financial Statement Schedules: See “Index to Financial Statements and Schedule”

(3) Exhibits:

No.

3.1

3.2

3.3

3.4

4.1

10.1

10.2

10.3

10.4

10.5

10.6

Description

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. (P)

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. (P)

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 incorporated herein by reference.

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 dated September 6, 2013, is incorporated herein by reference.

Description of Securities of the Registrant, as previously filed as Exhibit 4.1 to the Trust’s Annual Report
on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference.

Amended and Restated Advisory Agreement dated December 24, 1986, effective January 1, 2019,
between Universal Health Realty Income Trust and UHS of Delaware, Inc. is incorporated herein by
reference.

Contract of Acquisition, dated as of August 1986, between the Trust and certain subsidiaries of Universal
Health Services, Inc., previously filed as Exhibit 10.2 to Amendment No. 3 of the Registration Statement
on Form S-11 and S-2 of Universal Health Services, Inc. and the Trust (File No. 33-7872), is incorporated
herein by reference. (P)

Form of Leases, including Form of Master Lease Document Leases, between certain subsidiaries of
Universal Health Services, Inc. and the Trust, previously filed as Exhibit 10.3 to Amendment No. 3 of the
Registration Statement on Form S-11 and Form S-2 of Universal Health Services, Inc. and the Trust
(File No. 33-7872), is incorporated herein by reference. (P)

Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases and Contract of Acquisition, dated
December 1986, issued by Universal Health Services, Inc. in favor of the Trust, previously filed as Exhibit
10.5 to the Trust’s Current Report on Form 8-K dated December 24, 1986, is incorporated herein by
reference. (P)

Lease, dated December 22, 1993, between the Trust and THC-Chicago, Inc., as lessee, previously filed as
Exhibit 10.14 to the Trust’s Annual Report on Form 10-K for the year ended December 31, 1993, is
incorporated herein by reference. (P)

Credit Agreement, dated as of March 27, 2015, by and among the Trust, a syndicate of lenders and Wells
Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent
and Fifth Third Bank, N.A., JPMorgan Chase Bank, N.A. and SunTrust Bank as Co-Documentation
Agents, previously filed as Exhibit 10.1 to the Trust’s Current Report on Form 8-K dated March 27, 2015,
is incorporated herein by reference.

66

No.

10.7

10.8

10.9

10.10

10.11*

10.12*

10.13*

10.14

10.15

10.16

11

21

23.1

31.1

Description

First Amendment to Credit Agreement, dated as of May 24, 2016, between Universal Health Realty
Income Trust, certain subsidiaries of Universal 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.

Dividend Reinvestment and Share Purchase Plan included in the Trust’s Registration Statement on
Form S-3 (Registration No. 333-81763) filed on June 28, 1999, is incorporated herein by reference.

Asset Exchange and Substitution Agreement, dated as of April 24, 2006, by and among the Trust and
Universal Health Services, Inc. and certain of its subsidiaries, previously filed as Exhibit 10.1 to the
Trust’s Current Report on Form 8-K dated April 25, 2006, is incorporated herein by reference.

Amendment No. 1 to the Master Lease Document, between certain subsidiaries of Universal Health
Services, Inc. and the Trust, previously filed as Exhibit 10.2 to the Trust’s Current Report on
Form 8-K dated April 25, 2006, is incorporated herein by reference.

Amendment and Restatement of the Universal Health Realty Income Trust 2007 Restricted Stock
Plan, previously filed as Exhibit 4.1 to the Trust’s Registration Statement on Form S-8
(File No. 333-211903), is incorporated herein by reference.

Form of Restricted Stock Agreement, previously filed as Exhibit 10.2 to the Trust’s Current Report
on Form 8-K dated April 27, 2007, is incorporated herein by reference.

The Universal Health Realty Income Trust Amended and Restated 2007 Restricted Stock Plan, as
amended, previously filed as Annex A to the Company’s Proxy Statement filed on April 21, 2020, is
incorporated herein by reference.

Agreement dated December 2, 2020, to renew Amended and Restated Advisory Agreement dated as
of December 24, 1986, effective January 1, 2021, between Universal Health Realty Income Trust and
UHS of Delaware, Inc. is filed herewith.

First Amendment, dated as of June 5, 2020 to Credit Agreement, dated as of March 27, 2018 between
Universal Health Realty Income Trust, certain subsidiaries of Universal 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 Company’s
Current Report on Form 8-K dated June 3, 2020, is incorporated herein by reference.

ATM Equity Offering Sales Agreement, dated June 8, 2020, among BofA Securities, Inc., Credit
Agricole Securities (USA) Inc., Fifth Third Securities, Inc., SunTrust Robinson Humphrey, Inc. and
Wells Fargo Securities, LLC, as sales agents, principals and/or (except in the case of Fifth Third
Securities, Inc., SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC) forward
sellers, Bank of America, N.A. and Crédit Agricole Corporate and Investment Bank, as forward
purchasers, Universal Health Realty Income Trust, and UHS of Delaware, Inc., previously filed as
Exhibit 5.1 to the Company’s Current Report on Form 8-K dated June 9, 2020, is incorporated herein
by reference.

Statement re computation of per share earnings is set forth on the Consolidated Statements of
Income.

Subsidiaries of Registrant.

Consent of Independent Registered Public Accounting Firm.

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.

67

No.

31.2

32.1

32.2

Description

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.

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.

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

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data
file because iXBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

*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.

ITEM 16. Form 10-K Summary

None.

68

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

UNIVERSAL HEALTH REALTY INCOME TRUST

By:

/S/ ALAN B. MILLER

Alan B. Miller,
Chairman of the Board,
Chief Executive Officer and President

Date: February 25, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures

Title

Date

/S/ ALAN B. MILLER

Alan B. Miller

/S/ GAYLE L. CAPOZZALO

Gayle L. Capozzalo

/S/ MICHAEL ALLAN DOMB

Michael Allan Domb

/S/ ROBERT F. MCCADDEN

Robert F. McCadden

/S/ MARC D. MILLER

Marc D. Miller

/S/

JAMES P. MOREY
James P. Morey

/S/ CHARLES F. BOYLE

Charles F. Boyle

Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)

Trustee

Trustee

Trustee

Trustee

Trustee

Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer)

February 25, 2021

February 25, 2021

February 25, 2021

February 25, 2021

February 25, 2021

February 25, 2021

February 25, 2021

69

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and

Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets—December 31, 2020 and December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income—Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income—Years Ended December 31, 2020, 2019 and 2018 . .
Consolidated Statements of Changes in Equity—Years Ended December 31, 2020, 2019 and 2018 . . . . . . .
Consolidated Statements of Cash Flows—Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule III—Real Estate and Accumulated Depreciation—December 31, 2020 . . . . . . . . . . . . . . . . . . . . .
Notes to Schedule III—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

71
73
74
75
76
77
78
102
105

70

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Trustees Universal Health Realty Income Trust:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Universal Health Realty Income Trust
and subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes and financial statement schedule III (collectively,
the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in
conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 and Note 4 to the consolidated financial statements, the Company has changed its method
of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification
Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit
matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.

71

Assessment of the carrying value of net real estate investments

As discussed in Note 1 to the consolidated financial statements, the Company tests net real estate investments for
recoverability whenever events or changes in circumstances indicate the carrying value of such assets may not be
future
recoverable. When such impairment
undiscounted net cash flows, excluding interest charges, to perform the recoverability test. The net real estate
investment balance as of December 31, 2020 was $443.8 million.

the Company makes certain estimates of

indicators exist,

We identified the assessment of the carrying value of net real estate investments as a critical audit matter. There
is a high degree of subjective and complex auditor judgement in evaluating the relevant events or changes in
circumstances that may indicate the carrying value of the asset may not be recoverable. As applicable, future
occupancy, rental rates, capital requirements, and expected holding periods used to estimate the expected cash
flows were challenging to test, due to the sensitivity of changes to those assumptions on the impact of the
assessment of the recoverability of the asset.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the
design and tested the operating effectiveness of certain internal controls over the Company’s asset impairment
process, including controls over identification and evaluation of events or changes in circumstances that may
indicate the carrying amount of net real estate investments may not be recoverable. We examined the Company’s
impairment indicator assessment, which included an evaluation that all of the Company’s net real estate
investments were analyzed and potential impairment indicators were identified in the assessment. We performed
an independent assessment of changes in property operating metrics and general market conditions related to
individual net real estate investments and compared the results of that assessment to the Company’s analysis. We
read board of trustees meeting minutes and inquired with certain members of operating management to identify
any significant adverse changes in the extent or manner in which net real estate investments are being used and
their physical condition, legal factors and current strategies.

For properties that had impairment indicators that required further analysis, the following are the primary
procedures we performed. We tested certain internal controls over the Company’s process for evaluating
recoverability, including controls related to the determination of future occupancy, rental rates, and capital
requirement assumptions. We involved valuation professionals with specialized skills and knowledge, who
assisted in evaluating the Company’s estimates of future occupancy, rental rates, capital requirements, and
expected holding periods by comparing these assumptions against a range that was independently developed
using publicly available market data for comparable assets.

(signed) KPMG LLP

We have served as the Company’s auditor since 2002.

Philadelphia, Pennsylvania
February 25, 2021

72

UNIVERSAL HEALTH REALTY INCOME TRUST

CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)

December 31, December 31,

2020

2019

Assets:
Real Estate Investments:

Buildings and improvements and construction in progress . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 605,292
(216,648)

$ 572,503
(194,888)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investments in limited liability companies (“LLCs”) . . . . . . . . . . . . . . . . . . . . . .

Other Assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease and other receivables from UHS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease receivable—other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets (net of accumulated amortization of $19.5 million and

$26.5 million, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use land assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred charges and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

388,644
55,157

443,801

4,278

5,742
3,199
7,504

11,742
8,914
8,829

377,615
54,892

432,507

6,918

6,110
2,963
7,640

14,553
8,944
9,154

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 494,009

$ 488,789

Liabilities:

Line of credit borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage notes payable, non-recourse to us, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ground lease liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant reserves, deposits and deferred and prepaid rents . . . . . . . . . . . . . . . . . . .

$ 236,200
58,895
351
19,802
8,914
10,842

$ 212,950
60,744
374
12,888
8,944
11,155

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

335,004

307,055

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: 2020—13,771,287; 2019—13,757,498 . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss)/income . . . . . . . . . . . . . . . . . . . . . . . . .

138
267,368
680,727
(785,413)
(3,815)

138
266,723
661,280
(747,417)
1,010

Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

159,005

181,734

Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 494,009

$ 488,789

See the accompanying notes to these consolidated financial statements.

73

UNIVERSAL HEALTH REALTY INCOME TRUST

CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)

Year ended December 31,
2019

2020

2018

Revenues:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease revenue—UHS facilities (a.)
Lease revenue—Non-related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue—UHS facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue—Non-related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,571
51,562
882
995

$ 23,095
52,020
867
1,181

$22,661
50,466
338
2,745

Expenses:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advisory fees to UHS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before equity in income of unconsolidated limited liability companies

(“LLCs”), interest expense, hurricane insurance recovery proceeds and gains
on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income of unconsolidated LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hurricane insurance recovery proceeds in excess of damaged property

78,010

77,163

76,210

25,581
4,141
22,284

52,006

25,870
3,974
21,569

24,976
3,806
20,723

51,413

49,505

26,004
1,706

25,750
1,796

26,705
1,771

write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hurricane business interruption insurance recovery proceeds . . . . . . . . . . . .
Gains on sales of real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest expense, net

—
—
—
(8,263)

—
—
1,951
(10,533)

4,535
1,162
—
(9,977)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$19,447

$ 18,964

$24,196

Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

1.42

1.41

$

$

1.38

1.38

$

$

1.76

1.76

Weighted average number of shares outstanding—Basic . . . . . . . . . . . . . . . . . . .
Weighted average number of share equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,743
22

13,732
20

13,722
—

Weighted average number of shares and equivalents outstanding—Diluted . . . . .

