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 ~~September~~June 30, ~~2017~~2020


☐	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~~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~~Pennsylvania		19406
(Address of principal executive offices)		(Zip Code)

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

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

Title of each class

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and ~~“smaller reporting~~“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 ~~October~~July 31, ~~2017—13,734,618~~2020—13,769,667.

UNIVERSAL HEALTH REALTY INCOME TRUST

INDEX

		PAGE NO.
PART I. FINANCIAL INFORMATION (unaudited)
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income—Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	3
	Condensed Consolidated Statements of Comprehensive Income—Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	4
	Condensed Consolidated Balance Sheets—~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019	5
	Condensed Consolidated Statements of ~~Cash Flows—Nine~~Changes in Equity—Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	6 through 7
	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements	79 through 1719
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1820 through 3032
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3032 through 34
Item 4.	Controls and Procedures	3034
PART II. OTHER INFORMATION		35
Item 1A. Risk Factors		35
Item 6.	Exhibits	31
~~EXHIBIT INDEX~~		3235

~~Signatures~~SIGNATURES		3336

This Quarterly Report on Form 10-Q is for the quarter ended ~~September~~June 30, ~~2017.~~2020. 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~~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.~~1986, and as amended and restated as of January 1, 2019. Our officers are all employees of UHS through its wholly-owned subsidiary, UHS of Delaware, Inc. In addition, three of our hospital facilities are leased to subsidiaries of UHS, and subsidiaries of UHS are tenants of seventeenmedical office buildings or free-standing emergency departments, that are either wholly or jointly-owned by us ~~include tenants which are subsidiaries of UHS.~~(excluding new construction). 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 ~~four~~ various non-controlling equity interests ranging from 33% to 95%. As of June 30, 2020, we had investments in five jointly-owned LLCs/LPs (including one currently under construction which is scheduled to be completed in late 2020). 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~~condensed consolidated financial statements included herein).

Part I. ~~Financi~~alFinancial Information

Item I. Financial Statements

Universal Health Realty Income Trust

Condensed Consolidated Statements of Income

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019

(amounts in thousands, except ~~per~~ share ~~amounts)~~information)

(unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Revenues:

Base rental - UHS facilities

$
4,242

$
4,066

$
12,625

$
12,226

Base rental - Non-related parties

10,167

9,273

30,253

27,118

Bonus rental - UHS facilities

1,126

1,118

3,656

3,557

Tenant reimbursements and other - Non-related parties

2,440

2,168

6,872

5,984

Tenant reimbursements and other - UHS facilities

219

176

683

603

18,194

16,801

54,089

49,488

Expenses:

Depreciation and amortization

6,321

5,893

18,761

16,872

Advisory fees to UHS

908

832

2,648

2,380

Other operating expenses

4,877

4,663

14,505

13,603

Transaction costs

(19
)

331

107

477

Hurricane related expenses

3,398

-

3,398

-

Hurricane insurance recoveries

(3,398
)

-

(3,398
)

-

12,087

11,719

36,021

33,332

Income before equity in income of unconsolidated limited liability
companies ("LLCs"), interest expense and gain

6,107

5,082

18,068

16,156

Equity in income of unconsolidated LLCs

384

1,110

1,959

3,396

Gain on Arlington transaction

-

-

27,196

-

Interest expense, net

(2,531
)

(2,374
)

(7,668
)

(6,783
)
Net income

$
3,960

$
3,818

$
39,555

$
12,769

Basic earnings per share

$
0.29

$
0.28

$
2.91

$
0.95

Diluted earnings per share

$
0.29

$
0.28

$
2.91

$
0.95

Weighted average number of shares outstanding - Basic

13,621

13,575

13,595

13,426

Weighted average number of share equivalents

-

-

-

5

Weighted average number of shares and equivalents
outstanding - Diluted

13,621

13,575

13,595

13,431

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Revenues:
Lease revenue - UHS facilities (a.)	$	5,981		$	5,651		$	11,862		$	11,444
Lease revenue- Non-related parties		12,843			13,178			25,685			25,909
Other revenue - UHS facilities		221			209			435			422
Other revenue - Non-related parties		236			288			506			663
		19,281			19,326			38,488			38,438
Expenses:
Depreciation and amortization		6,381			6,426			12,761			13,134
Advisory fees to UHS		1,027			982			2,043			1,952
Other operating expenses		5,576			5,330			10,959			10,540
		12,984			12,738			25,763			25,626
Income before equity in income of unconsolidated limited liability companies ("LLCs"), interest expense and gain on sale		6,297			6,588			12,725			12,812
Equity in income of unconsolidated LLCs		419			454			854			884
Gain on sale of land		-			-			-			250
Interest expense, net		(2,016	)		(2,781	)		(4,325	)		(5,473	)
Net income	$	4,700		$	4,261		$	9,254		$	8,473
Basic earnings per share	$	0.34		$	0.31		$	0.67		$	0.62
Diluted earnings per share	$	0.34		$	0.31		$	0.67		$	0.62

