UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

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 number 1-9321

UNIVERSAL HEALTH REALTY INCOME TRUST

(Exact name of registrant as specified in its charter)

Maryland	23-6858580
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification No.)
UNIVERSAL CORPORATE CENTER 367 SOUTH GULPH ROAD KING OF PRUSSIA, Pennsylvania	19406-0958
(Address of principal executive offices)	(Zip Code)

(610) 265-0688

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Shares of beneficial interest, $0.01 par value	UHT	New York Stock Exchange

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  ☒    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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☒	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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Number of common shares of beneficial interest outstanding at July 31, 2022—13,800,698.

UNIVERSAL HEALTH REALTY INCOME TRUST

INDEX

		PAGE NO.
PART I. FINANCIAL INFORMATION (unaudited)
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2022 and 2021	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2022 and 2021	4
	Condensed Consolidated Balance Sheets—June 30, 2022 and December 31, 2021	5
	Condensed Consolidated Statements of Changes in Equity—Three and Six Months Ended June 30, 2022 and 2021	6 through 7
	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9 through 20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 through 33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33 through 34
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION		35
Item 1A.	Risk Factors	35
Item 6.	Exhibits	35
SIGNATURES		36

This Quarterly Report on Form 10-Q is for the quarter ended June 30, 2022. In this Quarterly Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and its subsidiaries.

As disclosed in this Quarterly Report, including in Note 2 to the condensed consolidated financial statements—Relationship with Universal Health Services, Inc. (“UHS”) and Related Party Transactions, 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. The Advisory Agreement expires on December 31 of each year, however, it is renewable by us, subject to a determination by our Trustees who are unaffiliated with UHS, that the Advisor’s performance has been satisfactory.  The Advisory Agreement was renewed for 2022 with the same terms as the Advisory Agreement in place during 2021 and 2020. Our officers are all employees of UHS through its wholly-owned subsidiary, UHS of Delaware, Inc. In addition, five 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 twenty medical office or general office buildings (one of which is currently under construction) 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 Quarterly Report, the term “revenues” does not include the revenues of the unconsolidated limited liability companies (“LLCs”) in which we have various non-controlling equity interests ranging from 33% to 95%.  As of June 30, 2022, we had investments in four jointly-owned LLCs/LPs. We currently account for our share of the income/loss from these investments by the equity method (see Note 5 to the condensed consolidated financial statements included herein).  

2

Part I. Financial Information

Item I. Financial Statements

Universal Health Realty Income Trust

Condensed Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2022 and 2021

(amounts in thousands, except per share information)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Revenues:
Lease revenue - UHS facilities (a.)	$	7,394		$	7,265		$	14,820		$	14,397
Lease revenue - Non-related parties		12,933			13,117			25,828			26,209
Other revenue - UHS facilities		233			207			462			433
Other revenue - Non-related parties		242			287			497			536
Interest income on financing leases - UHS facilities		1,369			-			2,739			-
		22,171			20,876			44,346			41,575
Expenses:
Depreciation and amortization		6,679			6,951			13,388			13,738
Advisory fees to UHS		1,266			1,089			2,490			2,151
Other operating expenses		6,986			5,903			13,853			11,505
		14,931			13,943			29,731			27,394
Income before equity in income of unconsolidated limited liability companies ("LLCs"), gain on sale and interest expense		7,240			6,933			14,615			14,181
Equity in income of unconsolidated LLCs		345			567			597			1,038
Gain on sale of real estate assets		-			1,304			-			1,304
Interest expense, net		(2,367	)		(2,183	)		(4,589	)		(4,316	)
Net income	$	5,218		$	6,621		$	10,623		$	12,207
Basic earnings per share	$	0.38		$	0.48		$	0.77		$	0.89
Diluted earnings per share	$	0.38		$	0.48		$	0.77		$	0.89
Weighted average number of shares outstanding - Basic		13,768			13,753			13,766			13,751
Weighted average number of shares outstanding - Diluted		13,789			13,776			13,788			13,773
(a.) Includes bonus rental on McAllen Medical Center, a UHS acute care hospital facility of $643 and $1,321 for the three and six-month periods ended June 30, 2022, respectively, and includes bonus rental on three UHS acute care hospital facilities of $1,648 and $3,343 for the three and six-month periods ended June 30, 2021, respectively.

See accompanying notes to these condensed consolidated financial statements.

3

Universal Health Realty Income Trust

Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2022 and 2021

(amounts in thousands)

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2022		2021			2022		2021
Net income	$	5,218	$	6,621		$	10,623	$	12,207
Other comprehensive gain/(loss):
Unrealized derivative gains/(losses) on cash flow hedges		2,005		(560	)		7,689		2,788
Total other comprehensive gains/(losses):		2,005		(560	)		7,689		2,788
Total comprehensive income	$	7,223	$	6,061		$	18,312	$	14,995

See accompanying notes to these condensed consolidated financial statements.

4

Universal Health Realty Income Trust

Condensed Consolidated Balance Sheets

(amounts in thousands, except share information)

(unaudited)

	June 30,			December 31,
	2022			2021
Assets:
Real Estate Investments:
Buildings and improvements and construction in progress	$	630,220		$	608,836
Accumulated depreciation		(237,268	)		(225,584	)
		392,952			383,252
Land		56,631			54,897
Net Real Estate Investments		449,583			438,149
Financing receivable from UHS		83,697			82,439
Net Real Estate Investments and Financing receivable		533,280			520,588
Investments in and advances to limited liability companies ("LLCs")		9,713			10,139
Other Assets:
Cash and cash equivalents		8,399			22,504
Lease and other receivables from UHS		4,696			4,641
Lease receivable - other		7,767			7,109
Intangible assets (net of accumulated amortization of $14.3 million and    $14.2 million, respectively)		10,548			9,972
Right-of-use land assets, net		11,476			11,495
Deferred charges and other assets, net		17,934			11,971
Total Assets	$	603,813		$	598,419
Liabilities:
Line of credit borrowings	$	284,300		$	271,900
Mortgage notes payable, non-recourse to us, net		50,729			56,866
Accrued interest		323			346
Accrued expenses and other liabilities		12,286			12,157
Ground lease liabilities, net		11,476			11,495
Tenant reserves, deposits and deferred and prepaid rents		10,053			10,328
Total Liabilities		369,167			363,092
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: 2022 - 13,800,694;    2021 - 13,783,442		138			138
Capital in excess of par value		269,039			268,515
Cumulative net income		800,182			789,559
Cumulative dividends		(843,515	)		(823,998	)
Accumulated other comprehensive income		8,802			1,113
Total Equity		234,646			235,327
Total Liabilities and Equity	$	603,813		$	598,419

See accompanying notes to these condensed consolidated financial statements.

5

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Six Months Ended June 30, 2022

(amounts in thousands)

(unaudited)

	Common Shares
					Capital in							Accumulated other
	Number				excess of		Cumulative		Cumulative			comprehensive		Total
	of Shares		Amount		par value		net income		dividends			income/(loss)		Equity
January 1, 2022		13,785	$	138	$	268,515	$	789,559	$	(823,998	)	$	1,113	$	235,327
Shares of Beneficial Interest:
Issued, net		16		—		93		—		—			—		93
Repurchased						—									-
Restricted stock-based compensation expense		—		—		431		—		—			—		431
Dividends and dividend equivalents ($1.415/share)		—		—		—		—		(19,517	)		—		(19,517	)
Comprehensive income:
Net income		—		—		—		10,623		—			—		10,623
Unrealized net gain on cash flow hedges		—		—		—		—		—			7,689		7,689
Subtotal - comprehensive income								10,623					7,689		18,312
June 30, 2022		13,801	$	138	$	269,039	$	800,182	$	(843,515	)	$	8,802	$	234,646

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended June 30, 2022

(amounts in thousands)

(unaudited)

	Common Shares
					Capital in							Accumulated other
	Number				excess of		Cumulative		Cumulative			comprehensive		Total
	of Shares		Amount		par value		net income		dividends			income/(loss)		Equity
April 1, 2022		13,786	$	138	$	268,792	$	794,964	$	(833,717	)	$	6,797	$	236,974
Shares of Beneficial Interest:
Issued, net		15		—		39		—		—			—		39
Repurchased						—									-
Restricted stock-based compensation expense		—		—		208		—		—			—		208
Dividends and dividend equivalents ($.71/share)		—		—		—		—		(9,798	)		—		(9,798	)
Comprehensive income:
Net income		—		—		—		5,218		—			—		5,218
Unrealized net loss on cash flow hedges		—		—		—		—		—			2,005		2,005
Subtotal - comprehensive income								5,218					2,005		7,223
June 30, 2022		13,801	$	138	$	269,039	$	800,182	$	(843,515	)	$	8,802	$	234,646

6

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Six Months Ended June 30, 2021

(amounts in thousands)

(unaudited)