13,765

13,752

13,722

(a.) Includes bonus rental on UHS hospital facilities of $6,116, $5,551 and $4,988 for the years ended

December 31, 2020, 2019 and 2018, respectively.

See the accompanying notes to these consolidated financial statements.

74

UNIVERSAL HEALTH REALTY INCOME TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollar amounts in thousands)

Year ended December 31,
2019

2018

2020

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income/(loss):

$19,447

$18,964

$24,196

Unrealized derivative (loss)/gain on cash flow hedges . . . . . . . . . . . . . . . . . .

(4,825)

Total other comprehensive (loss)/income: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,825)

878

878

(12)

(12)

Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,622

$19,842

$24,184

See the accompanying notes to these consolidated financial statements.

75

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S

UNIVERSAL HEALTH REALTY INCOME TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

Year ended December 31,
2019

2018

2020

Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

$ 19,447

$ 18,964

$ 24,196

activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization related to above/below market leases, net . . . . . . . . . . .
Amortization of debt premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hurricane insurance recovery proceeds in excess of damaged

property write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,581
(186)
(53)
764
912

25,870
(200)
(53)
638
702

24,976
(213)
(50)
648
571

—
—

—
(1,951)

(4,535)
—

Changes in assets and liabilities:

Lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant reserves, deposits and deferred and prepaid rents . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasing costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .

Cash flows from investing activities:

Investments in LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash distributions in excess of income from LLCs . . . . . . . . . . . . . . . . . . .
Additions to real estate investments, net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds received from divestiture of property, net . . . . . . . . . . . . . .
Hurricane insurance recovery proceeds in excess of damaged property

write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hurricane remediation payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid for acquisition of properties . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .

(100)
(232)
(367)
(23)
(969)
(564)
44,210

(3,204)
6,524
(28,262)
—

—
—
(2,266)
(27,208)

(395)
478
(549)
(76)
(1,084)
308
42,652

(2,133)
318
(12,320)
2,768

—
—
(5,105)
(16,472)

(1,106)
(823)
1,219
(90)
(1,383)
(482)
42,928

(820)
834
(8,263)
—

4,535
(192)
(4,053)
(7,959)

Cash flows from financing activities:

Net borrowings on line of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from mortgage notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of mortgage notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Issuance of shares of beneficial interest, net
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease)/increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,250
—
(1,913)
(467)
(235)
(37,973)
(32)
(17,370)
(368)
6,110
$ 5,742

16,550
—
(4,201)
(35)
(221)
(37,411)
212
(25,106)
1,074
5,036

15,350
13,000
(23,397)
(1,671)
—
(36,831)
229
(33,320)
1,649
3,387
$ 6,110 $ 5,036

Supplemental disclosures of cash flow information:

Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Invoices accrued for construction and improvements . . . . . . . . . . . . . . . . .

$ 7,573
$ 4,368

$ 10,025 $ 9,469
924
$ 1,485 $

See accompanying notes to these consolidated financial statements.

77

UNIVERSAL HEALTH REALTY INCOME TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Universal Health Realty Income Trust and subsidiaries (the “Trust”) is organized as a Maryland real estate
investment trust. We invest in healthcare and human-service related facilities currently including acute care
hospitals, behavioral health care hospitals, specialty hospitals, free-standing emergency departments, childcare
centers and medical/office buildings. As of February 25, 2021, we have seventy-two real estate investments
located in twenty states consisting of:

•

•

•

•

seven hospital facilities consisting of three acute care, one behavioral health care and three specialty
hospitals (two of which are currently vacant);

four free-standing emergency departments (“FEDs”);

fifty-seven medical/office buildings (“MOBs”), including five owned by unconsolidated limited liability
companies (“LLCs”)/limited liability partnerships (“LPs”), and;

four preschool and childcare centers.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the federal
government declared COVID-19 a national emergency. As a result of various policies implemented by the
federal and state governments, and varying by individual state, many non-essential businesses in the nation were
closed for varying time periods.

Although COVID-19 has not had a material adverse impact on our results of operations through
December 31, 2020, we believe that the potentially adverse impact that the pandemic may have on the future
operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of which
are beyond our, or our tenants’, ability to control or predict. Such factors include, but are not limited to, the
length of time and severity of the spread of the pandemic; the volume of cancelled or rescheduled elective
procedures and the volume of COVID-19 patients treated by the operators of our hospitals and other healthcare
facilities; measures our tenants are taking to respond to the COVID-19 pandemic; the impact of government and
including travel bans and restrictions, shelter-in-place or stay-at-home orders,
administrative regulation,
quarantines, the promotion of social distancing, business shutdowns and limitations on business activity; changes
in patient volumes at our tenants’ hospitals and other healthcare facilities due to patients’ general concerns
related to the risk of contracting COVID-19 from interacting with the healthcare system; the impact of stimulus
on the health care industry and our tenants; changes in patient volumes and payer mix caused by deteriorating
macroeconomic conditions (including increases in uninsured and underinsured patients as the result of business
closings and layoffs); potential disruptions to clinical staffing and shortages and disruptions related to supplies
required for our tenants’ employees and patients, including equipment, pharmaceuticals and medical supplies,
particularly personal protective equipment, or PPE; potential increases to expenses incurred by our tenants
related to staffing, supply chain or other expenditures; the impact of our indebtedness and the ability to refinance
such indebtedness on acceptable terms; disruptions in the financial markets and the business of financial
institutions as the result of the COVID-19 pandemic which could impact our ability to access capital or increase
associated borrowing costs; and changes in general economic conditions nationally and regionally in the markets
our properties are located resulting from the COVID-19 pandemic, including increased unemployment and
underemployment levels and reduced consumer spending and confidence. Since the underlying businesses in
each of our properties are operated by the tenants, we can provide no assurance that the businesses will continue
to operate in the future or stay current with their lease obligations.

Bonus rents earned by us on the three acute care hospitals leased to wholly-owned subsidiaries of Universal
Health Services, Inc., are computed based upon a computation that compares each hospital’s current quarter

78

revenue to the corresponding quarter in the base year, we could therefore experience significant declines in future
bonus rental revenue earned on these properties should those hospitals experience significant declines in patient
volumes and revenues. These hospitals believe that, to the extent that they experience revenue declines and
increased expenses resulting from the COVID-19 pandemic, as ultimately measured over the life of the
pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”).

Certain factors may result in the inability or unwillingness on the part of some of our tenants to make timely
payment of their rent to us at current levels or to seek to amend or terminate their leases which, in turn, would
have an adverse effect on our occupancy levels and our revenue and cash flow and the value of our properties,
and potentially, our ability to maintain our dividend at current levels. Due to COVID-19 restrictions and its
impact on the economy, we may experience a decrease in prospective tenants which could unfavorably impact
the volume of new leases, as well as the renewal rate of existing leases. The COVID-19 pandemic could also
impact our indebtedness and the ability to refinance such indebtedness on acceptable terms, as well as risks
associated with disruptions in the financial markets and the business of financial institutions as the result of the
COVID-19 pandemic which could impact us from a financing perspective; and changes in general economic
conditions nationally and regionally in the markets our properties are located resulting from the COVID-19
pandemic. Decreases in cash flows and results of operations may have an impact on the inputs and assumptions
used in significant accounting estimates, including potential impairments of intangible and long-lived assets.

Our future results of operations could be unfavorably impacted by government regulations and deterioration
in general economic conditions which could result in increases in the number of people unemployed and/or
uninsured. Should that occur, it may result in decreased occupancy rates at our medical office buildings as well
as a reduction in the revenues earned by the operators of our hospital facilities which would unfavorably impact
our future bonus rentals (on the three Universal Health Services, Inc. hospital facilities) and may potentially have
a negative impact on the future lease renewal terms and the underlying value of the hospital properties.
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 meet their obligations under the terms of their leases with us. Management’s estimate
of future cash flows from our leased properties could be materially affected in the near term, if certain of the
leases are not renewed or renewed with less favorable terms at the end of their lease terms.

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 accordance with current accounting guidance, we account for our property acquisitions as
acquisitions of assets, which requires the capitalization of acquisition costs to the underlying assets and prohibits
the recognition of goodwill or bargain purchase gains. The fair value of the real estate acquired is allocated to the
improvements, and identified
acquired tangible assets, consisting primarily of land, building and tenant
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 assumed
loans, or loan discounts, in the case of below market assumed 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 replacement costs adjusted for physical and market obsolescence for the improvements. The fair
values of the tangible assets of an acquired property are also determined by valuing the property as if it were
vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on
management’s determination of the relative fair values of these assets. Management determines the as-if-vacant
fair value of a property based on assumptions that a market participant would use, which is similar to methods
used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in
the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer
of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and

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unreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in
performing these analyses include an estimate of carrying costs during the expected lease-up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, management includes
real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected
lease-up periods based on current market demand. Management also estimates costs to execute similar leases
including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases
are amortized to expense in the consolidated statements of income over the 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-place lease values are recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts
to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a
market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal
to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial
term plus any below market fixed rate renewal periods. The capitalized above-market lease values are amortized
as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized
below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental
income over the initial terms of the respective leases.

At December 31, 2020, our net intangible assets total $11.7 million (net of $19.5 million accumulated
amortization) and primarily consist of the value of in-place leases. At December 31, 2020, our net intangible
value of in-place leases total $10.2 million (net of $18.7 million of accumulated amortization) and will be
amortized over the remaining lease terms (aggregate weighted average of 3.8 years at December 31, 2020) and
are expected to result in estimated aggregate amortization expense of, $2.6 million, $1.8 million, $1.5 million,
$1.1 million and $3.2 million for 2021, 2022, 2023, 2024 and 2025 and thereafter, respectively. Amortization
expense on intangible values of in place leases was $2.9 million for the year ended December 31, 2020,
$3.3 million for the year ended December 31, 2019 and $3.8 million for the year ended December 31, 2018. The
remaining amount of our net intangible assets primarily consists of above-market leases. At December 31, 2020,
our net intangible value of above-market leases total $1.3 million (net of $777,000 of accumulated amortization)
and will be amortized over the remaining lease terms (aggregate weighted average of approximately 6.6 years at
December 31, 2020) and are expected to result in estimated aggregate amortization offset to rental revenue of
approximately $204,000 in 2021, $199,000 in 2022, $196,000 in 2023, $168,000 in 2024 and $570,000 in 2025
and thereafter. Amortization offset to rental revenue on intangible values of above-market leases was $202,000,
$189,000 and $176,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and
capital improvements. The estimated original useful lives of our buildings range from 25-45 years and the
estimated original useful lives of capital improvements ranges from 3-35 years. On a consolidated basis,
depreciation expense was $21.8 million for each of the years ended December 31, 2020 and 2019 and
$20.5 million for the year ended December 31, 2018.