Weighted average number of shares outstanding - Basic		13,739			13,730			13,737			13,729
Weighted average number of shares outstanding - Diluted		13,761			13,749			13,759			13,748

(a.) Includes bonus rental on UHS hospital facilities of $1,417 and $1,352 for the three-month periods ended June 30, 2020 and 2019, respectively, and $2,797 and $2,746 for the six-month periods ended June 30, 2020 and 2019, respectively.

See accompanying notes to these condensed consolidated financial statements.

Universal Health Realty Income Trust

Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2020 and 2019

(amounts in thousands)

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020			2019		2020			2019
Net income	$	4,700		$	4,261	$	9,254		$	8,473
Other comprehensive loss:
Unrealized derivative losses on cash flow hedges		(1,272	)		-		(5,943	)		(132	)
Total other comprehensive loss:		(1,272	)		-		(5,943	)		(132	)
Total comprehensive income	$	3,428		$	4,261	$	3,311		$	8,341

See accompanying notes to these condensed consolidated financial statements.

Universal Health Realty Income Trust

Condensed Consolidated ~~Statements of Comprehensive Income~~

~~For the Three and Nine Months Ended September 30, 2017 and 2016~~Balance Sheets

(~~dollar~~ amounts in ~~thousands)~~thousands, except share information)

(unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net income

$
3,960

$
3,818

$
39,555

$
12,769

Other comprehensive income/(loss):

Unrealized derivative income/(loss) on interest rate caps

12

16

(81
)

(6
)
Total other comprehensive income/(loss):

12

16

(81
)

(6
)
Total comprehensive income

$
3,972

$
3,834

$
39,474

$
12,763

	June 30,			December 31,
	2020			2019
Assets:
Real Estate Investments:
Buildings and improvements and construction in progress	$	586,391		$	572,503
Accumulated depreciation		(205,720	)		(194,888	)
		380,671			377,615
Land		54,892			54,892
Net Real Estate Investments		435,563			432,507
Investments in limited liability companies ("LLCs")		4,408			6,918
Other Assets:
Cash and cash equivalents		6,342			6,110
Lease and other receivables from UHS		3,023			2,963
Lease receivable - other		7,354			7,640
Intangible assets (net of accumulated amortization of $18.4 million and $26.5 million, respectively)		12,948			14,553
Right-of-use land assets, net		8,929			8,944
Deferred charges and other assets, net		8,039			9,154
Total Assets	$	486,606		$	488,789
Liabilities:
Line of credit borrowings	$	221,250		$	212,950
Mortgage notes payable, non-recourse to us, net		59,871			60,744
Accrued interest		346			374
Accrued expenses and other liabilities		18,287			12,888
Ground lease liabilities, net		8,929			8,944
Tenant reserves, deposits and deferred and prepaid rents		11,683			11,155
Total Liabilities		320,366			307,055
Equity:
Preferred shares of beneficial interest, $.01 par value; 5,000,000 shares authorized; NaN issued and outstanding		-			-
Common shares, $.01 par value; 95,000,000 shares authorized; issued and outstanding: 2020 - 13,769,586; 2019 - 13,757,498		138			138
Capital in excess of par value		266,843			266,723
Cumulative net income		670,534			661,280
Cumulative dividends		(766,342	)		(747,417	)
Accumulated other comprehensive (loss)/income		(4,933	)		1,010
Total Equity		166,240			181,734
Total Liabilities and Equity	$	486,606		$	488,789

See accompanying notes to these condensed consolidated financial statements.

Universal Health Realty Income Trust

Condensed Consolidated ~~Balance Sheets~~Statements of Changes in Equity

For the Six Months Ended June 30, 2020

(~~dollar~~ amounts in thousands)

(unaudited)

September 30,

December 31,

2017

2016

Assets:

Real Estate Investments:

Buildings and improvements and construction in progress

$
547,358

$
534,190

Accumulated depreciation

(149,909
)

(138,588
)

397,449

395,602

Land

53,037

51,638

               Net Real Estate Investments

450,486

447,240

Investments in and advances to limited liability companies ("LLCs")

4,695

35,593

Other Assets:

Cash and cash equivalents

3,948

3,930

Base and bonus rent and other receivables from UHS

3,883

2,321

Rent receivable - other

5,864

5,291

Hurricane insurance recoveries receivable

1,898

-

Intangible assets (net of accumulated amortization of $29.6 million and
   $27.1 million at September 30, 2017 and December 31, 2016, respectively)