	Common Shares
					Capital in								Accumulated other
	Number				excess of			Cumulative		Cumulative			comprehensive			Total
	of Shares		Amount		par value			net income		dividends			income/(loss)			Equity
January 1, 2021		13,771	$	138	$	267,368		$	680,727	$	(785,413	)	$	(3,815	)	$	159,005
Shares of Beneficial Interest:
Issued, net		12		—		106			—		—			—			106
Repurchased						(16	)										(16	)
Restricted stock-based compensation expense		—		—		493			—		—			—			493
Dividends and dividend equivalents ($1.395/share)		—		—		—			—		(19,219	)		—			(19,219	)
Comprehensive income:
Net income		—		—		—			12,207		—			—			12,207
Unrealized net gain on cash flow hedges		—		—		—			—		—			2,788			2,788
Subtotal - comprehensive income									12,207					2,788			14,995
June 30, 2021		13,783	$	138	$	267,951		$	692,934	$	(804,632	)	$	(1,027	)	$	155,364

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended June 30, 2021

(amounts in thousands)

(unaudited)

	Common Shares
					Capital in								Accumulated other
	Number				excess of			Cumulative		Cumulative			comprehensive			Total
	of Shares		Amount		par value			net income		dividends			income/(loss)			Equity
April 1, 2021		13,772	$	138	$	267,667		$	686,313	$	(794,984	)	$	(467	)	$	158,667
Shares of Beneficial Interest:
Issued, net		11		—		49			—		—			—			49
Repurchased						(16	)										(16	)
Restricted stock-based compensation expense		—		—		251			—		—			—			251
Dividends and dividend equivalents ($.70/share)		—		—		—			—		(9,648	)		—			(9,648	)
Comprehensive income:
Net income		—		—		—			6,621		—			—			6,621
Unrealized net loss on cash flow hedges		—		—		—			—		—			(560	)		(560	)
Subtotal - comprehensive income									6,621					(560	)		6,061
June 30, 2021		13,783	$	138	$	267,951		$	692,934	$	(804,632	)	$	(1,027	)	$	155,364

See accompanying notes to these condensed consolidated financial statements.

7

Universal Health Realty Income Trust

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

	Six months ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	10,623		$	12,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,388			13,738
Amortization related to above/below market leases, net		(72	)		(92	)
Amortization of debt premium		(25	)		(25	)
Amortization of deferred financing costs		359			433
Stock-based compensation expense		431			493
Gain on sale of real estate assets		-			(1,304	)
Changes in assets and liabilities:
Lease receivable		(713	)		(601	)
Accrued expenses and other liabilities		273			(70	)
Tenant reserves, deposits and deferred and prepaid rents		(275	)		327
Accrued interest		(23	)		(9	)
Leasing costs paid		(770	)		(570	)
Other, net		1,744			869
Net cash provided by operating activities		24,940			25,396
Cash flows from investing activities:
Investments in LLCs		-			(1,544	)
Cash distributions from LLCs		391			-
Advance made to LLC		-			(3,500	)
Additions to real estate investments, net		(11,223	)		(8,421	)
Cash paid for acquisition of properties		(13,620	)		(12,989	)
Cash proceeds received from divestiture of property, net		-			3,209
Net cash paid as part of asset exchange transaction		(1,346	)		-
Net cash used in investing activities		(25,798	)		(23,245	)
Cash flows from financing activities:
Net borrowings on the line of credit		12,400			22,000
Repayments of mortgage notes payable		(6,170	)		(1,028	)
Financing costs paid		(26	)		(41	)
Dividends paid		(19,545	)		(19,196	)
Issuance of shares of beneficial interest, net		94			105
Net cash (used in)/provided by financing activities		(13,247	)		1,840
(Decrease)/increase in cash and cash equivalents		(14,105	)		3,991
Cash and cash equivalents, beginning of period		22,504			5,742
Cash and cash equivalents, end of period	$	8,399		$	9,733
Supplemental disclosures of cash flow information:
Interest paid	$	4,333		$	3,919
Invoices accrued for construction and improvements	$	1,709		$	277

See accompanying notes to these condensed consolidated financial statements.

8

UNIVERSAL HEALTH REALTY INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited)

(1) General

This Quarterly Report on Form 10-Q is for the quarter ended June 30, 2022. In this Quarterly Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and its subsidiaries.

In this Quarterly Report on Form 10-Q, the term “revenues” does not include the revenues of the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%. As of June 30, 2022, we had investments in four jointly-owned LLCs/LPs. We currently account for our share of the income/loss from these investments by the equity method (see Note 5). These LLCs are included in our consolidated financial statements for all periods presented on an unconsolidated basis since they are not variable interest entities for which we are the primary beneficiary, nor do we hold a controlling voting interest.  

The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the SEC and reflect all normal and recurring adjustments which, in our opinion, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements, the notes thereto and accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2021.

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.

(2) Relationship with Universal Health Services, Inc. (“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.  The base rentals and lease and renewal terms for each of the hospitals leased to subsidiaries of UHS as of June 30, 2022 are provided below. The base rents are paid monthly. The lease on McAllen Medical Center also provides for bonus rent which is paid quarterly based upon a computation that compares the hospital’s current quarter revenue to a corresponding quarter in the base year. The hospital leases with subsidiaries of UHS, with the exception of the lease on Clive Behavioral Health Hospital (which is operated by UHS in a joint venture with an unrelated third party), are unconditionally guaranteed by UHS and are cross-defaulted with one another. The lease for the Clive facility is guaranteed on a several basis by UHS (52%) and Catholic Health Initiatives-Iowa (48%).

As previously disclosed on Form 8-K as filed on January 4, 2022, on December 31, 2021, we entered into an asset purchase and sale agreement with UHS and certain of its affiliates. Pursuant to the terms of the asset purchase and sale agreement, which was amended during the first quarter of 2022, a wholly-owned subsidiary of UHS purchased from us the real estate assets of the Inland Valley Campus of Southwest Healthcare System (at its fair market value of $79.6 million), and two wholly-owned subsidiaries of UHS transferred to us the real estate assets of Aiken Regional Medical Center (at its fair market value of $57.7 million) and Canyon Creek Behavioral Health (at its fair market value of $26.0 million).  In connection with this transaction, since the $83.7 million aggregate fair market value of Aiken Regional Medical Center (“Aiken”) located in Aiken, South Carolina, and Canyon Creek Behavioral Health (“Canyon Creek”) located in Temple, Texas, exceeded the $79.6 million fair market value of Inland Valley Campus of Southwest Healthcare System, we paid approximately $4.1 million in cash to UHS. Aiken Regional Medical Center includes an acute care hospital and a behavioral health pavilion.  

The properties acquired by us in connection with this asset purchase and sale agreement with UHS were accounted for as financing arrangements and our consolidated balance sheets as of June 30, 2022 and December 31, 2021 include financing receivables related to this transaction amounting to $83.7 million and $82.4 million, respectively. Pursuant to the leases, as amended during the first quarter of 2022, the aggregate annual rental during 2022 on the acquired properties, which is payable to us on a monthly basis, amounts to approximately $5.7 million ($3.9 million related to Aiken and $1.8 million related to Canyon Creek). The portion of the lease payments that will be included in our consolidated statements of income, and reflected as interest income on financing leases, is expected to be approximately $5.5 million during the full year of 2022. Pursuant to the terms of the previous lease on the Inland Valley Campus of Southwest Healthcare System, we earned $4.5 million of lease revenue during the year ended December 31, 2021 ($2.6 million in base rental and $1.9 million in bonus rental).

9

The combined revenues generated from the leases on the three acute care and three behavioral health care hospital facilities leased to subsidiaries of UHS at June 30, 2022, accounted for approximately 24% and 25% of our consolidated revenues for the three and six months ended June 30, 2022, respectively.  The combined revenues generated from the leases on the three acute care and one behavioral health care hospital facilities leased to subsidiaries of UHS at June 30, 2021 accounted for approximately 25% of our consolidated revenues for each of the three and six month periods ended June 30, 2021. In addition to the six UHS hospital facilities, we have twenty properties consisting of MOBs (including one under construction) and FEDs that are either wholly or jointly-owned by us that include, or will include, tenants which are subsidiaries of UHS. The aggregate revenues generated from UHS-related tenants comprised approximately 41% and 36% of our consolidated revenues during the three-month periods ended June 30, 2022 and 2021, respectively, and approximately 41% and 36% of our consolidated revenues during the six-month periods ended June 30, 2022 and 2021, respectively.

Pursuant to the terms of the two master leases by and among us and certain subsidiaries of UHS, dated December 24, 1986 and December 31, 2021 (the “Master Leases”), which govern the leases of McAllen Medical Center, Wellington Regional Medical Center (governed by the Master Lease dated December 24, 1986), Aiken Regional Medical Center and Canyon Creek Behavioral Health (governed by the Master Lease dated December 31, 2021), all of which are hospital properties that are 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 leases 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 four wholly-owned UHS 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.    