Cash and Cash Equivalents

We consider all highly liquid investment instruments with original maturities of three months or less to be

cash equivalents.

Asset Impairment

We review each of our properties for indicators that its carrying amount may not be recoverable. Examples
of such indicators may include a significant decrease in the market price of the property, a change in the expected
holding period for the property, a significant adverse change in how the property is being used or expected to be

80

used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excess of 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 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
other factors. 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. The evaluation of anticipated cash flows is highly subjective and
is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ
materially from actual results in future periods. Since cash flows on properties considered 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 is recoverable, our strategy of holding properties over the long-term directly decreases the likelihood of
their carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our
strategy changes or market conditions otherwise dictate 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 to the income approach that is commonly
utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside broker opinions 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 to sell 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 significant changes
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. The assets and related liabilities of the property are classified
separately on the consolidated balance sheets for the most recent reporting period. Only those assets held for sale
that constitute a strategic shift or that will have a major effect on our operations are classified as discontinued
operations.

Investments in Limited Liability Companies (“LLCs”)

In accordance with U.S. GAAP and guidance relating to accounting for investments and real estate ventures,
we account for our unconsolidated investments in LLCs/LPs which we do not control, using the equity method of
accounting. The third-party members in these investments have equal voting rights with regards to issues such as,
but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments.
These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our
cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from,
the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of
the LLC investments may be allocated disproportionately as compared to ownership interests after specified
preferred return rate thresholds have been satisfied.

Distributions received from equity method investees in the consolidated statements of cash flows are
classified based on the nature of the distribution. Returns on investments are presented net of equity in income
from unconsolidated investments as cash flows from operating activities. Returns of investment are classified as
cash flows from investing activities.

81

At December 31, 2020, we have non-controlling equity investments or commitments in five jointly-owned
LLCs/LPs which own MOBs. As of December 31, 2020, we accounted for these LLCs/LPs on an unconsolidated
basis pursuant to the equity method since they are not variable interest entities which we are the primary
beneficiary nor do we have a controlling voting interest. The majority of these entities are joint ventures between
us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-
sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow
requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically
no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from
time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures,
leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole
discretion, additional cash fundings are typically advanced as equity or member loans. These entities maintain
property insurance on the properties.

An other than temporary impairment of an investment in an unconsolidated LLC is recognized when the
carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of
the decline in value, including projected declines in cash flow. To the extent impairment has occurred, 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 real estate investment
trust under Sections 856 to 860 of the Internal Revenue Code of 1986, and intend to continue to remain so
qualified. To qualify as a REIT, we must meet certain organizational and operational requirements, including a
requirement to distribute at least 90% of our annual REIT taxable income to shareholders. As a REIT, we
generally will not be subject to federal, state or local income tax on income that we distribute as dividends to our
shareholders.

We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the
amount by which 85% of our ordinary income plus 95% of any capital gain income for the calendar year exceeds
cash distributions during the calendar year, as defined. No provision for excise tax has 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 purposes due 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 of provision for
impairment losses.

The aggregate gross cost basis and net book value of the properties for federal income tax purposes are
approximately $645 million (unaudited) and $406 million (unaudited), respectively, at December 31, 2020. The
aggregate cost basis and net book value of the properties for federal income tax purposes were approximately
$606 million (unaudited) and $382 million (unaudited), respectively, at December 31, 2019.

Stock-Based Compensation

We expense the grant-date fair value of restricted stock awards over the vesting period. We recognize the
grant-date fair value of equity-based compensation 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, stock-based compensation expense is an adjustment to reconcile net
income to cash provided by operating activities.

82

Fair Value

Fair value is a market-based measurement, not an entity-specific measurement and determined based upon
the assumptions that market participants would use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements, accounting requirements establish a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy). In instances when it is necessary to establish the fair value of our real 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 impairment activity, are considered to be Level 3 valuations as they are
primarily based upon an income capitalization approach. Significant inputs into the models used to determine fair
value of real estate investments and components of real estate investments include future cash flow projections,
holding period, terminal capitalization rate and discount rates. Additionally, the fair value of land takes into
consideration comparable sales, as adjusted for site specific factors. The fair value of real estate investments is
based upon significant judgments made by management, and accordingly, we typically obtain assistance from
third party 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-term nature of these instruments. Accordingly, these items are
excluded from the fair value disclosures included elsewhere in these notes to the consolidated financial
statements.

Concentration of Revenues

The rental revenue earned pursuant to the lease on McAllen Medical Center, which is leased to a related
party (see Note 2), generated approximately 10% during 2020, 10% during 2019 and 9% during 2018, of our
consolidated revenues.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America requires us to make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

New Accounting Standards

Except as noted below there were no new accounting pronouncements that impacted or are expected to

impact us.

Accounting for Lease Concessions Granted in Connection with the COVID-19 Pandemic

On April 8, 2020, the Financial Accounting Standards Board (“FASB”) held a public meeting and shortly
afterwards issued a question-and-answer (“Q&A”) document which was intended to provide accounting relief for
lease concessions related to the COVID-19 pandemic. The accounting relief permits an entity to choose to forgo
the evaluation of the enforceable rights and obligations of a lease contract, which is a requirement of Accounting
Standards Codification Topic 842, Leases, which we adopted on January 1, 2019, as long as the total rent
payments after the lease concessions are substantially the same, or less than, the total payments previously

83

required by the lease. An entity may account for COVID-19 related lease concessions either (i) as if they were
part of the enforceable rights and obligations of the parties under the existing lease contract; or (ii) as a lease
modification. To the extent that a rent concession is granted as a deferral of payments, but the total lease
payments are substantially the same, lessors are allowed to account for the concession as if no change had been
made to the original lease contract.

Based on the Q&A, an entity is not required to account for all lease concessions related to the effects of the
COVID-19 pandemic under one elected option, however, the entity is required to apply the elected option
consistently to leases with similar characteristics and in similar circumstances. The COVID-19 pandemic did not
start to adversely impact the economic conditions in the United States until late March 2020 and did not have a
material effect on our operations or financial results during the year ended December 31, 2020.

We have received short-term rent deferral requests from a portion of tenants under lease at our MOBs.
These requests are reviewed on a request-by-request basis based upon each tenant’s specific circumstances as
well as consideration of potential economic benefit available and received by tenants through governmental
assistance programs. At this time, we cannot estimate the magnitude of short-term rent deferral requests that we
may ultimately agree to provide, or the magnitude of additional short-term rent deferral requests that we may
receive in the future.

Reference Rate Reform

In March 2020, the FASB issued an accounting standard classified under FASB ASC Topic 848, “Reference
Rate Reform.” The amendments in this update contain practical expedients for reference rate reform related
activities that impact debt, leases, derivatives and other contracts. The guidance in ASC 848 is optional and may
be elected over time as reference rate reform activities occur. We will evaluate the impact of the guidance and
may apply elections as applicable as additional changes in the market occur.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses,” which introduced
new guidance for an approach based on expected losses to estimate credit losses on certain types of financial
instruments. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as
well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies
that operating lease receivables are outside the scope of the new standard. The standard was effective for us on
January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial
statements.

(2) RELATIONSHIP WITH UHS AND RELATED PARTY TRANSACTIONS

Leases: We commenced operations in 1986 by purchasing properties from certain subsidiaries of UHS and
immediately leasing the properties back to the respective subsidiaries. Most of the leases were entered into at the
time we commenced operations and provided for initial terms of 13 to 15 years with up 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 wholly-owned subsidiaries of UHS 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 a quarterly basis based upon a
computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital
leases with wholly-owned subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted
with one another.

The combined revenues generated from the leases on the three hospital facilities leased to wholly-owned
subsidiaries of UHS accounted for approximately 22% of our consolidated revenue for the five years ended
December 31, 2020 (approximately 22%, 22% and 21% for the years ended December 31, 2020, 2019 and 2018

84

respectively). In addition to these three UHS hospital facilities, we have nineteen hospitals, MOBs, FEDs that are
either wholly or jointly-owned by us that include tenants which are subsidiaries or joint ventures of UHS. The
aggregate revenues generated from UHS-related tenants comprised approximately 32% of our consolidated
revenue for the five years ended December 31, 2020 (approximately 33%, 31% and 30% for the years ended
December 31, 2020, 2019 and 2018, respectively).

Pursuant

to the Master Lease Document by and among us and certain subsidiaries of UHS, dated
December 24, 1986 (the “Master Lease”), which governs the leases of all hospital properties with wholly-owned
subsidiaries of UHS, UHS has the option, among other things, to renew the leases at the lease terms described
below by providing notice 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 from us at their appraised fair market value upon any of the
following: (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of
control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that UHS provides
notice to us of their intent to offer a substitution property/properties in exchange for one (or more) of the three
hospital facilities leased from us, should we be unable to reach an agreement with UHS on the properties to be
substituted. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilities during and
for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew
the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms
and conditions pursuant to any third-party offer.

The table below details the existing lease terms and renewal options for our three acute care hospitals

operated by wholly-owned subsidiaries of UHS:

Annual
Minimum
Rent

End of
Lease Term

McAllen Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wellington Regional Medical Center . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southwest Healthcare System, Inland Valley Campus . . . . . . . . . . . . . .

$5,485,000 December, 2026
$3,030,000 December, 2021
$2,648,000 December, 2021

(a) UHS has one 5-year renewal option at existing lease rates (through 2031).
(b) UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031).

Renewal
Term
(years)

5(a)
10(b)
10(b)

A wholly-owned subsidiary of UHS has notified us that it is considering terminating the existing lease on
Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current term on
December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased
property at its appraised fair market value at the end of the existing lease term. However, UHS has notified us
that they are planning to offer us potential substitution properties, with fair market value substantially equal to
that of Southwest Healthcare System, Inland Valley Campus, in exchange for the Inland Valley Campus. UHS is
expected to submit its proposal to us during the first quarter of 2021. Upon receipt, the proposal will be reviewed
and evaluated by management of the Trust as well as by our Board of Trustees. All transactions with UHS must
be approved by a majority of our Independent Trustees. We can provide no assurance that we will ultimately
agree on a property substitution with UHS in connection with the Inland Valley Campus property. Pursuant to the
terms of the lease on the Inland Valley Campus, we earned $4.4 million of lease revenue during the year ended
December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental) and $4.3 million during the year
ended December 31, 2019 ($2.6 million in base rental and $1.7 million in bonus rental).

Management cannot predict whether the leases with wholly-owned subsidiaries of UHS, which have
renewal options at existing lease rates or fair market value lease rates, 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 lease

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rates, 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, our future 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 currently earned pursuant to these leases.

We are the lessee on twelve ground leases with subsidiaries of UHS (for consolidated and unconsolidated
investments). The remaining lease terms on the ground leases with subsidiaries of UHS range from
approximately 29 years to approximately 78 years. The annual aggregate lease payments on these properties are
approximately $486,000 for the year ended 2020 and $508,000 for each of the years ended 2021, 2022, 2023 and
2024, and an aggregate of $29.0 million thereafter. See Note 4 for further disclosure around our lease accounting.

In late July, 2019 and September, 2019 we entered into two separate agreements which are each related to
wholly-owned subsidiaries of UHS in connection with newly constructed properties located in Clive, Iowa and
Denison, Texas. Please see additional disclosure in Note 3.

Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and
although as of December 31, 2020 we had no salaried employees, our officers do typically receive annual stock-
based compensation awards in the form of restricted stock or restricted stock units. In special circumstances, if
warranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may
also receive one-time compensation awards in the form of restricted stock and/or cash bonuses.

Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves
as Advisor to us under an advisory agreement dated December 24, 1986, and as amended and restated as of
January 1, 2019 (the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Advisor is obligated to
present an investment program to us, to use its best efforts to obtain investments suitable for such program
(although it is not obligated to present any particular investment opportunity to us), to provide administrative
services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by
the Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the
Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax
and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be
terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires
on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent
Trustees, that the Advisor’s performance has been satisfactory.

Our advisory fee for 2020, 2019 and 2018 was computed at 0.70% of our average invested real estate assets,
as derived from our consolidated balance sheet. Based upon a review of our advisory fee and other general and
the advisory fee computation remained
administrative expenses, as compared to an industry peer group,
unchanged for 2020, as compared to 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 other things,
accumulated depreciation, cash and cash equivalents, lease receivables, deferred charges and other assets. The
advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financial statements.
Advisory fees incurred and paid (or payable) to UHS amounted to $4.1 million during 2020, $4.0 million during
2019 and $3.8 million during 2018 and were based upon average invested real estate assets of $592 million,
$568 million and $544 million during 2020, 2019 and 2018, respectively.

Share Ownership: As of December 31, 2020 and 2019, UHS owned 5.7% 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 is required to file annual reports containing audited financial information
and quarterly reports containing unaudited financial information. Since the aggregate revenues generated from

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UHS-related tenants comprised approximately 32% of our consolidated revenue for the five years ended
December 31, 2020 (approximately 33%, 31% and 30% for the years ended December 31, 2020, 2019 and 2018,
respectively), and since a subsidiary 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.

(3) NEW CONSTRUCTION, ACQUISITIONS AND DISPOSITIONS

2020:

New Construction:

In September 2019, we entered into an agreement whereby we own a 95% non-controlling ownership
interest in Grayson Properties II L.P., which developed, constructed, owns and operates the Texoma Medical
Plaza II, an MOB located in Denison, Texas. This MOB, which was substantially completed in December 2020,
is located on the campus of Texoma Medical Center, a hospital that is owned and operated by a wholly-owned
subsidiary of UHS. A 10-year master flex lease was executed with the wholly-owned subsidiary of UHS for over
50% of the rentable square feet of the MOB and commenced in December 2020 upon the issuance of the
certificate of occupancy. The master flex lease commitment is subject to reduction upon the execution of third-
party leases on up to the initial 50% of the rentable square footage of the property and as a result of fully
executed third-party leases, as of December 31, 2020, the master lease commitment has been reduced to 5,840
rentable square feet on the third floor of the MOB. As of December 31, 2020, 61% of the rentable square feet of
the MOB is under lease. In June 2020 an $13.1 million third-party construction loan was obtain by Grayson
Properties II LP, which is scheduled to mature in June 2025 and has an outstanding balance of $12.3 million as of
December 31, 2020. In addition, we have committed to invest up to $4.8 million in equity or member loans on
the development and construction of this MOB, none of which has been invested as of December 31, 2020. We
account for this LP on an unconsolidated basis pursuant to the equity method since it is not a variable interest
entity and we do not have a controlling voting interest.

In late July 2019, Des Moines Medical Properties, LLC, a wholly-owned subsidiary of ours, entered into an
agreement to build and lease a newly constructed UHS-related behavioral health care hospital located in Clive,
Iowa. The lease on this facility, which is triple net and has an initial term of 20 years with five 10-year renewal
options, was executed with Clive Behavioral Health, LLC, a joint venture between a wholly-owned subsidiary of
UHS and Catholic Health Initiatives—Iowa, Corp. Construction of this hospital, for which we engaged a wholly-
owned subsidiary of UHS to act as project manager for an aggregate fee of approximately $750,000, was
substantially completed in December 2020 and the property received a temporary certificate of occupancy on
December 31, 2020. The hospital lease commenced upon the issuance of the temporary certificate of occupancy
and the initial annual rent is estimated to be approximately $2.5 million. The approximate cost of the project is
estimated to be $35.1 million, of which approximately $32.0 million has been incurred as of December 31, 2020.

Acquisition:

On December 28, 2020, we acquired the Sand Point Medical Properties building located in Escanaba,
Michigan for a purchase price of approximately $2.2 million. The building is 100% leased under the terms of a
15-year double net lease (“NN”) with a remaining initial lease term of approximately 14 years at the time of
purchase, with three, five-year renewal options.

Disposition:

There were no dispositions during 2020.

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2019:

Acquisition:

In late November 2019, we acquired the Bellin Health Family Medicine Center located in Escanaba,
Michigan for a purchase price of approximately $5.1 million. The building is 100% leased under the terms of a
triple net lease with a remaining initial lease term of approximately eight years at the time of purchase, with four,
five-year renewal options.

Dispositions:

In December 2019, we sold the Kings Crossing II medical office building, located in Kingwood, Texas for a
sale price of approximately $2.5 million, net of closing costs. This divestiture resulted in a gain of approximately
$1.7 million which is included in our consolidated statement of income for the year ended December 31, 2019.

During the first quarter of 2019, we sold a parcel of land located at one of our buildings for approximately
$250,000. This divestiture generated approximately $250,000 of cash proceeds to us, net of closing costs, and
resulted in a gain of approximately $250,000 which is included in our consolidated statement of income for the
year ended December 31, 2019.

2018:

Acquisition:

During 2018, we acquired the Beaumont Medical Sleep Center Building located in Southfield, Michigan for
a purchase price of approximately $4.1 million. This building is 100% leased under the terms of a triple net lease
with a remaining initial lease term of approximately 9.5 years at the time or purchase, with two, five year renewal
options.

Disposition:

There were no dispositions during 2018.

(4) LEASE ACCOUNTING

We adopted the new lease standard on January 1, 2019 and applied it to leases that were in place on the
effective date as both a lessor and lessee. Our results for reporting periods beginning January 1, 2019 are
presented under the new lease standard. We adopted ASC 842 effective January 1, 2019 under the modified
retrospective approach and elected the optional transition method to apply the provisions of ASC 842 as of the
adoption date, rather than the earliest period presented. We elected to apply certain adoption related practical
expedients for all leases that commenced prior to the election date. This practical expedient allowed us to not
separate expenses reimbursed by our customers (“tenant reimbursements”) from the associated rental revenue if
certain criteria were met.

As Lessor:

We lease our operating properties to customers under agreements that are classified as operating leases. We
recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease
term. Generally, under the terms of our leases, the majority of our rental expenses, including common area
maintenance, real estate taxes and insurance, are recovered from our customers. We record amounts reimbursed
by customers in the period that the applicable expenses are incurred, which is generally ratably throughout the
term of the lease. We have elected the package of practical expedients that allows lessors to not separate lease
and non-lease components by class of underlying asset. This practical expedient allowed us to not separate

88

expenses reimbursed by our customers (“tenant reimbursements”) from the associated rental revenue if certain
criteria were met. We assessed these criteria and concluded that the timing and pattern of transfer for rental
revenue and the associated tenant reimbursements are the same, and as our leases qualify as operating leases, we
accounted for and presented rental revenue and tenant reimbursements as a single component under Lease
revenue in our consolidated statements of income for the twelve months ended December 31, 2020 and 2019.

The components of the “Lease revenue – UHS facilities” and “Lease revenue – Non-related parties”
captions for the years ended 2020, 2019 and 2018 are disaggregated below (in thousands). Base rents are
primarily stated rent amounts provided for under the leases that are recognized on a straight-line basis over the
term of the lease. Bonus rents and tenant reimbursements represent amounts where tenants are contractually
obligated to pay an amount that is variable in nature.

Year Ended December 31,

2020

2019

2018

UHS Facilities:
Base rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonus rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,302
6,116
1,153

$16,660
5,551
884

$16,738
4,988
935

Lease Revenue—UHS facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,571

$23,095

$22,661

Non-related parties:
Base rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,562
10,000

$42,295
9,725

$41,267
9,199

Lease Revenue—Non-related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,562

$52,020

$50,466

Disclosures Related to Certain Hospital Facilities:

Southwest Healthcare System, Inland Valley Campus:

A wholly-owned subsidiary of UHS has notified us that it is considering terminating the existing lease on
Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current term on
December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased
property at its appraised fair market value at the end of the existing lease term. However, UHS has notified us
that they are planning to offer us potential substitution properties, with fair market value substantially equal to
that of Southwest Healthcare System, Inland Valley Campus in exchange for the Inland Valley Campus. UHS is
expected to submit its proposal to us during the first quarter of 2021. Upon receipt, the proposal will be reviewed
and evaluated by management of the Trust as well as by our Board of Trustees. All transactions with UHS must
be approved by a majority of our Independent Trustees. We can provide no assurance that we will ultimately
agree on a property substitution with UHS in connection with the Inland Valley Campus property. Pursuant to the
terms of the lease on the Inland Valley Campus, we earned $4.4 million of lease revenue during the year ended
December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental) and $4.3 million during the year
ended December 31, 2019 ($2.6 million in base rental and $1.7 million in bonus rental).

Vacancies—Evansville, Indiana and Corpus Christi, Texas:

The leases on two hospital facilities, located in Evansville, Indiana, and Corpus Christi, Texas, expired on
May 31, 2019 and June 1, 2019, respectively. The former tenant of the hospital located in Evansville, Indiana,
entered into a short-term lease with us, which covered the period of June 1, 2019 through September 30, 2019, at
a substantially increased lease rate as compared to the original lease rate.

The combined lease revenue generated at

these facilities amounted to approximately $842,000 and
$1.7 million during the three and nine-month periods ended September 30, 2019, respectively. The hospital

89

located in Evansville, Indiana, has remained vacant since September 30, 2019 and the hospital located in Corpus
Christi, Texas, has remained vacant since June 1, 2019.

We continue to market each property for lease to new tenants. However, should these properties continue to
remain owned and vacant for an extended period of time, or should we experience decreased lease rates on future
leases, as compared to prior/expired lease rates, or incur substantial renovation costs to make the properties
suitable for other operators/tenants, our future results of operations could be materially unfavorably impacted.

Kindred Hospital Chicago Central:

The existing lease with Kindred Hospital Chicago Central

is scheduled to expire on December 31,
2021. Pursuant to the terms of the lease, we earned approximately $1.6 million of lease revenue during the year
ended December 31, 2020, and approximately $1.5 million during the year ended December 31, 2019. We can
provide no assurance that the lease on this facility, which during the years ended December 31, 2020 and 2019
did not generate sufficient operating income to cover its rent due to us, will be renewed, or renewed at existing
lease rates, upon maturity.

Minimum future base rents from non-cancelable leases related to properties included in our financial
statements on a consolidated basis, excluding increases resulting from changes in the consumer price index,
bonus rents and the impact of straight line rent adjustments, are as follows (amounts in thousands):

For the year ended December 31,

2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2020

$ 59,241
43,031
37,026
30,160
26,078
104,011

Total minimum base rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$299,547

Some of the leases contain gross terms where operating expenses are included in the base rent amounts.
Other leases contain net terms where the operating expenses are assessed separately from the base rentals. The
table above contains a mixture of both gross and net leases and does not include any separately calculated
operating expense reimbursements. Under the terms of the hospital leases, the lessees are required to pay all
operating costs of the properties including property insurance and real estate taxes. Tenants of the medical office
buildings generally are required to pay their pro-rata share of the property’s operating costs.