21,669

23,815

Deferred charges and other assets, net

6,535

6,560

               Total Assets

$
498,978

$
524,750

Liabilities:

Line of credit borrowings

$
176,700

$
201,500

Mortgage notes payable, non-recourse to us, net

83,464

114,217

Accrued interest

620

626

Accrued expenses and other liabilities

14,817

11,809

Tenant reserves, deposits and deferred and prepaid rents

10,070

5,321

               Total Liabilities

285,671

333,473

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: 2017 - 13,734,606;
   2016 - 13,599,055

137

136

Capital in excess of par value

265,132

255,656

Cumulative net income

612,056

572,501

Cumulative dividends

(664,042
)

(637,121
)
Accumulated other comprehensive income

24

105

Total Equity

213,307

191,277

Total Liabilities and Equity

$
498,978

$
524,750

	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, 2020		13,757	$	138	$	266,723		$	661,280	$	(747,417	)	$	1,010		$	181,734
Shares of Beneficial Interest:
Issued, net		13		—		(297	)		—		—			—			(297	)
Restricted stock-based compensation expense		—		—		417			—		—			—			417
Dividends and dividend equivalents ($1.375/share)		—		—		—			—		(18,925	)		—			(18,925	)
Comprehensive income:
Net income		—		—		—			9,254		—			—			9,254
Unrealized loss on cash flow hedges		—		—		—			—		—			(5,943	)		(5,943	)
Subtotal - comprehensive income									9,254					(5,943	)		3,311
June 30, 2020		13,770	$	138	$	266,843		$	670,534	$	(766,342	)	$	(4,933	)	$	166,240

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended June 30, 2020

(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, 2020		13,758	$	138	$	266,970		$	665,834	$	(756,841	)	$	(3,661	)	$	172,440
Shares of Beneficial Interest:
Issued, net		12		—		(347	)		—		—			—			(347	)
Restricted stock-based compensation expense		—		—		220			—		—			—			220
Dividends and dividend equivalents ($.69/share)		—		—		—			—		(9,501	)		—			(9,501	)
Comprehensive income:
Net income		—		—		—			4,700		—			—			4,700
Unrealized loss on cash flow hedges		—		—		—			—		—			(1,272	)		(1,272	)
Subtotal - comprehensive income									4,700					(1,272	)		3,428
June 30, 2020		13,770	$	138	$	266,843		$	670,534	$	(766,342	)	$	(4,933	)	$	166,240

See accompanying notes to these condensed consolidated financial statements.

Universal Health Realty Income Trust

Condensed Consolidated ~~Statement~~Statements of ~~Cash Flows~~Changes in Equity

For the Six Months Ended June 30, 2019

(~~dollar~~ 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, 2019		13,747	$	137	$	266,031		$	642,316	$	(710,006	)	$	132		$	198,610
Shares of Beneficial Interest:
Issued, net		10		1		(110	)		—		—			—			(109	)
Restricted stock-based compensation expense		—		—		331			—		—			—			331
Dividends ($1.355/share)		—		—		—			—		(18,633	)		—			(18,633	)
Comprehensive income:
Net income		—		—		—			8,473		—			—			8,473
Unrealized loss on cash flow hedges		—		—		—			—		—			(132	)		(132	)
Subtotal - comprehensive income									8,473					(132	)		8,341
June 30, 2019		13,757	$	138	$	266,252		$	650,789	$	(728,639	)	$	-		$	188,540

Universal Health Realty Income Trust

Condensed Consolidated Statements of Changes in Equity

For the Three Months Ended June 30, 2019

(amounts in thousands)

(unaudited)

Nine months ended September 30,

2017

2016

Cash flows from operating activities:

Net income

$
39,555

$
12,769

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

18,804

16,920

Amortization of debt premium

(126
)

(166
)
Stock-based compensation expense

390

354

Hurricane related expenses

3,398

—

Hurricane insurance recoveries

(3,398
)

—

Gain on Arlington transaction

(27,196
)

—

Changes in assets and liabilities:

Rent receivable

(913
)

(497
)
Accrued expenses and other liabilities

89

203

Tenant reserves, deposits and deferred and prepaid rents

3,527

604

Accrued interest

(6
)

47

Leasing costs paid

(475
)

(452
)
Other, net

(22
)

(30
)
Net cash provided by operating activities

33,627

29,752

Cash flows from investing activities:

Investments in LLCs

(532
)

(5,454
)
Repayments of advances made to LLC

216

634

Cash distributions in excess of income from LLCs

1,060

318

Additions to real estate investments, net

(10,983
)