In addition, a wholly-owned subsidiary of UHS is the managing, majority member in a joint-venture with an unrelated third-party that operates, and leases from us, Clive Behavioral Health.  This 100-bed behavioral health care facility is located in Clive, Iowa and was completed and opened in late December, 2020 and the hospital lease commenced on December 31, 2020. The lease on this facility is a triple net lease and has an initial term of 20 years with five 10-year renewal options.  Beginning on January 1, 2022, and thereafter on each January 1^st through 2040 (and potentially through 2070 if the first three of five, 10-year renewal options are exercised), the annual rental will increase by 2.75% on a cumulative and compounded basis. The first three of the five 10-year renewal options will provide for annual rental as stipulated in the lease (2041 through 2070) and the two additional 10-year lease renewal options will be at fair market value lease rates (2071 through 2090). Pursuant to the terms of the lease on this facility, the joint venture has the option to, among other things, renew the lease at the terms specified in the lease agreement by providing notice to us at least 270 days prior to the termination of the then current term. The joint venture also has the right to purchase the leased facility from us at its appraised fair market value upon either of the following: (i) by providing notice at least 270 days prior to the end of the lease terms or any renewal terms, or; (ii) upon 30 days’ notice anytime within 12 months of a change of control of the Trust. Additionally, the joint venture has rights of first offer to purchase the facility prior to any third-party sale.

The table below details the existing lease terms and renewal options for each of the hospital leases that are related to UHS as of June 30, 2022, consisting of three acute care hospitals and three behavioral health hospitals:

Hospital Name	Annual Minimum Rent		End of Lease Term	Renewal Term (years)
McAllen Medical Center	$	5,485,000	December, 2026		5	(a.)
Wellington Regional Medical Center	$	6,319,000	December, 2026		5	(b)
Aiken Regional Medical Center/Aurora Pavilion Behavioral Health Services	$	3,895,000	December, 2033		35	(c)
Canyon Creek Behavioral Health	$	1,670,000	December, 2033		35	(c)
Clive Behavioral Health Hospital	$	2,628,000	December, 2040		50	(d)

(a) UHS has one 5-year renewal option at existing lease rates (through 2031).

(b) UHS has one 5-year renewal option at fair market value lease rates (through 2031; see additional disclosure below).

(c) UHS has seven 5-year renewal options at fair market value lease rates (2034 through 2068).

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(d) The UHS-related joint venture has five 10-year renewal options; the first three of the five 10-year renewal options will be at computed lease rates as stipulated in the lease (2041 through 2070) and the last two 10-year renewal options will be at fair market lease rates (2071 through 2090).

Upon the December 31, 2021 expiration of the lease on Wellington Regional Medical Center located in West Palm Beach, Florida, a wholly-owned subsidiary of UHS exercised its fair market value renewal option and renewed the lease for a 5-year term scheduled to expire on December 31, 2026.  Effective January 1, 2022, the annual fair market value lease rate for this hospital, which is payable to us monthly, is $6.3 million (there is no longer a bonus rental component of the lease payment). Beginning on January 1, 2023, and thereafter on each January 1^st through 2026, the annual rent will increase by 2.50% on a cumulative and compounded basis.  Pursuant to the terms of the hospital’s previous lease, we earned aggregate lease revenue of $5.5 million during the year ended December 31, 2021 (consisting of $3.0 million of base rental and $2.5 million of 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.  

In January, 2022, we entered into a ground lease and master flex-lease agreement with a wholly-owned subsidiary of UHS with the intent to develop, construct and own the real property of Sierra Medical Plaza I, an MOB located in Reno, Nevada, consisting of approximately 86,000 rentable square feet. This MOB will be located on the campus of the Northern Nevada Sierra Medical Center, a newly constructed hospital that is owned and operated by a wholly-owned subsidiary of UHS, which was completed and opened during April of 2022. Construction of this MOB, for which we have engaged a non-related third party to act as construction manager, commenced in January, 2022 and is anticipated to be completed and opened during the first quarter of 2023. The cost of the MOB is estimated to be approximately $34 million. The master flex lease agreement, which is subject to reduction based upon the execution of third-party leases, is for approximately 68% of the rentable square feet of the MOB.

During the fourth quarter of 2021, we purchased the 5% minority ownership interest held by a third-party member in Grayson Properties, LP which owns the Texoma Medical Plaza, an MOB located in Denison, Texas for approximately $3.1 million. The MOB is located on the campus of Texoma Medical Center, a hospital that is owned and operated by a wholly-owned subsidiary of UHS. A third-party appraisal was completed to determine the fair value of the property.  As a result of this minority ownership purchase during the fourth quarter of 2021, we own 100% of the LP and are therefore consolidating this LP effective with the purchase date.  We do not expect a material impact on our net income as a result of the consolidation of this LP subsequent to the transaction.  Please see Note 5 for additional disclosure surrounding this transaction.

In May, 2021, we acquired the Fire Mesa office building located in Las Vegas, Nevada for a purchase price of approximately $12.9 million.  The building is 100% leased under the terms of a triple net lease by a wholly-owned subsidiary of UHS.  The initial lease is scheduled to expire on August 31, 2027 and has two five-year renewal options.  As discussed in Note 4, the acquisition of this office building is part of a series of planned tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code, as amended.

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 27 years to approximately 76 years.  The annual aggregate lease payments on these properties are approximately $508,000 during each of the years ended 2022 through 2026, and an aggregate of $28.0 million thereafter. See Note 7 for additional lease accounting disclosure.

Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of June 30, 2022 we had no salaried employees, 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 special 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

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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.  The Advisory Agreement was renewed for 2022 with the same terms as the Advisory Agreement in place during 2021 and 2020.

Our advisory fee for the three and six months ended June 30, 2022 and 2021, was computed at 0.70% of our average invested real estate assets, as derived from our condensed consolidated balance sheets.  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 2022, as compared to the last three years. The average real estate assets for advisory fee calculation purposes exclude certain items from our condensed 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 approximately $1.3 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively, and were based upon average invested real estate assets of $723 million and $623 million, respectively. Advisory fees incurred and paid (or payable) to UHS were approximately $2.5 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively, and were based upon average invested real estate assets of $711 million and $615 million, respectively.

Share Ownership: As of June 30, 2022 and December 31, 2021, 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 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 the UHS-related tenants comprised approximately 41% and 36% of our consolidated revenues during each of the three and six-month periods ended June 30, 2022 and 2021, 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) Dividends and Equity Issuance Program

Dividends and dividend equivalents:

During the second quarter of 2022, we declared and paid dividends of approximately $9.8 million (including accrued dividends that were paid related to the vesting of restricted stock), or $.71 per share. We declared and paid dividends of approximately $9.6 million, or $.705 per share, during the second quarter of 2021. During the six-month period ended June 30, 2022, we declared and paid dividends of approximately $19.5 million, or $1.415 per share.  Dividend equivalents, which are applicable to shares of unvested restricted stock, were accrued during the first six months of 2022 and will be paid upon vesting of the restricted stock.

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.

No shares were issued pursuant to this ATM equity program during the first six months of 2022.  Pursuant to this ATM program, since the program commenced in the second quarter of 2020, 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 June 30, 2022, we have paid or incurred approximately $508,000 in various fees and expenses related to the commencement of our ATM program.

(4) Acquisitions and Divestitures    

During the six-month periods ended June 30, 2022 and 2021, we completed various transactions, as described below, utilizing qualified third-party intermediaries as part of a series of planned tax-deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code, as amended.

Six Months Ended June 30, 2022:

Acquisitions:

In March, 2022, we acquired the Beaumont Heart and Vascular Center, a medical office building located in Dearborn, Michigan for a purchase price of approximately $5.4 million. The building, which has approximately 17,621 rentable square feet, is 100% leased to a single tenant under the terms of a triple-net lease that is scheduled to expire on November 30, 2026 and has lease escalations of 2.5% per year commencing on December 1, 2022.

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In January, 2022, we acquired the 140 Thomas Johnson Drive medical office building located in Frederick, Maryland for a purchase price of approximately $8.0 million.  The building, which has approximately 20,146 rentable square feet, is 100% leased to three tenants under the terms of triple-net leases.  Approximately 72% of the rentable square feet of this MOB is leased pursuant to a 15-year lease, with a remaining lease term of approximately 14 years at the time of purchase, with three, five-year renewal options.

Divestitures:

There were no divestitures during the first six months of 2022.   

Six Months Ended June 30, 2021:    

Acquisitions:

In May, 2021, we acquired the Fire Mesa office building located in Las Vegas, Nevada for a purchase price of approximately $12.9 million.   The building, which has approximately 44,000 rentable square feet, is 100% leased under the terms of a triple net lease with a wholly-owned subsidiary of UHS. The lease on this building is scheduled to expire on August 31, 2027 and has two five-year renewal options.

Divestitures:

In June, 2021, we sold the Children’s Clinic at Springdale, a medical office building located in Springdale, AR for a sale price of approximately $3.2 million, net of closing costs.  This divestiture resulted in a gain of approximately $1.3 million which is included in our consolidated statement of income for the three and six-month periods ended June 30, 2021.  

(5) 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 upon 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 investments are classified as cash flows from investing activities.