ASU 2016-02 requires that lessors expense certain initial direct costs, which were capitalized under the
previous leasing standard, as incurred. ASU 2016-02 also requires that only the incremental costs of signing a
lease be capitalized, which was consistent to our historical practice.

As Lessee:

We are the lessee with various third parties, including subsidiaries of UHS, in connection with ground leases
for land at fourteen of our consolidated properties. Our right-of-use land assets represent our right to use the land
for the lease term and our lease liabilities represent our obligation to make lease payments arising from the
leases. Right-of-use assets and lease liabilities were recognized upon adoption of Topic 842 based on the present
value of lease payments over the lease term. We utilized our estimated incremental borrowing rate, which was
derived from information available as of January 1, 2019, in determining the present value of lease payments. A
right-of-use asset and lease liability are not recognized for leases with an initial term of 12 months or less, as

90

these short-term leases are accounted for similar to previous guidance for operating leases. We do not currently
have any ground leases with an initial term of 12 months or less. As of December 31, 2020, our consolidated
balance sheet includes right-of-use land assets of approximately $8.9 million and ground lease liabilities of
approximately $8.9 million.

The components of lease expense payments were as follows (in thousands):

Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2020

$480

$480

2019

$480

$480

During each of the years ended December 31, 2020 and 2019, the cash paid for amounts included in the
measurement of lease liabilities related to our operating leases was approximately $480,000, which is included as
an operating cash outflow within the consolidated statement of cash flows and included in other operating
expenses within the consolidated statements of income. As of and during the year ended December 31, 2020, we
did not enter into any lease agreements for our consolidated properties set to commence in the future and there
were no newly leased assets for which a right-of-use asset was recorded in exchange for a new lease liability.
Supplemental balance sheet information related to leases was as follows (in thousands):

Operating Leases

Right-of-use land assets-operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2020

$8,914

$8,914

Weighted Average remaining lease term, years

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57.3

Weighted Average discount rate

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.07%

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As of December 31, 2020, we are the lessee with various third parties, including subsidiaries of UHS, in
connection with ground leases for land at fourteen of our consolidated properties. Total consolidated amounts
expensed relating to the applicable leases in 2020, 2019 and 2018 was approximately $480,000, $480,000 and
$474,000, respectively. The following table summarizes fixed, future minimum rental payments, excluding
variable costs, which are discounted by our incremental borrowing rate to calculate the lease liabilities for our
operating leases in which we are the lessee. We do not include renewal options in the lease term for calculating
the lease liability unless we are reasonably certain we will exercise the option. Maturities of lease liabilities are
as follows (amounts in thousands):

Year ending:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total undiscounted lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

480
480
480
480
480
24,961

$27,361
18,447

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,914

(5) DEBT AND FINANCIAL INSTRUMENTS

Debt:

Management routinely monitors and analyzes the Trust’s capital structure in an effort to maintain the
targeted balance among capital resources including the level of borrowings pursuant to our $350 million
revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debt secured by the real
property of our properties and our level of equity including consideration of additional equity issuances pursuant
to our ATM equity issuance program. This ongoing analysis considers factors such as the current debt market
and interest rate environment, the current/projected occupancy and financial performance of our properties, the
current loan-to-value ratio of our properties, the Trust’s current stock price, the capital resources required for
anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis,
revolving credit agreement borrowings,
together with consideration of
non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize
when events such as refinancing of specific debt components occur or additional funds are required to finance the
Trust’s growth.

the Trust’s current balance of

In June 2020, we entered into the first amendment (the “First Amendment”) to the revolving credit
agreement (“Credit Agreement”), pursuant to which, among other things, an additional tranche of revolving
credit commitments in the amount of $50 million, designated as the “Revolving B Facility”, was established
thereby increasing the aggregate revolving credit commitment to $350 million from $300 million. The Credit
Agreement, as amended, which is scheduled to mature in March 2022, provides for a revolving credit facility in
an aggregate principal amount of $350 million, including a $40 million sublimit for letters of credit and a
$30 million sublimit for swingline/short-term loans. Borrowings under the Credit Agreement are guaranteed by
certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority
security interests in and liens on all equity interests in certain of the Trust’s wholly-owned subsidiaries. The
remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to
giving effect to the First Amendment, has been designated as the “Revolving A Facility”.

Borrowings made pursuant to the Revolving A Facility will bear interest, at our option, at one, two, three or
six-month LIBOR plus an applicable margin ranging from 1.10% to 1.35% or at the Base Rate plus an applicable

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margin ranging from 0.10% to 0.35%. The Credit Agreement defines “Base Rate” as the greater 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 facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving A Facility
of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total
leverage ratio. At December 31, 2020, the applicable margin over the LIBOR rate was 1.20%, the margin over
the Base Rate was 0.20%, and the facility fee was 0.20%. The Credit Agreement also provides for options to
extend the maturity date and borrowing availability for two additional six-month periods for the Revolving A
Facility.

Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three or
six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an
applicable margin ranging from 0.85% to 1.10%. The 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%. The initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A
facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit
Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At
December 31, 2020, the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was
0.95% and the facility fee was 0.20%.

At December 31, 2020, we had $236.2 million of outstanding borrowings and $5.6 million of letters of
credit outstanding under our Credit Agreement. We had $108.2 million of available borrowing capacity, net of
the outstanding borrowings and letters of credit outstanding as of December 31, 2020. The carrying amount and
fair value of borrowings outstanding pursuant to the Credit Agreement was $236.2 million at December 31, 2020.
There are no compensating balance requirements. The average amount outstanding under our Credit Agreement
during the years ended December 31, 2020, 2019 and 2018 was $219.1 million, $198.3 million and
$191.4 million, respectively, with corresponding effective interest rates of 2.4%, 3.7% and 3.5%, respectively,
including commitment fees and interest rate swaps/caps. At December 31, 2019, we had $213.0 million of
outstanding borrowings outstanding against our revolving credit agreement and $87.0 million of available
borrowing capacity.

The Credit Agreement contains customary affirmative and negative covenants, including limitations on
certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and
dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding 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 total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as
well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding
under the Credit Agreement. We are in compliance with all of the covenants at December 31, 2020 and 2019. We
also believe that we would remain in compliance if, assuming that the majority of the potential new borrowings
will be used to fund investments, the full amount of our commitment was borrowed.

The following table includes a summary of the required compliance ratios at December 31, 2020 and 2019,
giving effect to the covenants contained in the Credit Agreements in effect on the respective dates (dollar
amounts in thousands):

Tangible net worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unencumbered leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed charge coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$125,000

$147,263

$125,000

$167,181

< 60%
< 30%
< 60%

> 1.50x

44.8%
8.6%
41.4%
4.7x

< 60%
< 30%
< 60%

> 1.50x

42.3%
9.1%
38.5%
4.0x

December 31, 2020

December 31, 2019

Covenant

UHT

Covenant

UHT

93

As indicated on the following table, we have various mortgages, all of which are non-recourse to us and are
not cross-collateralized, included on our consolidated balance sheet as of December 31, 2020 and 2019 (amounts
in thousands):

Facility Name

As of 12/31/2020

As of
12/31/2019

Interest
Rate

Maturity
Date

Outstanding
Balance
(in thousands)(a.)

Outstanding
Balance
(in thousands)

700 Shadow Lane and Goldring MOBs fixed rate

mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.54%

June, 2022

BRB Medical Office Building fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.27% December, 2022

Desert Valley Medical Center fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2704 North Tenaya Way fixed rate mortgage loan . .
Summerlin Hospital Medical Office Building III

3.62%
January, 2023
4.95% November, 2023

5,437

5,505

4,511
6,576

5,654

5,721

4,661
6,727

fixed rate mortgage loan . . . . . . . . . . . . . . . . . . . .

4.03%

April, 2024

13,043

13,196

Tuscan Professional Building fixed rate mortgage

loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.56%

June, 2025

Phoenix Children’s East Valley Care Center fixed

rate mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . .

3.95%

January, 2030

2,933

8,718

3,492

8,961

Rosenberg Children’s Medical Plaza fixed rate

mortgage loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.42% September, 2033

12,508

12,732

Total, excluding net debt premium and net financing
fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net financing fees . . . . . . . . . . . . . . . . . . . .
Plus net debt premium . . . . . . . . . . . . . . . . . . . .

Total mortgage notes payable, non-recourse to us,

net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,231
(477)
141

61,144
(594)
194

$58,895

$60,744

(a.) All mortgage loans require monthly principal payments through maturity and either fully amortize or

include a balloon principal payment upon maturity.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The
mortgages outstanding as of December 31, 2020 had a combined carrying value of approximately $59.2 million
and a combined fair value of approximately $62.0 million. At December 31, 2019, we had various mortgages, all
of which were non-recourse to us, included in our consolidated balance sheet. The combined outstanding balance
of these various mortgages was $61.1 million and these mortgages had a combined fair value of approximately
$63.1 million.

The fair value of our debt was computed based upon quotes received from financial institutions. We
consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosure in
connection with debt instruments. Changes in market rates on our fixed rate debt impacts the fair value of debt,
but it has no impact on interest incurred or cash flow.

94

As of December 31, 2020, our aggregate consolidated scheduled debt repayments (including mortgages) are

as follows (amounts in thousands):

2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,081
248,397
11,892
13,550
939
18,572

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$295,431

(a.) Includes assumed repayment of $236.2 million of outstanding borrowings under the terms of our

$350 million revolving credit agreement scheduled to mature in March, 2022.

Financial Instruments:

In March 2020, we entered into an interest rate swap agreement on a total notional amount of $55 million
with a fixed interest rate of 0.565% that we designated as a cash flow hedge. The interest rate swap became
effective on March 25, 2020 and is scheduled to mature on March 25, 2027. If the one-month LIBOR is above
0.565%, the counterparty pays us, and if the one-month LIBOR is less than 0.565%, we pay the counterparty, the
difference between the fixed rate of 0.565% and one-month LIBOR.

In January 2020, we entered into an interest rate swap agreement on a total notional amount of $35 million
with a fixed interest rate of 1.4975% that we designated as a cash flow hedge. The interest rate swap became
effective on January 15, 2020 and is scheduled to mature on September 16, 2024. If the one-month LIBOR is
above 1.4975%, the counterparty pays us, and if the one-month LIBOR is less than 1.4975%, we pay the
counterparty, the difference between the fixed rate of 1.4975% and one-month LIBOR.