At June 30, 2022, we have non-controlling equity investments or commitments in four jointly-owned LLCs/LPs which own MOBs. As of June 30, 2022 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 funding is typically advanced as equity or member loans. These entities maintain property insurance on the properties.

During the fourth quarter of 2021, we purchased the 5% minority ownership interest, held by the third-party member in Grayson Properties, LP which owns the Texoma Medical Plaza, in which we previously held a noncontrolling majority ownership interest. As a result of this minority ownership purchase, we now own 100% of the LP and began to account for it on a consolidated basis effective November 1, 2021.  Prior to November 1, 2021, the LP was accounted for on an unconsolidated basis pursuant to the equity method.  

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The following property table represents the four LLCs/LPs in which we owned a non-controlling interest and were accounted for under the equity method as of June 30, 2022:

Name of LLC/LP	Ownership			Property Owned by LLC/LP
Suburban Properties		33	%	St. Matthews Medical Plaza II
Brunswick Associates (a.)(b.)		74	%	Mid Coast Hospital MOB
FTX MOB Phase II (c.)		95	%	Forney Medical Plaza II
Grayson Properties II (d.)(e.)		95	%	Texoma Medical Plaza II

(a.) This LLC has a third-party term loan of $8.9 million, which is non-recourse to us, outstanding as of June 30, 2022.

(b.) We are the lessee with a third party on a ground lease for land.

(c.) During the first quarter of 2021, this LP paid off its $4.7 million mortgage loan, upon maturity, utilizing pro rata equity contributions from the limited partners as well as a $3.5 million member loan from us to the LP which was funded utilizing borrowings from our revolving credit agreement.

(d.) Construction of this MOB was substantially completed in December, 2020. This 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, $1.8 million of which has been funded as of June 30, 2022. This LP entered into a $13.1 million third-party construction loan commitment, which is non-recourse to us, which has an outstanding balance of $13.1 million as of June 30, 2022.  The LP developed, constructed, owns and operates the Texoma II Medical Plaza.

(e.) We are the lessee with a UHS-related party for the land related to this property.

Below are the condensed combined statements of income (unaudited) for the four LLCs/LPs accounted for under the equity method at June 30, 2022 and the five LLCs/LPs accounted for under the equity method at June 30, 2021.  The data for the three and six months ended June 30, 2021 includes financial results for the above-mentioned Texoma Medical Plaza in which we purchased the minority ownership interest during the fourth quarter of 2021.     

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(amounts in thousands)				(amounts in thousands)
Revenues	$	2,049	$	2,849	$	3,979	$	5,637
Operating expenses		737		1,065		1,463		2,172
Depreciation and amortization		463		536		923		1,057
Interest, net		269		441		531		872
Net income	$	580	$	807	$	1,062	$	1,536
Our share of net income	$	345	$	567	$	597	$	1,038

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Below are the condensed combined balance sheets (unaudited) for the four above-mentioned LLCs/LPs that were accounted for under the equity method as of June 30, 2022 and December 31, 2021:     

	June 30, 2022			December 31, 2021
	(amounts in thousands)
Net property, including construction in progress	$	30,182		$	30,983
Other assets (a.)		4,647			4,574
Total assets	$	34,829		$	35,557
Other liabilities (a.)	$	2,670		$	2,797
Mortgage notes payable, non-recourse to us		21,937			22,068
Advances payable to us (b.)		3,500			3,500
Equity		6,722			7,192
Total liabilities and equity	$	34,829		$	35,557
Investments in and advances to LLCs before amounts included in
accrued expenses and other liabilities	$	9,713		$	10,139
Amounts included in accrued expenses and other liabilities		(1,749	)		(1,784	)
Our share of equity in LLCs, net	$	7,964		$	8,355

(a.) Other assets and other liabilities as of June 30, 2022 and December 31, 2021 include approximately $655,000 and $656,000, 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 party lessors, including subsidiaries of UHS.  

(b.) Consists of a 7.25% member loan to FTX MOB Phase II, LP with a maturity date of March 1, 2023.

As of June 30, 2022, and December 31, 2021, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs/LPs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands):

	Mortgage Loan Balance (a.)
Name of LLC/LP	6/30/2022		12/31/2021		Maturity Date
Brunswick Associates (2.80% fixed rate mortgage loan)		8,862		8,993	December, 2030
Grayson Properties II (3.70% fixed rate construction loan) (b.)		13,075		13,075	June, 2025
	$	21,937	$	22,068

(a.) All mortgage loans require monthly principal payments through maturity and include a balloon principal payment upon maturity. 

(b.) This construction loan has a maximum commitment of $13.1 million and requires interest on the outstanding principal balance to be paid on a monthly basis through December 1, 2022.  Monthly principal and interest payments are scheduled to commence on January 1, 2023. 

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.

(6) Recent Accounting Pronouncements

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.

(7) Lease Accounting

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We adopted the lease standard ASC 842 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 ASC 842 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 most of our operating properties to customers under agreements that are typically classified as operating leases (as noted below, two of our leases are accounted for as financing arrangements effective on December 31, 2021). We recognize the total minimum lease payments provided for under the operating 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 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 for the leases that 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 three and six months ended June 30, 2022 and 2021.

On December 31, 2021, as a result of the asset purchase and sale transaction with UHS, as amended during the first quarter of 2022, the real estate assets of two wholly-owned subsidiaries of UHS were transferred to us (Aiken and Canyon Creek).  As discussed in Note 2, these assets are accounted for as financing arrangements and our consolidated balance sheets at June 30, 2022 and December 31, 2021 reflect financing receivables related to this transaction amounting to $83.7 million and $82.4 million, respectively. Pursuant to the leases, as amended during the first quarter of 2022, the aggregate annual rental during 2022 on the acquired properties, which is payable to us on a monthly basis, amounts to approximately $5.7 million ($3.9 million related to Aiken and $1.8 million related to Canyon Creek).  The portion of these lease payments that will be included in our consolidated statements of income, and reflected as interest income on financing leases, is expected to be approximately $5.5 million during the full year of 2022. Lease revenue will not be impacted by the lease payments received related to these two properties.

The components of the “Lease revenue – UHS facilities” and “Lease revenue – Non-related parties” captions for the three and six month periods ended June 30, 2022 and 2021 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.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
UHS facilities:
Base rents	$	6,112	$	5,283	$	12,201	$	10,429
Bonus rents (a.)		643		1,648		1,321		3,343
Tenant reimbursements		639		334		1,298		625
Lease revenue - UHS facilities	$	7,394	$	7,265	$	14,820	$	14,397
Non-related parties:
Base rents		10,109		10,499		20,244		21,004
Tenant reimbursements		2,824		2,618		5,584		5,205
Lease revenue - Non-related parties	$	12,933	$	13,117	$	25,828	$	26,209

(a.) Includes bonus rental on McAllen Medical Center, a UHS acute care hospital facility of $643 and $1,321 for the three and six-month periods ended June 30, 2022, respectively, and includes bonus rental on three UHS acute care hospital facilities of $1,648 and $3,343  for the three and six-month periods ended June 30, 2021, respectively.  Please see disclosure above surrounding the December 31, 2021 asset purchase and sale transaction with UHS.

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Disclosures Related to Vacant Facilities:  

Vacancies – Specialty Hospitals:    

As previously disclosed, the lease on the specialty hospital located in Chicago, Illinois, expired on December 31, 2021 and the facility is currently vacant.  During the three and six-month periods ended June 30, 2021, we earned $390,000 and $780,000, respectively, of lease revenue in connection with this property. The operating expenses incurred by us in connection with this facility during the three and six-month periods ended June 30, 2022 were $347,000 and $840,000, respectively. Prior to 2022, the former tenant was responsible for the operating expenses on this facility. Pursuant to the terms of the lease that expired in December, 2021, we earned approximately $1.6 million of lease revenue during the 2021 full year. 

The leases on two specialty hospital facilities, located in Evansville, Indiana, and Corpus Christi, Texas, expired on May 31, 2019 and June 1, 2019, respectively. The hospital 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 estimate that the aggregate operating expenses for the three vacant specialty facilities, including the facility located in Chicago, Illinois, as well as the facilities located in Evansville, Indiana, and Corpus Christi, Texas, will approximate $1.3 million during the remaining six months of 2022. Future operating expenses related to these facilities will be incurred by us during the time they remain owned and vacant.  We continue to market these specialty facilities to potential interested parties. However, should these properties continue to remain vacant for an extended period of time, or should we incur substantial renovation costs to make the properties suitable for other operators/tenants, our future results of operations could be materially unfavorably impacted.  

 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 these short-term leases are accounted for similarly 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 June 30, 2022, our condensed consolidated balance sheet includes right-of-use land assets of approximately $11.5 million and ground lease liabilities of approximately $11.5 million. There were no newly leased assets for which a right-of-use asset was recorded in exchange for a new lease liability during the three and six months ended June 30, 2022.

(8) 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 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 the Trust’s current balance 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.