During the third quarter of 2019, we entered into an interest rate swap agreement on a total notional amount
of $50 million with a fixed interest rate of a 1.144%. that we designated as a cash flow hedge. The interest rate
swap became effective on September 16, 2019 and is scheduled to mature on September 16, 2024. If the
one-month LIBOR is above 1.144%, the counterparty pays us, and if the one-month LIBOR is less than 1.144%,
we pay the counterparty, the difference between the fixed rate of 1.144% and one-month LIBOR.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate
swaps is based on quotes from third parties. We consider those inputs to be “level 2” in the fair value hierarchy
as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging
activities. At December 31, 2020, the fair value of our interest rate swaps was a net liability of $3.8 million
which is included in accrued expenses and other liabilities on the accompanying consolidated balance sheet.
During the twelve months of 2020, we paid or accrued approximately $733,000 in net payments made to the
counterparty by us, adjusted for accruals, pursuant to the terms of the swaps (consisting of approximately
$824,000 in payments, adjusted for accruals, or accruals made to the counterparty by us, offset by approximately
$91,000 of payments paid to us by the counterparty). From inception of the swap agreements through
December 31, 2020 we paid or accrued approximately $626,000 in net payments made to the counterparty by us
pursuant to the terms of the swap (consisting of approximately $198,000 in payments or accruals made to us by
the counterparty, offset by approximately $824,000 of payments due to the counterparty from us). During the
twelve months of 2019, we received or accrued approximately $108,000 in payments made to us by the
counterparty pursuant to the terms of the swap entered into during the third quarter of 2019. Cash flow hedges
are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset
or a liability, with a corresponding amount recorded in accumulated other comprehensive income (“AOCI”)
within shareholders’ equity. Amounts are classified from AOCI to the income statement in the period or periods
the hedged transaction affects earnings.

95

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. This interest rate cap became effective in January, 2017
and expired in March 2019. In exchange for the premium payment, the counterparties agreed to pay us the
difference between 1.50% and one-month LIBOR if one-month LIBOR rises above 1.50% during the term of the
cap. From inception through the March, 2019 expiration, we received approximately $205,000 in payments made
to us by the counterparties ($61,000 of which was received during the first three months of 2019 and $144,000 of
which was received during 2018) pursuant to the terms of this cap.

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 paid a premium of $55,000. This interest rate cap became effective in
October, 2016 and expired in March, 2019. 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. From inception through the March, 2019 expiration, we received approximately $205,000 in
payments made to us by the counterparties ($61,000 of which was received during the first three months of 2019
and $144,000 of which was received during 2018) pursuant to the terms of this cap.

(6) DIVIDENDS AND EQUITY ISSUANCE PROGRAM

Dividends:

During each of the last three years, dividends were declared and paid by us as follows:

•

•

•

2020:
$2.76 per share of which $2.43 per share was ordinary income and $.33 per share was
non-dividend distributions (there was no capital gain and no Unrecaptured Section 1250 gain in 2020).

$2.72 per share of which $2.48 per share was ordinary income and $.24 per share was total

2019:
capital gain (there was no Unrecaptured Section 1250 gain in 2019).

$2.68 per share of which $2.35 per share was ordinary income and $.33 per share was total

2018:
capital gain (total capital gain amount includes Unrecaptured Section 1250 gain of $.30 per share).

Equity Issuance Program:

During the second quarter of 2020, we commenced an at-the-market (“ATM”) equity issuance program,
pursuant to the terms of which we may sell, from time-to-time, common shares of our beneficial interest up to an
aggregate sales price of $100 million to or through our agent banks. The common shares will be offered pursuant
to the Registration Statement filed with the Securities and Exchange Commission, which became effective in
June 2020.

During the twelve months ended December 31, 2020 pursuant to this ATM equity program, we have issued
2,704 shares at an average price of $101.30 per share, which generated approximately $270,000 of net proceeds
(net of approximately $4,000, consisting of compensation to BofA Securities, Inc.). Additionally, as of
December 31, 2020, we have paid or incurred approximately $507,000 in various fees and expenses related to the
commencement of our ATM program.

(7)

INCENTIVE PLANS

During 2007, our Board of Trustees and shareholders approved the Universal Health Realty Income Trust
2007 Restricted Stock Plan which was amended and restated in 2020 and 2016 (the “2007 Plan”). An aggregate
of 175,000 shares (as amended in 2020) were authorized for issuance under this plan and a total of 117,040
shares, net of cancellations, have been issued pursuant to the terms of this plan, 95,295 of which have vested as
of December 31, 2020. At December 31, 2020 there are 57,960 shares remaining for issuance under the terms of
the 2007 Plan.

96

During 2020, there were 10,765 restricted Shares of Beneficial Interest, net of cancellations, issued to the
Trustees, officers and other personnel of the Trust pursuant to the 2007 Plan at a weighted average grant price of
$96.74 per share ($1.0 million in the aggregate). These restricted shares are scheduled to vest in June of 2022
(the second anniversary date of the grant). Pursuant to the restricted shares issued during 2020, Dividends on
unvested stock will be deferred and accumulated prior to the vesting of the shares and paid, in either cash and/or
stock, in the aggregate on the vesting date on the shares that ultimately vest.

During 2019, there were 10,980 restricted Shares of Beneficial Interest, net of cancellations, issued to the
Trustees, officers and other personnel of the Trust pursuant to the 2007 Plan at a weighted average grant price of
$84.24 per share ($924,955 in the aggregate). These restricted shares are scheduled to vest in June of 2021 (the
second anniversary of the date of grant).

During 2018, there were 10,580 restricted Shares of Beneficial Interest, net of cancellations, issued to the
Trustees, officers and other personnel of the Trust pursuant to the 2007 Plan at a weighted average grant price of
$61.77 per share ($653,526 in the aggregate). These restricted shares vested in June of 2020 (the second
anniversary of the date of grant).

the award.

We expense the grant-date fair value restricted stock awards under the straight-line method over the stated
vesting period of
In connection with these grants, we recorded compensation expense of
approximately $912,000, $702,000 and $575,000 during 2020, 2019 and 2018, respectively. The remaining
expense associated with these grants is approximately $944,000 and will be recorded over the remaining
weighted average vesting period for outstanding restricted Shares of Beneficial Interest of approximately one
year at December 31, 2020.

There were no stock options outstanding or exercised during 2020, 2019 or 2018.

(8) SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES

In accordance with U. S. GAAP and guidance relating to accounting for investments and real estate
ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity
method of accounting. The third-party members in these investments have equal voting rights with regards to
issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing
commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded
initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and
distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and
losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests
after specified preferred return rate thresholds have been satisfied.

Distributions received from equity method investees in the consolidated statements of cash flows are
classified based on the nature of the distribution. Returns on investments are presented net of equity in income
from unconsolidated investments as cash flows from operating activities. Returns of investment are classified as
cash flows from investing activities.

At December 31, 2020, we have non-controlling equity investments or commitments in five jointly-owned
LLCs/LPs which own MOBs. As of December 31, 2020, we accounted for these LLCs/LPs on an unconsolidated
basis pursuant to the equity method since they are not variable interest entities which we are the primary
beneficiary nor do we have a controlling voting interest. The majority of these entities are joint-ventures between
us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-
sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow
requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically
no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from
time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures,

97

leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole
discretion, additional cash funding is typically advanced as equity or member loans. These entities maintain
property insurance on the properties.

The following property table represents the five LLCs or LPs in which we own a non-controlling interest

and were accounted for under the equity method as of December 31, 2020:

Name of LLC/LP

Ownership

Property Owned by LLC/LP

Suburban Properties . . . . . . . . . . . . . . . . . . . . . . . .
Brunswick Associates (a.)(e.) . . . . . . . . . . . . . . . . .
Grayson Properties (b.)(f.) . . . . . . . . . . . . . . . . . . .
FTX MOB Phase II (c.) . . . . . . . . . . . . . . . . . . . . .
Grayson Properties II (d.)(f.) . . . . . . . . . . . . . . . . .

33% St. Matthews Medical Plaza II
74% Mid Coast Hospital MOB
95% Texoma Medical Plaza
95% Forney Medical Plaza II
95% Texoma Medical Plaza II

(a.) This LLC refinanced its fixed rate mortgage during the fourth quarter of 2020 (as reflected in the mortgage
loan table below) and has a third-party term loan of $9.25 million, which is non-recourse to us, outstanding
as of December 31, 2020.

(b.) This building is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS. This LP
has a third-party term loan, which is non-recourse to us, of $13.4 million, outstanding as of December 31,
2020.

(c.) We have committed to invest up to $2.5 million in equity and debt financing, of which $2.1 million has been
funded as of December 31, 2020. This LP has a third-party term loan, which is non-recourse to us, of
$4.8 million, outstanding as of December 31, 2020. This mortgage loan had an extended maturity date of
February 11, 2021, at which time it was repaid utilizing additional equity contributions from the limited
partners, as well as a $3.5 million member loan from UHT to the LP.

(d.) Construction on this MOB was substantially completed in December 2020. The MOB is located in Denison,
Texas on the campus of a hospital owned and operated by a wholly-owned subsidiary of UHS. We have
committed to invest up to $4.8 million in equity and debt financing, none of which has been funded as of
December 31, 2020. This LLP entered into a $13.1 million third-party construction loan, which is
non-recourse to us and has an outstanding balance of $12.3 million as of December 31, 2020. The LP
developed constructed, owns and operates the Texoma Medical Plaza II.

(e.) We are the lessee with a third party on a ground lease for land.
(f.) We are the lessee with a UHS-related party for the land related to this property.

Below are the combined statements of income for the five LLCs/LPs accounted for under the equity method
at December 31, 2020 and the four LLCs/LPs (excluding one that owns an MOB that was under construction in
2019) accounted for under the equity method at December 31, 2019 and 2018.

For the Year Ended
December 31,

2020

2019

2018

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(amounts in thousands)
$10,063
4,046
1,758
1,295

$9,592
3,557
1,772
1,311

$9,973
3,979
1,827
1,296

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,871

$ 2,964

$2,952

Our share of net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,706

$ 1,796

$1,771

98

Below are the combined balance sheets for the five above-mentioned LLCs/LPs that were accounted for

under the equity method as of December 31, 2020 and 2019:

Net property, including construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2020

2019

(amounts in thousands)
$33,207
$42,374
7,452
8,818

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,192

$40,659

Other liabilities (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage notes payable, non-recourse to us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,402
39,735
2,055

$ 6,785
26,650
7,224

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,192

$40,659

Investments in LLCs before amounts included in accrued expenses and other liabilities . . . .
Amounts included in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . .

4,278
(3,020)

6,918
(1,856)

Our share of equity in LLCs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,258

$ 5,062

(a.) Other assets and other liabilities as of December 31, 2020 and 2019 include approximately $4.3 million and
$3.7 million, respectively, of right-of-use land assets and right-of-use land liabilities related to ground leases
whereby the LLC/LP is the lessee, with third parties, including subsidiaries of UHS.

As of December 31, 2020, aggregate principal amounts due on mortgage notes payable by unconsolidated
LLCs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in
thousands):

2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$18,405
263
621
640
11,905
7,901

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$39,735

Name of LLC/LP

FTX MOB Phase II (5.00% fixed rate mortgage loan) (b.) . . . . . . . . . .
Grayson Properties (5.034% fixed rate mortgage loan) (c.) . . . . . . . . . .
Brunswick Associates (3.64% fixed rate mortgage loan) . . . . . . . . . . . .
. . . . . .
Grayson Properties II (3.70% fixed rate construction loan) (d.)

Mortgage Loan Balance (a.)

12/31/2020

12/31/2019

Maturity Date

$ 4,777
13,372
9,250
12,336
$39,735

February, 2021
$ 4,926
13,658
September, 2021
8,066 December, 2024
June, 2025

—
$26,650

(a.) All mortgage loans require monthly principal payments through maturity and include a balloon principal

payment upon maturity.