On July 2, 2021, we entered into an amended and restated revolving credit agreement (“Credit Agreement”) to amend and restate the previously existing $350 million credit agreement, as amended and dated June 5, 2020 (“Prior Credit Agreement”). Among other things, under the Credit Agreement, our aggregate revolving credit commitment was increased to $375 million from $350 million.  The Credit Agreement, which is scheduled to mature on July 2, 2025, provides for a revolving credit facility in an aggregate principal amount of $375 million, including a $40 million sublimit for letters of credit and a $30 million sublimit for swingline/short-term loans.  Under the terms of the Credit Agreement, we may request that the revolving line of credit be increased by up to an additional $50 million. Borrowings under the new facility are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the new facility are secured by first priority security interests in and liens on all equity interests in most of the Trust’s wholly-owned subsidiaries.

Borrowings under the Credit Agreement will bear interest annually at a rate equal to, at our option, at either LIBOR (for one, three, or six months) or the Base Rate, plus in either case, a specified margin depending on our ratio of debt to total capital, as determined by the formula set forth in the Credit Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and 0.10% to 0.35% for Base Rate loans. The initial applicable margin was 1.25% for LIBOR loans and 0.25% for Base Rate loans. The Credit

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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 Trust will also pay a quarterly revolving facility fee ranging from 0.15% to 0.35% (depending on the Trust’s ratio of debt to asset value) on the revolving committed amount of the Credit Agreement. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods.

The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio.  At June 30, 2022, 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%.  

At June 30, 2022, we had $284.3 million of outstanding borrowings and $3.2 million of letters of credit outstanding under our Credit Agreement.  We had $87.5 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of June 30, 2022. There are no compensating balance requirements. At December 31, 2021, we had $271.9 million of outstanding borrowings, $3.2 million of outstanding letters of credit and $99.9 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 then outstanding under the Credit Agreement. We are in compliance with all of the covenants in the Credit Agreement at June 30, 2022 and were in compliance with all of the covenants in the Credit Agreement at December 31, 2021. We also believe that we would remain in compliance if, based on the assumption 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, giving effect to the covenants contained in the Credit Agreement (dollar amounts in thousands):

	Covenant	June 30, 2022			December 31, 2021
Tangible net worth	> =$125,000	$	224,098		$	225,355
Total leverage	< 60%		42.5	%		43.1	%
Secured leverage	< 30%		6.4	%		7.4	%
Unencumbered leverage	< 60%		41.1	%		41.9	%
Fixed charge coverage	> 1.50x	4.8x			4.8x

As indicated on the following table, we have various mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of June 30, 2022 (amounts in thousands):

Facility Name	Outstanding Balance (in thousands) (a.)			Interest Rate			Maturity Date
BRB Medical Office Building fixed rate mortgage loan (b.)	$	5,163			4.27	%	December, 2022
Desert Valley Medical Center fixed rate mortgage loan (b.)		4,276			3.62	%	January, 2023
2704 North Tenaya Way fixed rate mortgage loan		6,336			4.95	%	November, 2023
Summerlin Hospital Medical Office Building III fixed    rate mortgage loan		12,683			4.03	%	April, 2024
Tuscan Professional Building fixed rate mortgage loan		2,036			5.56	%	June, 2025
Phoenix Children’s East Valley Care Center fixed rate    mortgage loan		8,336			3.95	%	January, 2030
Rosenberg Children's Medical Plaza fixed rate mortgage loan		12,152			4.42	%	September, 2033
Total, excluding net debt premium and net financing fees		50,982
Less net financing fees		(318	)
Plus net debt premium		65
Total mortgages notes payable, non-recourse to us, net	$	50,729

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

(b.) This loan is scheduled to mature within the next twelve months.  We intend to refinance this loan prior to the maturity date. 

On June 1, 2022, the $5.1 million fixed rate mortgage loan on 700 Shadow Lane and Goldring MOBs was fully repaid utilizing borrowings under our Credit Agreement.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as of June 30, 2022 had a combined fair value of approximately $50.1 million.  At December 31, 2021, we had various mortgages, all of which were non-recourse to us, included in our condensed consolidated balance sheet. The combined outstanding balance of these various mortgages at December 31, 2021 was $57.2 million and had a combined fair value of approximately $59.4 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.

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 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 June 30, 2022, the fair value of our interest rate swaps was a net asset of $8.8 million which is included in deferred charges and other assets on the accompanying condensed consolidated balance sheet. During the second quarter of 2022, we paid or accrued approximately $122,000 to the counterparty by us, offset by $35,000 in receipts from the counterparty, adjusted for the previous quarter accrual, pursuant to the terms of the swaps.  During the first six months of 2022, we paid or accrued approximately $412,000 to the counterparty by us, offset by $35,000 in receipts from the counterparty and adjusted for the previous quarter accrual, pursuant to the terms of the swaps. From inception of the swap agreements through June 30, 2022 we paid or accrued approximately $2.3 million in net payments made to the counterparty by us pursuant to the terms of the swap (consisting of approximately $234,000 in payments or accruals made to us by the counterparty, offset by approximately $2.5 million of payments due to the counterparty from us).  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.  We do not expect any gains or losses on our interest rate swaps to be reclassified to earnings in the next twelve months.

(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

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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 segment.

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Item 2. 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 facilities, free-standing emergency departments, childcare centers and medical/office buildings. As of August 1, 2022, we have seventy-six real estate investments or commitments located in twenty-one states consisting of:  

• six hospital facilities consisting of three acute care hospitals and three behavioral health care hospitals;

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

• fifty-nine medical/office buildings, including four owned by unconsolidated limited liability companies (“LLCs”)/limited liability partnerships (“LPs”);

• four preschool and childcare centers, and;

• three specialty facilities that are currently vacant.

Forward Looking Statements and Certain Risk Factors

You should carefully review all of the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. 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. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks described elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 in Item 1A Risk Factors and in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward Looking Statements and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward Looking Statements and Risk Factors, as included herein. Those factors may cause our actual results to differ materially from any of our 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; vaccine requirements; 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; 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, 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 higher sustained rates of unemployment and underemployment levels and reduced consumer spending and confidence. The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issues facing our healthcare provider tenants, including UHS. In some areas, the labor scarcity is putting a strain on the resources of our tenants and their staff, which has required them to utilize higher-cost temporary labor and pay premiums

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above standard compensation for essential workers. In addition to significantly increasing the labor cost of our tenants, the healthcare staffing shortage could also require the operators of our hospital facilities to limit the services provided which would have an adverse effect on their operating revenues. There may be significant declines in future bonus rental revenue earned on one acute care hospital leased to a subsidiary of UHS to the extent that the hospital experiences significant declines 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. Although COVID-19 has not previously had a material adverse impact on our financial results, we are not able to quantify the impact that these factors could have on our future financial results and therefore can provide no assurance that developments related to the COVID-19 pandemic will not have a material adverse impact on our future financial results.  

• The Centers for Medicare and Medicaid Services (“CMS”) issued an Interim Final Rule (“IFR”) effective November 5, 2021 mandating COVID-19 vaccinations for all applicable staff at all Medicare and Medicaid certified facilities. Under the IFR, facilities covered by this regulation must establish a policy ensuring all eligible staff have received the COVID-19 vaccine prior to providing any care, treatment, or other services by December 5, 2021. All eligible staff must have received the necessary shots to be fully vaccinated. The regulation also provides for exemptions based on recognized medical conditions or religious beliefs, observances, or practices. Under the IFR, facilities must develop a similar process or plan for permitting exemptions in alignment with federal law. If facilities fail to comply with the IFR by the deadlines established, they are subject to potential termination from the Medicare and Medicaid program for non-compliance.  We cannot predict at this time the potential viability or impact of any additional vaccine requirements on us or the operators of our facilities. Implementation of these rules could have an impact on staffing at the operators of our facilities for those employees that are not vaccinated in accordance with IFR requirements, and associated loss of revenues and increased costs resulting from staffing issues could have a material adverse effect on our financial results or those of the operators.

• Recent legislation, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) and the American Rescue Plan Act of 2021 (“ARPA”), 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, the PPPHCE Act and ARPA, 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, the PPPHCE Act and the ARPA, 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.  There can be no assurance as to whether our tenants would be required to repay any previously granted funding, due to noncompliance with grant terms or otherwise. 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, the PPPHCE Act and the ARPA.

• A substantial portion of our revenues are dependent upon one operator, UHS, which comprised approximately 41% and 36% of our consolidated revenues for the three-month periods ended June 30, 2022 and 2021, respectively, and approximately 41% and 36% of our consolidated revenues for the six-month periods ended June 30, 2022 and 2021, respectively. As previously disclosed, on December 31, 2021, a wholly-owned subsidiary of UHS purchased the real estate assets of Inland Valley Campus of Southwest Healthcare System from us and in exchange, transferred the real estate assets of Aiken Regional Medical Center and Canyon Creek Behavioral Health to us.  These transactions were approved by the Independent Trustees of our Board, as well as the UHS Board of Directors. The aggregate annual rental revenue during 2022 pursuant to the leases for the two facilities transferred to us is approximately $5.7 million; there is no bonus rent component applicable to either of these leases.   Pursuant to the terms of the lease on the Inland Valley Campus, we earned $4.5 million of lease revenue during year ended December 31, 2021 ($2.6 million in base rental and $1.9 million in bonus rental).