(b.) This mortgage loan had an extended maturity date of February 11, 2021 at which time it was paid off
utilizing additional equity contributions from the limited partners, as well as a $3.5 million member loan
from UHT to the LP.

(c.) This loan is scheduled to mature within the next twelve months, at which time the venture intends to

refinance pursuant to a new mortgage loan.

99

(d.) This construction loan has a maximum balance of $13.1 million and requires unpaid interest on the
outstanding principal balance to be paid on a monthly basis through December 1, 2022. Principal and
accrued interest monthly payments will commence on January 1, 2023.

Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold
non-controlling ownership interests, the third-party member and the Trust, 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 (“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
ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the
Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60
to 90 days of the acceptance by the Non-Offering Member.

(9) SEGMENT REPORTING

Our primary business is investing in and leasing healthcare and human service facilities through direct
ownership or through joint ventures, which aggregate into a single reportable segment. We actively manage our
portfolio of healthcare and human service facilities and may from time to time make decisions to sell lower
performing properties not meeting our long-term investment objectives. The proceeds of sales are typically
reinvested in new developments or acquisitions, which we believe will meet our planned rate of return. It is our
intent that all healthcare and human service facilities will be owned or developed 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 of allocating resources or measuring performance. We review
operating and financial data for each property on an individual basis; therefore, we define an operating segment
as our individual properties. Individual properties have been aggregated into one reportable segment based upon
their similarities with regard to both the nature and economics of the facilities, tenants and operational processes,
as well as long-term average financial performance. No individual property meets the requirements necessary to
be considered its own reportable segment.

(10) IMPACT OF HURRICANE HARVEY

In late August of 2017, five of our medical office buildings located in the Houston, Texas area incurred
extensive water damage as a result of Hurricane Harvey. Until various times during the second quarter of 2018,
these properties were temporarily closed and non-operational as we continued to reconstruct and restore them to
operational condition. As of June 30, 2018, reconstruction on all of the occupied space in these properties had
been completed and operations resumed.

During 2018, pursuant to the terms of a global settlement with our commercial property insurance carrier,
we received $5.5 million of additional insurance recovery proceeds bringing the aggregate hurricane-related
insurance recoveries to $12.5 million. The aggregate insurance proceeds recoveries, which are net of applicable
deductibles, covered substantially all of the costs incurred related to the remediation, repair and reconstruction of
each of these properties, as well as business interruption recoveries for the lost income related to each of these
properties during the period they were non-operational.

Included in our financial results for the year ended December 31, 2018 are approximately $1.2 million of
business interruption insurance recovery proceeds, covering the period of late August 2017 through June 30,
2018, approximately $500,000 of which related to 2017. These business interruption insurance recovery proceeds
are included in net cash provided by operating activities in our Consolidated Statement of Cash Flows for the

100

year ended December 31, 2018. Additionally, the year ended December 31, 2018 included approximately
$4.5 million of hurricane insurance recoveries in excess of property damage write-downs, which are included in
net cash provided by investing activities in our Consolidated Statement of Cash Flows for the year ended
December 31, 2018.

(11) QUARTERLY RESULTS (unaudited)

First
Quarter

Second
Quarter

2020

Third
Quarter

Fourth
Quarter

Total

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(amounts in thousands, except per share amounts)
$19,692

$19,281

$19,830

$78,010

$19,207

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,554

$ 4,700

$ 5,193

$ 5,000

$19,447

Total basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . .

Total diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . .

$

$

0.33

0.33

$

$

0.34

0.34

$

$

0.38

0.38

$

$

0.36

0.36

$

$

1.42

1.41

First
Quarter

Second
Quarter

2019

Third
Quarter

Fourth
Quarter

Total

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(amounts in thousands, except per share amounts)
$19,866

$19,326

$18,859

$77,163

$19,112

Net income before gains on sales . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of real estate assets . . . . . . . . . . . . . . . . . . . . .

$ 3,962
250
$

$ 4,261
$ 4,137
$ 4,653
$ — $ — $ 1,701

$17,013
$ 1,951

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,212

$ 4,261

$ 4,653

$ 5,838

$18,964

Total basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . .

Total diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . .

$

$

0.31

0.31

$

$

0.31

0.31

$

$

0.34

0.34

$

$

0.43

0.42

$

$

1.38

1.38

101

Schedule III
Universal Health Realty Income Trust
Real Estate and Accumulated Depreciation — December 31, 2020
(amounts in thousands)

Initial Cost

Gross amount at
which carried
at end of period

Encumbrance
(c.)

Land

Building &
Improv.

Adjustments
to Basis (a.) Land

Building &

Improvements CIP

Total

Accumulated
Depreciation
as of Dec. 31,
2020

Date of
Completion of
Construction,
Acquisition
or Significant
improvement

Date
Acquired

Average
Depreciable
Life

— $2,050 $10,701

$14,597 $2,050

$25,298

$27,348 $15,439

4,720 31,442

10,189

6,281

40,070

46,351

30,056

2007

1994

1986

43 Years

1986

42 Years

1,190 14,652

17,370

1,663

31,549

33,212

22,275

2006

1986

42 Years

500

6,945

1,062

158

6,404

1,838

500

158

8,007

8,242

8,507

6,287

8,400

8,242

1993

1993

1989

40 Years

1986

25 Years

54

1,526

494

54

2,020

2,074

1,188

1991

1995

45 Years

439

1,837

(354)

307

250

180

195

996

744

815

749

—

—

—

—

439

307

250

180

195

1,483

996

744

815

749

1,922

1,303

994

995

944

314

542

411

445

413

1,130

5,092

(2,060) 1,130

3,032

4,162

2,588

1995

1996

1991

1992

1992

1994

1995

45 Years

1996

45 Years

1996

45 Years

1996

45 Years

1996

45 Years

1996

45 Years

—

—

5,325

806

4,519

5,325

3,188

2000

1998

35 Years

573

3,842

(2,667)

573

1,175

101

1,849

201

— 1,579

68

—

1,647

1,647

1,383

1,151

5,176

1,109

1,151

6,285

10

7,446

4,238

1,104

5,508

— 1,104

5,508

6,612

2,029

240

3,590

1,398

240

4,988

5

5,233

2,280

1997

1999

2000

2008

2004

1997

35 Years

1999

25 Years

2000

30 Years

2008

35 Years

2004

30 Years

— 10,200

176

—

10,376

10,376

3,082

2009

2009

36 Years

5,505

430

8,970

84

430

9,054

9,484

2,654

2010

2010

37 Years

—

—

— 19,890

3,280

—

23,170

8 23,178

7,460

1,200

9,560

2,682

1,200

12,242

44 13,486

4,266

5,437

400 11,300

5,180

400

16,480

12 16,892

6,052

— 9,500

1,667

—

11,167

11,167

3,726

2006

1998

2003

2004

2006

34 Years

1998

30 Years

2003

30 Years

2004

35 Years

— 9,800

1,078

—

10,878

972 11,850

3,534

2006

2006

34 Years

102

Description

Inland Valley Regional

Medical Center
Wildomar, California . . . . . . . . . . . .

McAllen Medical Center

McAllen, Texas . . . . . . . . . . . . . . . . .

Wellington Regional
Medical Center
West Palm Beach, Florida . . . . . . . .

Evansville

Rehabilitation Hospital
Evansville, Indiana . . . . . . . . . . . . . .

Kindred Chicago Central Hospital

Central Chicago, Illinois . . . . . . . . .

Family Doctor’s Medical

Office Building
Shreveport, Louisiana . . . . . . . . . . .

Professional Buildings at

King’s Crossing
Kingwood, Texas (d.) . . . . . . . . . . . .

Chesterbrook Academy

Audubon, Pennsylvania . . . . . . . . . .

Chesterbrook Academy

New Britain, Pennsylvania . . . . . . . .

Chesterbrook Academy

Uwchlan, Pennsylvania . . . . . . . . . .

Chesterbrook Academy

Newtown, Pennsylvania . . . . . . . . . .

The Southern Crescent

Center I (b.) . . . . . . . . . . . . . . . . . . .

The Southern Crescent

Center II (b.)
Riverdale, Georgia . . . . . . . . . . . . . .

The Cypresswood

Professional Center
Spring, Texas (e.) . . . . . . . . . . . . . . .

701 South Tonopah Building

Las Vegas, Nevada (f.) . . . . . . . . . . .

Danbury Medical Plaza
Danbury, Connecticut

Corpus Christi

. . . . . . . . . . .

Corpus Christi, Texas . . . . . . . . . . .

Apache Junction Medical Plaza

Apache Junction, AZ . . . . . . . . . . . .

Auburn Medical Office

Building II
Auburn, WA (g.) . . . . . . . . . . . . . . .

BRB Medical Office

Building
Kingwood, Texas . . . . . . . . . . . . . . .

Centennial Hills Medical

Office Building
Las Vegas, NV (f.) . . . . . . . . . . . . . .

Desert Springs Medical Plaza

Las Vegas, NV . . . . . . . . . . . . . . . . .

700 Shadow Lane &
Goldring MOBs
Las Vegas, NV . . . . . . . . . . . . . . . . .

Spring Valley Hospital MOB I

Las Vegas, NV (f.) . . . . . . . . . . . . . .

Spring Valley Hospital

MOB II
Las Vegas, NV (f.) . . . . . . . . . . . . . .

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Schedule III
Universal Health Realty Income Trust
Real Estate and Accumulated Depreciation — December 31, 2020—(Continued)
(amounts in thousands)

Description

Summerlin Hospital

MOB I
Las Vegas, NV . . . . . . . . . . . . . . . . . . . .

Summerlin Hospital

MOB II
Las Vegas, NV . . . . . . . . . . . . . . . . . . . .

Summerlin Hospital

MOB III
Las Vegas, NV (f.) . . . . . . . . . . . . . . . . .

Emory at Dunwoody

Building
Dunwoody, GA . . . . . . . . . . . . . . . . . . . .

Forney Medical Plaza

Forney, TX . . . . . . . . . . . . . . . . . . . . . . .

Lake Pointe Medical Arts

Building
Rowlett, TX . . . . . . . . . . . . . . . . . . . . . . .

Tuscan Professional

Building
Irving, TX . . . . . . . . . . . . . . . . . . . . . . . .

Peace Health Medical

Clinic
Bellingham, WA . . . . . . . . . . . . . . . . . . .

Northwest Texas

Professional Office Tower
Amarillo, TX (f.) . . . . . . . . . . . . . . . . . . .

Ward Eagle Office Village

Farmington Hills, MI . . . . . . . . . . . . . . .

5004 Poole Road MOB

Denison, TX . . . . . . . . . . . . . . . . . . . . . .

Desert Valley Medical

Center
Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . .

Hanover Emergency Center

Initial Cost

Gross amount at
which carried
at end of period

Encumbrance
(c.)

Building &
Improv.

Adjustments
to Basis (a.) Land

Land

Building &

Improvements CIP Total

Accumulated
Depreciation
as of Dec. 31,
2020

Date of
Completion of
Construction,
Acquisition
or Significant
improvement

Date
Acquired

Average
Depreciable
Life

—

—

460 15,440

1,974

460

17,414

9 17,883

6,478

1999

1999

30 Years

370 16,830

1,711

370

18,541

18,911

6,676

2000

2000

30 Years

13,043 — 14,900

2,243

— 17,143

340 17,483

4,985

2009

2009

36 Years

—

—

782

3,455

—

782

3,455

4,237

1,183

910 11,960

102

910

12,062

12,972

4,219

2011

2011

2011

35 Years

2011

35 Years

— 1,100

9,000

298

1,100

9,298

39 10,437

2,982

2011

2011

35 Years

2,933

1,100 12,525

1,698

1,100

14,223

27 15,350

4,755

2011

2011

35 Years

— 1,900 24,910

921

1,900

25,831

27,731

7,489

2012

2012

35 Years

—

—

—

— 7,180

1,322

—

8,502

8,502

1,995

220

3,220

106

220

3,326

96

529

—

96

529

3,546

625

888

134

4,511

2,280

4,624

1,184

2,280

5,808

8,088

1,657

Mechanicsville, VA . . . . . . . . . . . . . . . . .

— 1,300

6,224

— 1,300

6,224

7,524

1,326

Haas Medical Office Park

Ottumwa, IA (g.)

. . . . . . . . . . . . . . . . . .

—

— 3,571

—

—

3,571

South Texas ER at Mission

Mission, TX . . . . . . . . . . . . . . . . . . . . . .

— 1,441

4,696

— 1,441

4,696

3,571

6,137

703

931

North Valley Medical Plaza

Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . .

—

930

6,929

2,265

930

9,194

16 10,140

2,449

Northwest Medical Center

at Sugar Creek
Bentonville, AR . . . . . . . . . . . . . . . . . . .

The Children’s Clinic at

Springdale
Springdale, AR . . . . . . . . . . . . . . . . . . . .

Rosenberg Children’s

Medical Plaza
Phoenix, AZ (g.)
Phoenix Children’s East

. . . . . . . . . . . . . . . . . .

Valley Care
Center Phoenix, AZ . . . . . . . . . . . . . . . .

Palmdale Medical Plaza

Palmdale, CA (f.) . . . . . . . . . . . . . . . . . .

Piedmont-Roswell
Physician Center
Sandy Springs, GA . . . . . . . . . . . . . . . . .

Piedmont-Vinings
Physician Center
Vinings, GA . . . . . . . . . . . . . . . . . . . . . .

— 1,100

2,870

— 1,100

2,870

3,970

671

2014

2014

35 Years

—

610

1,570

—

610

1,570

2,180

367

2014

2014

35 Years

12,508 — 23,302

148

— 23,450

23,450

5,055

2001

2001

35 Years

8,718

1,050 10,900

— 1,050

10,900

11,950

2,348

—

— 10,555

1,847

— 12,402

12,402

3,040

2006

2008

2006

35 Years

2008

34 Years

— 2,338

2,128

— 2,338

2,128

4,466

521

2015

2015

30 Years

— 1,348

2,418

— 1,348

2,418

3,766

572

2015

2015

30 Years

103

2012

2013

2013

1996

2014

2015

2015

2010

2012

35 Years

2013

35 Years

2013

35 Years

1996

30 Years

2014

35 Years

2015

35 Years

2015

35 Years

2010

30 Years

Schedule III
Universal Health Realty Income Trust
Real Estate and Accumulated Depreciation — December 31, 2020—(Continued)
(amounts in thousands)

Initial Cost

Encumbrance
(c.)

Land

Building &
Improv.

Adjustments
to Basis (a.)

Gross amount at
which carried
at end of period

Building &

Land

Improvements CIP

Total

Accumulated
Depreciation
as of Dec. 31,
2020

Date of
Completion of
Construction,
Acquisition
or Significant
improvement

Date
Acquired

Average
Depreciable
Life

—

—

—

—

—

—

—

1,090

1,960

573

1,090

2,533

39

3,662

764

1999

1999

30 Years

— 11,538

876

—

9,276

1,782

1,749

4,879

2,328

14,131

2,265

18,731

—

—

—

—

—

1,749

2,328

2,265

12,414

3

12,417

3,213

2006

2006

30 Years

11,058

11,058

3,414

2008

2008

30 Years

4,879

6,628

976

2015

2015

35 Years

14,131

16,459

3,109

2016

2016

35 Years

18,731

20,996

3,110

2016

2016

35 Years

2,296

6,411

10

2,296

6,421

8,717

1,246

2016

2016

35 Years

6,576

3,032

10,602

—

3,032

10,602

13,634

1,647

2016

2016

35 Years

—

—

—

—

—

—

— 10,718

8,460

696

801

3,406

5,029

254

2,968

—

—

—

—

696

801

254

19,178

23

19,201

3,871

2017

2017

35 Years

3,406

4,102

5,029

5,830

475

620

2017

2017

2017

35 Years

2017

35 Years

2,968

3,222

307

2018

2018

35 Years

1,330

—

30,685

1,330

30,685

32,015

2

2020

2019

35 Years

605

3,906

—

605

3,906

4,511

176

2019

2019

35 Years

Description

Santa Fe Professional Plaza

Scottsdale, AZ . . . . . . . . . . . .

Sierra San Antonio Medical

Plaza Fontana, CA (g.) . . . . .
Vista Medical Terrace & Sparks
MOB Sparks, NV (f.) . . . . . .

South Texas ER at Weslaco

Weslaco ,TX . . . . . . . . . . . . .

Chandler Corporate Center III

Chandler, AZ . . . . . . . . . . . . .

Frederick Crestwood MOB

Frederick, MD . . . . . . . . . . .

Madison Professional Office

Building
Madison, AL . . . . . . . . . . . . .

Tenaya Medical Office

Building
Las Vegas, NV . . . . . . . . . . . .

Henderson Medical Plaza

Henderson, NV (f.) . . . . . . . .

Hamburg Medical Building

Hamburg, PA . . . . . . . . . . . .
Las Palmas Del Sol Emergency
Center—West El Paso, TX . .

Beaumont Medical Sleep

Center Building
Southfield, MI . . . . . . . . . . . .

Clive Behavioral Health

Clive, IA . . . . . . . . . . . . . . . .

Bellin Health Family Medical

Center Escanaba, MI . . . . . . .

Sand Point Medical Properties

Escanaba, MI

. . . . . . . . . . . .

1
TOTALS (h.) . . . . . . . . . . $59,231 $52,317 $485,763 $120,721 $55,157 $603,644 $1,648 $660,449 $216,648

1,919

1,654

1,654

265

265

—

—

2020

2020

35 Years

a. Consists of costs subsequent to acquisition that were capitalized, divested or written down in connection with asset impairments and hurricane related

damage.

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, 2020 on third-party debt that is non-recourse to us.
d. Carrying value of depreciable assets were written down to zero as a result of substantial damage from Hurricane Harvey during the third quarter of

2017.

e. Carrying value of depreciable assets were written down as a result of substantial damage from Hurricane Harvey during the third quarter of 2017.
f. At December 31, 2020, we are the lessee with a UHS-related party on a ground lease for land.
g. At December 31, 2020, we are the lessee with a third party on a ground lease for land.
h.

The aggregate cost for federal income tax purposes is $645 million (unaudited) with a net book value of $406 million (unaudited).

104

UNIVERSAL HEALTH REALTY INCOME TRUST

NOTES TO SCHEDULE III
DECEMBER 31, 2020
(amounts in thousands)

(1) RECONCILIATION OF REAL ESTATE PROPERTIES

The following table reconciles the Real Estate Properties from January 1, 2018 to December 31, 2020:

Balance at January 1,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions (a.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals/Divestitures (b.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$627,395
31,145
1,919
(10)

$611,046
12,882
4,510
(1,043)

$599,776
8,641
3,222
(593)

Balance at December 31,

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$660,449

$627,395

$611,046

2020

2019

2018

(2) RECONCILIATION OF ACCUMULATED DEPRECIATION

The following table reconciles the Accumulated Depreciation from January 1, 2018 to December 31, 2020:

Balance at January 1,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals/Divestitures (b.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$194,888
(10)
21,770

$173,316
(220)
21,792

$153,379
(593)
20,530

Balance at December 31,

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$216,648

$194,888

$173,316

2020

2019

2018

(a.) Included in the additions for 2020 are approximately $25.1 million related to the new behavioral health
hospital, located in Clive, Iowa, for which construction was substantially completed in December 2020.
Included in the additions for 2019 are approximately $6.9 million (including the land purchase) related to
the new behavioral health hospital. Included in the additions during 2018, were approximately $313,000
related to Henderson Medical Plaza, which was completed and opened during 2017. Additionally, 2018
includes approximately $2.7 million of hurricane-related reconstruction costs.

(b.) 2019 includes the sale of the Kings Crossing II medical office building, as well as the sale of a parcel of

land located at one of our buildings.

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Board of Trustees

Alan B. Miller

Chairman of the Board, President and
Chief Executive Officer of Universal
Health Realty Income Trust; Executive
Chairman of the Board of Universal
Health Services, Inc.

Officers

Alan B. Miller, President and Chief Executive Officer
Charles F. Boyle, Vice President and Chief Financial Officer
Cheryl K. Ramagano, Vice President, Treasurer and Secretary
Timothy J. Fowler, Vice President, Acquisitions and Development
Genevieve P. Owsiany, Controller

Gayle L. Capozzalo1,2*,3,5

Formerly served as Executive Vice
President and Chief Strategy Officer of
Yale New Haven Health, and currently
serving as Founder and Leader of The
Equity Collaborative, a not for profit
collaborative of large healthcare systems

Michael Allan Domb2,5

Owner of Allan Domb Real Estate, a
multi-faceted real estate firm focused on the
brokerage, development, investment and
management of residential and commercial
real estate in Philadelphia, Pennsylvania

Robert F. McCadden1*,2,3*,4,5

Formerly served as
Executive Vice President and Chief
Financial Officer of Pennsylvania Real
Estate Investment Trust, and Partner at
KPMG LLP and Arthur Anderson LLP

Marc D. Miller

Chief Executive Officer, President and
Director of Universal Health Services, Inc.

James P. Morey1,3,5

Executive Vice President and Chief
Marketing and Brand Officer of Wawa,
Inc., and previously Chief Operations
Officer responsible for store operations and
real estate

1 Audit Committee

2 Compensation Committee

3 Nominating & Governance Committee

4 Lead Independent Trustee

5 Independent Trustee

* Committee Chairman

Executive Offices

Universal Corporate Center
367 South Gulph Road
King of Prussia, PA 19406-0958
(610) 265-0688

Annual Meeting

June 2, 2021 10:00 a.m.

Company Counsel

Norton Rose Fulbright, US LLP
New York, NY

Auditors

KPMG, LLP
Philadelphia, PA

Transfer Agent and Registrar

Computershare
By Regular Mail
PO Box 505000
Louisville, KY 40233-5000

Telephone
Toll Free
800 851 9677
Toll
781 575 2879

Shareholder online inquires:
www.computershare.com/investor

By Overnight Mail
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202

Please contact Computershare for prompt
assistance on address changes, lost certificates,
consolidation of duplicate accounts or
related matters.

Internet Address

The Trust can be accessed online at
http://www.uhrit.com

Listing

Trust shares are listed on the New York
Stock Exchange under the symbol UHT

Universal Corporate Center
P.O. Box 61558
367 South Gulph Road
King of Prussia, Pennsylvania 19406
(610) 265-0688
www.uhrit.com