• We cannot assure you that subsidiaries of UHS will renew the leases on the hospital facilities and free-standing emergency departments, upon the scheduled expirations of the existing lease terms. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities and FEDs, and do not enter into a substitution arrangement upon

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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.

• 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 7 to the condensed 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 and the fourth quarter of 2021 on three specialty hospital facilities).

• Potential unfavorable tax consequences and reduced income resulting from an inability to complete, within the statutory timeframes, anticipated tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code, if, and as, applicable from time-to-time.

• 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 41% of our consolidated revenues during each of the three and six-month periods ended June 30, 2022, 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-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 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. Under these circumstances, 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 would likely materially affect the business of our operators, including UHS, which would likely unfavorably impact our future bonus rental revenue (on one UHS hospital facility) and may potentially have a negative impact on the future lease renewal terms and the underlying value of the hospital properties.

• Real estate market factors, including without limitation, the supply and demand of office space and market rental rates, changes in interest 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.

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• 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 resulting from the Budget Control Act of 2011, as discussed in the next bullet point below) and Medicaid (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.

• The Budget Control Act of 2011 imposed annual spending 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 established a bipartisan Congressional committee, known as the Joint Select Committee on Deficit Reduction (the “Joint Committee”), which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented on March 1, 2013 resulting in 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 the 2% reductions to Medicare reimbursement imposed under the Budget Control Act of 2011. Recent legislation has suspended payment reductions through December 31, 2021 in exchange for extended cuts through 2030. Subsequent legislation extended the payment reduction suspension through March 31, 2022, with a 1% payment reduction from then until June 30, 2022 and the full 2% payment reduction thereafter.  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 (the “ACA”). President Biden is expected to undertake executive actions that will strengthen the ACA and may reverse the policies of the prior administration. To date, the Biden administration has issued executive orders implementing a special enrollment period permitting individuals to enroll in health plans outside of the annual open enrollment period and reexamining policies that may undermine the ACA or the Medicaid program. The ARPA’s expansion of subsidies to purchase coverage through an exchange is anticipated to increase exchange enrollment. The Trump Administration had directed the issuance of final rules: (i) enabling the formation of association health plans that would be exempt from certain ACA 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 arrangements by employers to permit employees to purchase health insurance in the individual market.  The uncertainty resulting from these Executive Branch policies had led to reduced Exchange enrollment in 2018, 2019 and 2020, and is expected to further worsen the individual and small group market risk pools in future years.  It is also anticipated 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 ACA have not been successful to date, a key provision of the ACA was eliminated 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 ACA is unconstitutional. That ruling was ultimately appealed to the United States Supreme Court, which decided in California v. Texas that the plaintiffs in the matter lacked standing to bring their constitutionality claims.  As a result, the Legislation will continue to remain law, in its entirety, likely for the foreseeable future.    

• 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 includes, but is 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.

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• 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.

• Changes in, or inadvertent violations of, tax laws and regulations and other factors that can affect REITs and our status as a REIT, including possible future changes to federal tax laws that could materially impact our ability to defer gains on divestitures through like-kind property exchanges.

• 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 four 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.  Please see Note 5 to the condensed consolidated financial statements – Summarized Financial Information of Equity Affiliates for additional disclosure related to a fourth quarter, 2021 transaction between us and the minority partner in Grayson Properties, LP.

• 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    

There have been no significant changes to our critical accounting policies or estimates from those disclosed in our 2021 Annual Report on Form 10-K.  

Results of Operations

During the three-month period ended June 30, 2022, net income was $5.2 million, as compared to $6.6 million during the second quarter of 2021.  The $1.4 million decrease was attributable to:

• a decrease of $1.3 million resulting from the gain recorded during the second quarter of 2021 related to the sale of certain real estate assets;

• a decrease of $737,000 related to a vacant specialty hospital located in Chicago, Illinois, on which, as discussed in Note 7 to the consolidated financial statements, the lease expired on December 31, 2021;

• a decrease of $184,000 resulting from an increase in interest expense primarily due to increased borrowings and an increase in our interest rate;

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• a net increase of $341,000 resulting from the asset purchase and sale agreement with UHS that occurred on December 31, 2021;

• an increase of $335,000 resulting from the impact of the fair market value lease renewal on Wellington Regional Medical Center, which became effective on January 1, 2022, and;

• $146,000 of other combined net increases.

During the six-month period ended June 30, 2022, net income was $10.6 million, as compared to $12.2 million during the six-month period ended June 30, 2021.  The $1.6 million increase was attributable to:

• a decrease of $1.3 million resulting from the gain recorded during the second quarter of 2021 related to the sale of certain real estate assets;

• a decrease of $1.6 million related to a vacant specialty hospital located in Chicago, Illinois, on which the lease expired on December 31, 2021;

• a decrease of $273,000 resulting from an increase in interest expense primarily due to increased borrowings and in increase in our interest rate;

• a net increase of $666,000 resulting from the asset purchase and sale agreement with UHS that occurred on December 31, 2021;

• an increase of $670,000 resulting from the impact of the fair market value lease renewal on Wellington Regional Medical Center, which became effective on January 1, 2022, and;

• $278,000 of other combined net increases.

Revenues increased $1.3 million to $22.2 million during the three-month period ended June 30, 2022, as compared to $20.9 million during the three-month period ended June 30, 2021. The increase during the second quarter of 2022, as compared to the second quarter of 2021, was due to: (i) a $926,000 increase due to the recording on a consolidated basis of Grayson Properties, LP (effective as of November 1, 2021 as discussed in Note 5 to the consolidated financial statements), resulting from our purchase of the 5% minority ownership interest in the entity; (ii) a $335,000 increase resulting from the fair market value lease renewal on Wellington Regional Medical Center, which became effective on January 1, 2022; (iii) a $270,000 net increase resulting from the December 31, 2021 asset purchase and sale agreement with UHS whereby we divested the real estate assets of the Inland Valley Campus of Southwest Healthcare System and acquired the real estate assets of Aiken Regional Medical Center and Canyon Creek Behavioral Health; (iv) a $154,000 aggregate net increase generated at various properties, including the impact of acquisitions and divestitures, partially offset by; (v) a $390,000 decrease resulting from the December 31, 2021 lease expiration on the specialty hospital located in Chicago, Illinois. Although our revenues and expenses increased during the second quarter of 2022, as compared to the second quarter of 2021, resulting from the recording of Grayson Properties, LP on a consolidated basis effective as of November 1, 2021, there was no significant impact on our net income resulting from the change from the unconsolidated/equity method basis.

Revenues increased $2.8 million to $44.3 million during the six-month period ended June 30, 2022, as compared to $41.6 million during the six-month period ended June 30, 2021. The increase during the first six months of 2022, as compared to the first six months of 2021, was due to: (i) a $1.8 million increase due to the recording on a consolidated basis of Grayson Properties, LP (effective as of November 1, 2021 as discussed above and in Note 5 to the consolidated financial statements); (ii) a $670,000 increase resulting from the fair market value lease renewal on Wellington Regional Medical Center, which became effective on January 1, 2022; (iii) a $523,000 net increase resulting from the December 31, 2021 asset purchase and sale agreement with UHS whereby we divested the real estate assets of the Inland Valley Campus of Southwest Healthcare System and acquired the real estate assets of Aiken Regional Medical Center and Canyon Creek Behavioral Health; (iv) a $513,000 aggregate net increase generated at various properties, including the impact of acquisitions and divestitures, partially offset by; (v) a $780,000 decrease resulting from the December 31, 2021 lease expiration on the specialty hospital located in Chicago, Illinois. As mentioned above, although our revenues and expenses increased during the first six months of 2022, as compared to the first six months of 2021, resulting from the recording of Grayson Properties, LP on a consolidated basis, there was no significant impact on our net income resulting from the change from the unconsolidated/equity method basis.  

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 or 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 lease revenue in our condensed consolidated statements of income.

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Included in our other operating expenses are expenses related to the consolidated medical office buildings and three vacant specialty facilities. Other operating expenses totaled $6.0 million and $5.0 million for the three-month periods ended June 30, 2022 and 2021, respectively. The $1.0 million increase in our other operating expenses during the second quarter of 2022, as compared to the second quarter of 2021, was due primarily to: (i) $347,000 of operating expenses incurred during the second quarter of 2022 at a vacant specialty facility located in Chicago, Illinois, on which the lease expired on December 31, 2021 (the operating expenses for this facility were the tenant’s responsibility through the lease expiration date); (ii) $463,000 of other operating expenses recorded during the second quarter of 2022 in connection with Grayson Properties, LP, which as discussed above, was recorded on a consolidated basis effective as of November 1, 2021, and; (iii) $167,000 of other combined increased expenses.      

Other operating expenses related to the consolidated medical office buildings and three vacant specialty facilities, as applicable, totaled $12.1 million and $9.8 million for the six-month periods ended June 30, 2022 and 2021, respectively. The $2.2 million increase in our other operating expenses during the first six months of 2022, as compared to the first six months of 2021, was due primarily to: (i) $840,000 of operating expenses incurred during the first six months of 2022 at the above-mentioned vacant specialty facility located in Chicago, Illinois, on which the lease expired on December 31, 2021; (ii) $915,000 of other operating expenses recorded during the first six months of 2022 in connection with Grayson Properties, LP, which as discussed above, was recorded on a consolidated basis effective as of November 1, 2021, and; (iii) $484,000 of other combined increased expenses.

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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 certain items, such as gains on transactions that occurred during the periods presented. To the extent a REIT recognizes a gain or loss with respect to the sale of incidental assets, 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.

Below is a reconciliation of our reported net income to FFO for the three and six-month periods ended June 30, 2022 and 2021 (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Net income	$	5,218	$	6,621		$	10,623	$	12,207
Depreciation and amortization expense on consolidated    investments		6,679		6,951			13,388		13,738
Depreciation and amortization expense on unconsolidated    affiliates		295		374			590		736
Gain on sale of real estate assets		-		(1,304	)		-		(1,304	)
Funds From Operations	$	12,192	$	12,642		$	24,601	$	25,377
Weighted average number of shares outstanding - Diluted		13,789		13,776			13,788		13,773
Funds From Operations per diluted share	$	0.88	$	0.92		$	1.78	$	1.84

Our FFO decreased $450,000 during the second quarter of 2022, as compared to the second quarter of 2021.  The net decrease was primarily due to: (i) a net decrease in net income of $99,000; excluding the $1.3 million gain recorded during the second quarter of 2021 related to the sale of certain real estate assets (which we exclude from our calculation of FFO), as discussed above, and; (ii) a $351,000 decrease in depreciation and amortization expense incurred on our consolidated and unconsolidated affiliates.

Our FFO decreased $776,000 during the first six months of 2022, as compared to the first six months of 2021.  The net decrease was primarily due to: (i) the net decrease in net income of $280,000; excluding the $1.3 million gain recorded during the second quarter of 2021 related to the sale of certain real estate assets (which we exclude from our calculation of FFO), as discussed above, and; (ii) a $496,000 decrease in depreciation and amortization expense incurred on our consolidated and unconsolidated affiliates.

Other Operating Results

Interest Expense:

As reflected in the schedule below, interest expense was $2.4 million and $2.2 million during the three-month periods ended June 30, 2022 and 2021, respectively, and $4.6 million and $4.3 million during the six-month periods ended June 30, 2022 and 2021, respectively (amounts in thousands):

	Three Months Ended June 30, 2022			Three Months Ended June 30, 2021			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021
Revolving credit agreement	$	1,550		$	1,029		$	2,718		$	1,996
Mortgage interest		584			629			1,196			1,264
Interest rate swaps expense, net (a.)		87			320			374			629
Amortization of financing fees		183			216			361			432
Amortization of fair value of debt		(13	)		(13	)		(26	)		(26	)
Capitalized interest on major projects		(35	)		-			(56	)		-
Other interest		11			2			22			21
Interest expense, net	$	2,367		$	2,183		$	4,589		$	4,316

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(a.) Represents interest paid by us to the counterparties pursuant to three interest rate SWAPs with a combined notional amount of $140 million.

Interest expense increased by $184,000 during the three-month period ended June 30, 2022, as compared to the comparable period of 2021, due primarily to: (i) a $521,000 increase in the interest expense on our revolving credit agreement primarily resulting from an increase in our average outstanding borrowings ($272.5 million during the three months ended June 30, 2022 as compared to $248.2 million in the comparable quarter of 2021) as well as an increase in our average cost of borrowings (2.28% average effective rate during the second quarter of 2022, as compared to 1.66% average effective rate during the comparable quarter of 2021); (ii) $9,000 of other combined net increases in interest expense, partially offset by; (iii) a $233,000 decrease in interest rate swap expense; (iv) a $45,000 decrease in mortgage interest expense; (v) a $35,000 decrease due to an increase in capitalized interest on a major project, and; (vi) a $33,000 decrease in amortization of financing fees and fair value of debt.

Interest expense increased by $273,000 during the six-month period ended June 30, 2022, as compared to the comparable period of 2021, due primarily to: (i) a $722,000 increase in the interest expense on our revolving credit agreement primarily resulting from an increase in our average outstanding borrowings ($270.8 million during the six months ended June 30, 2022 as compared to $243.7 million in the comparable six-month period of 2021) as well as an increase in our average cost of borrowings (2.02% average effective rate during the first six months of 2022, as compared to 1.65% average effective rate during the comparable six months of 2021); (ii) $1,000 of other combined net increases in interest expense, partially offset by; (iii) a $255,000 decrease in interest rate swap expense; (iv) a $68,000 decrease in mortgage interest expense; (v) a $71,000 decrease in amortization of financing fees and fair value of debt, and; (vi) a $56,000 decrease due to an increase in capitalized interest on a major project.

Disclosures Related to Certain Facilities

Please refer to Note 7 to the consolidated financial statements - Lease Accounting, for additional information regarding certain of our vacant specialty hospital facilities consisting of Evansville, Indiana; Corpus Christi, Texas, and; Chicago, Illinois.

Liquidity and Capital Resources    

Net cash provided by operating activities

Net cash provided by operating activities was $24.9 million during the six-month period ended June 30, 2022 as compared to $25.4 million during the comparable period of 2021. The $456,000 net decrease was attributable to:

• an unfavorable change of $746,000 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 related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation and gain on sale of real estate assets), as discussed above;

• an unfavorable change of $112,000 in lease receivable;

• an unfavorable change of $602,000 in tenant reserves, deposits and deferred and prepaid rents;

• an unfavorable change of $200,000 in leasing costs paid;

• a favorable change of $343,000 in accrued expenses and other liabilities;

• other combined net favorable change of $861,000, resulting primarily from the timing of deposits made on acquisitions and prepaid expense payments.

Net cash used in investing activities

Net cash used in investing activities was $25.8 million during the first six months of 2022 as compared to $23.2 million during the first six months of 2021.

During the six-month period ended June 30, 2022 we funded: (i) $13.6 million, including transaction costs, on the acquisitions of the Beaumont Heart and Vascular Center in March, 2022, and; the 140 Thomas Johnson Drive medical office building in January, 2022, as discussed in Note 4 to the consolidated financial statements–Acquisitions and Divestitures; (ii) $11.2 million in additions to real estate investments including construction costs related to the Sierra Medical Plaza I medical office building located in Reno, Nevada, that is scheduled to be completed during the first quarter of 2023, as well as tenant improvements at various MOBs, and; (iii) $1.3 million as part of the asset purchase and sale agreement with UHS, as discussed in Note 2 to the consolidated financial statements-Relationship with UHS and Related Party Transactions. In addition, during the six-months ended June 30, 2022, we received approximately $391,000 of cash in excess of income from LLCs.

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During the six-month period ended June 30, 2021 we funded: (i) $13.0 million, including transaction costs, on the acquisition of the Fire Mesa office building in May, 2021, as discussed in Note 4 to the consolidated financial statements–Acquisitions and Dispositions; (ii) $8.4 million in additions to real estate investments including construction costs related to the 100-bed behavioral health care hospital located in Clive, Iowa, that was substantially completed in late December, 2020, as well as tenant improvements at various MOBs; (iii) a $3.5 million member loan to an unconsolidated LP, and; (iv) $1.5 million in equity investments in unconsolidated LLCs.  In addition, during the six-months ended June 30, 2021, we received approximately $3.2 million of net cash proceeds from the sale of the Children’s Clinic of Springdale as discussed in Note 4 to the consolidated financial statements–Acquisitions and Dispositions.

Net cash (used in)/ provided by financing activities

Net cash used in financing activities was $13.2 million during the six months ended June 30, 2022, as compared to $1.8 million of cash provided by financing activities during the six months ended June 30, 2021.

During the six-month period ended June 30, 2022, we paid: (i) $6.2 million on mortgage notes payable that are non-recourse to us, including a $5.1 million repayment of a fixed rate mortgage loan that matured during the second quarter of 2022; (ii) $26,000 of financing costs related to the revolving credit agreement, and; (iii) $19.5 million of dividends, including $60,000 of accrued dividends. Additionally, during the six months ended June 30, 2022, we received: (i) $12.4 million of net borrowings on our revolving credit agreement, and; (ii) $94,000 of net cash from the issuance of shares of beneficial interest.

During the six-month period ended June 30, 2021, we paid: (i) $1.0 million on mortgage notes payable that are non-recourse to us; (ii) $41,000 of financing costs related to the revolving credit agreement, and; (iii) $19.2 million of dividends. Additionally, during the six months ended June 30, 2021, we received: (i) $22.0 million of net borrowings on our revolving credit agreement, and; (ii) $105,000 of net cash from the issuance of shares of beneficial interest.

During 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. No shares were issued pursuant to this ATM equity program during the first six months of 2022 and no shares were issued pursuant to this ATM equity program during the year ended December 31, 2021.

Additional cash flow and dividends paid information for the six-month periods ended June 30, 2022 and 2021:

As indicated on our condensed consolidated statement of cash flows, we generated net cash provided by operating activities of $24.9 million and $25.4 million during the six-month periods ended June 30, 2022 and 2021, respectively. As also indicated on our statement 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 expense and gain on sale of real estate assets are the primary differences between our net income and net cash provided by operating activities during each period.

We declared and paid dividends of $19.5 million and $19.2 million during the six-month periods ended June 30, 2022 and 2021, respectively. During the first six months of 2022, the $24.9 million of net cash provided by operating activities was approximately $5.4 million greater than the $19.5 million of dividends paid during the first six months of 2022. During the first six months of 2021, the $25.4 million of net cash provided by operating activities was approximately $6.2 million greater than the $19.2 million of dividends paid during the first six months of 2021.  

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 the six months ended June 30, 2022 and 2021.  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

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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 $375 million revolving credit agreement (which had $87.5 million of available borrowing capacity, net of outstanding borrowings and letters of credit as of June 30, 2022); (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 ATM 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 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 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 the Trust’s current balance 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.

On July 2, 2021, we entered into an amended and restated revolving credit agreement (“Credit Agreement”) to amend and restate the previously existing $350 million credit agreement, as amended and dated June 5, 2020 (“Prior Credit Agreement”). Among other things, under the Credit Agreement, our aggregate revolving credit commitment was increased to $375 million from $350 million.  The Credit Agreement, which is scheduled to mature on July 2, 2025, provides for a revolving credit facility in an aggregate principal amount of $375 million, including a $40 million sublimit for letters of credit and a $30 million sublimit for swingline/short-term loans.  Under the terms of the Credit Agreement, we may request that the revolving line of credit be increased by up to an additional $50 million. Borrowings under the new facility are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the new facility are secured by first priority security interests in and liens on all equity interests in most of the Trust’s wholly-owned subsidiaries.

Borrowings under the Credit Agreement will bear interest annually at a rate equal to, at our option, at either LIBOR (for one, three, or six months) or the Base Rate, plus in either case, a specified margin depending on our ratio of debt to total capital, as determined by the formula set forth in the Credit Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and 0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for LIBOR loans and 0.25% for Base Rate loans. 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 Trust will also pay a quarterly revolving facility fee ranging from 0.15% to 0.35% (depending on the Trust’s ratio of debt to asset value) on the revolving committed amount of the Credit Agreement. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods.

The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio.  At June 30, 2022, 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%.  

At June 30, 2022, we had $284.3 million of outstanding borrowings and $3.2 million of letters of credit outstanding under our Credit Agreement.  We had $87.5 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of June 30, 2022. There are no compensating balance requirements.  At December 31, 2021, we had $271.9 million of outstanding borrowings, $3.2 million of outstanding letters of credit and $99.9 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 then

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outstanding under the Credit Agreement. We are in compliance with all of the covenants in the Credit Agreement at June 30, 2022 and were in compliance with all of the covenants in the Credit Agreement at December 31, 2021. We also believe that we would remain in compliance if, based on the assumption 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, giving effect to the covenants contained in the Credit Agreement (dollar amounts in thousands):

	Covenant	June 30, 2022			December 31, 2021
Tangible net worth	> =$125,000	$	224,098		$	225,355
Total leverage	< 60%		42.5	%		43.1	%
Secured leverage	< 30%		6.4	%		7.4	%
Unencumbered leverage	< 60%		41.1	%		41.9	%
Fixed charge coverage	> 1.50x	4.8x			4.8x

 As indicated on the following table, we have various mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of June 30, 2022 (amounts in thousands):

Facility Name	Outstanding Balance (in thousands) (a.)			Interest Rate			Maturity Date
BRB Medical Office Building fixed rate mortgage loan (b.)	$	5,163			4.27	%	December, 2022
Desert Valley Medical Center fixed rate mortgage loan (b.)		4,276			3.62	%	January, 2023
2704 North Tenaya Way fixed rate mortgage loan		6,336			4.95	%	November, 2023
Summerlin Hospital Medical Office Building III fixed    rate mortgage loan		12,683			4.03	%	April, 2024
Tuscan Professional Building fixed rate mortgage loan		2,036			5.56	%	June, 2025
Phoenix Children’s East Valley Care Center fixed rate    mortgage loan		8,336			3.95	%	January, 2030
Rosenberg Children's Medical Plaza fixed rate mortgage loan		12,152			4.42	%	September, 2033
Total, excluding net debt premium and net financing fees		50,982
Less net financing fees		(318	)
Plus net debt premium		65
Total mortgages notes payable, non-recourse to us, net	$	50,729

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

(b.) This loan is scheduled to mature within the next twelve months.  We intend to refinance this loan prior to the maturity date. 

On June 1, 2022, the $5.1 million fixed rate mortgage loan on 700 Shadow Lane and Goldring MOBs was fully repaid utilizing borrowings under our Credit Agreement.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as of June 30, 2022 had a combined fair value of approximately $50.1 million.  At December 31, 2021, we had various mortgages, all of which were non-recourse to us, included in our condensed consolidated balance sheet. The combined outstanding balance of these various mortgages at December 31, 2021 was $57.2 million and had a combined fair value of approximately $59.4 million.

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.

Off Balance Sheet Arrangements

As of June 30, 2022, 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 June 30, 2022 totaled $3.2 million related to Grayson Properties II.  As of December 31, 2021 we had off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit at December 31, 2021 totaled $3.2 million related to Grayson Properties II.

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Acquisition and Divestiture Activity

Please see Note 4 to the consolidated financial statements for completed transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Reference is made to Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in the quantitative and qualitative disclosures during the first six months of 2022, except for the additional disclosure below.  

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 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 June 30, 2022, the fair value of our interest rate swaps was a net asset of $8.8 million which is included in deferred charges and other assets on the accompanying condensed consolidated balance sheet. During the second quarter of 2022, we paid or accrued approximately $122,000 to the counterparty by us, offset by $35,000 in receipts from the counterparty, adjusted for the previous quarter accrual, pursuant to the terms of the swaps.  During the first six months of 2022, we paid or accrued approximately $412,000 to the counterparty by us, offset by $35,000 in receipts from the counterparty and adjusted for the previous quarter accrual, pursuant to the terms of the swaps. From inception of the swap agreements through June 30, 2022 we paid or accrued approximately $2.3 million in net payments made to the counterparty by us pursuant to the terms of the swap (consisting of approximately $234,000 in payments or accruals made to us by the counterparty, offset by approximately $2.5 million of payments due to the counterparty from us).  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.  We do not expect any gains or losses on our interest rate swaps to be reclassified to earnings in the next twelve months.

The sensitivity analysis related to our fixed and variable rate debt assumes current market rates with all other variables held constant. As of June 30, 2022, the fair value and carrying value of our debt is approximately $334.4 million and $335.3 million, respectively. As of that date, the fair value exceeds the carrying value by approximately $900,000.

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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 June 30, 2022, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates.

	Maturity Date, Year Ending December 31
(Dollars in thousands)	2022			2023			2024			2025			2026			Thereafter			Total
Long-term debt:
Fixed rate:
Debt(a)	$	6,027		$	11,892		$	13,551		$	939		$	600		$	17,973		$	50,982
Average interest rates		4.40	%		4.40	%		4.40	%		4.30	%		4.20	%		4.30	%		4.4	%
Variable rate:
Debt(b)	$	—		$	—		$	—		$	284,300		$	—		$	—		$	284,300
Average interest rates	—			—			—				2.68	%	—			—				2.68	%
Interest rate swaps:
Notional amount(c)	$	—		$	—		$	85,000		$	—		$	—		$	55,000		$	140,000
Interest rates	—			—				1.320	%	—			—				0.565	%		1.070	%

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

(b) Includes $284.3 million of outstanding borrowings under the terms of our $375 million revolving credit agreement which has a maturity date of July 2, 2025.

(c) Includes a $50 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 June 30, 2022 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 $1.4 million.

Item 4. Controls and Procedures

As of June 30, 2022, 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 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 1934 Act and the SEC rules thereunder.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting or in other factors during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

UNIVERSAL HEALTH REALTY INCOME TRUST

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2021 includes a listing of risk factors to be considered by investors in our securities.  There have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 6. Exhibits

(a.) Exhibits:

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the 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)

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Signatures

Pursuant to the requirements 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.

Date:  August 8, 2022	UNIVERSAL HEALTH REALTY INCOME TRUST (Registrant)
	/s/ Alan B. Miller
	Alan B. Miller,
	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
	/s/ Charles F. Boyle
	Charles F. Boyle, Vice President and Chief Financial Officer (Principal Financial Officer)

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