(7,104
)
Cash proceeds received from divestiture of property, net

65,220

—

Hurricane insurance recoveries for damaged real estate property

1,500

—

Deposit on real estate assets

—

(420
)
Net cash paid for acquisition of properties

(9,040
)

(52,193
)
Cash paid to acquire minority interests in majority-owned LLCs

(7,890
)

—

Net cash provided by/(used in) investing activities

39,551

(64,219
)
Cash flows from financing activities:

Net (repayments)/borrowings on line of credit

(24,800
)

50,100

Repayments of mortgage notes payable

(43,656
)

(2,407
)
Proceeds from mortgage notes payable

13,200

—

Financing costs paid

(290
)

(307
)
Dividends paid

(26,921
)

(26,231
)
Partial settlement of dividend equivalent rights

—

(30
)
Issuance of shares of beneficial interest, net

9,307

13,430

Net cash (used in)/provided by financing activities

(73,160
)

34,555

Increase in cash and cash equivalents

18

88

Cash and cash equivalents, beginning of period

3,930

3,894

Cash and cash equivalents, end of period

$
3,948

$
3,982

Supplemental disclosures of cash flow information:

Interest paid

$
7,359

$
6,491

	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, 2019		13,748	$	137	$	266,247		$	646,528	$	(719,285	)	$	-	$	193,627
Shares of Beneficial Interest:
Issued, net		9		1		(167	)		—		—			—		(166	)
Restricted stock-based compensation expense		—		—		172			—		—			—		172
Dividends ($.68/share)		—		—		—			—		(9,354	)		—		(9,354	)
Comprehensive income:
Net income		—		—		—			4,261		—			—		4,261
Unrealized loss on cash flow hedges		—		—		—			—		—			—		-
Subtotal - comprehensive income									4,261					-		4,261
June 30, 2019		13,757	$	138	$	266,252		$	650,789	$	(728,639	)	$	-	$	188,540

See accompanying notes to these condensed consolidated financial statements.

Universal Health Realty Income Trust

Condensed Consolidated Statements of Cash Flows

(amounts in thousands)

(unaudited)

	Six months ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	9,254		$	8,473
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,761			13,134
Amortization related to above/(below) market leases, net		(93	)		(102	)
Amortization of debt premium		(27	)		(27	)
Amortization of deferred financing costs		329			324
Stock-based compensation expense		417			331
Gain on sale of land		—			(250	)
Changes in assets and liabilities:
Lease receivable		226			332
Accrued expenses and other liabilities		107			(420	)
Tenant reserves, deposits and deferred and prepaid rents		528			(382	)
Accrued interest		(28	)		(28	)
Leasing costs paid		(387	)		(591	)
Other, net		118			657
Net cash provided by operating activities		23,205			21,451
Cash flows from investing activities:
Investments in LLCs		(3,204	)		(598	)
Cash distributions from LLCs		5,196			348
Additions to real estate investments, net		(13,302	)		(2,956	)
Cash proceeds received from divestiture of property, net		—			245
Net cash used in investing activities		(11,310	)		(2,961	)
Cash flows from financing activities:
Net borrowings/(repayments) on line of credit		8,300			(4,850	)
Repayments of mortgage notes payable		(907	)		(3,351	)
Financing costs paid		(362	)		(35	)
Dividends paid		(18,917	)		(9,279	)
Issuance of shares of beneficial interest, net		223			61
Net cash used in financing activities		(11,663	)		(17,454	)
Increase in cash and cash equivalents		232			1,036
Cash and cash equivalents, beginning of period		6,110			5,036
Cash and cash equivalents, end of period	$	6,342		$	6,072
Supplemental disclosures of cash flow information:
Interest paid	$	4,047		$	5,204
Invoices accrued for construction and improvements	$	2,071		$	1,025

See accompanying notes to these condensed consolidated financial statements.

UNIVERSAL HEALTH REALTY INCOME TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September~~June 30, ~~2017~~2020

(unaudited)

(1) General

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 ~~September~~June 30, ~~2017,~~2020, we had investments in ~~four~~5 jointly-owned LLCs/LPs (including one under construction which ~~own medical office buildings, all~~is scheduled to be completed in late 2020). We currently account for our share of ~~which are accounted for~~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, ~~2016.~~2019.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the federal government declared COVID-19 a national emergency. As a result of various policies implemented by the federal and state governments, and varying by individual state, many non-essential businesses in the nation were closed for varying periods of time. With the exception of the operators of our 4 preschool and childcare centers, which were closed from mid-March until mid-June, we believe that most of the tenants occupying our hospitals, medical office buildings (“MOBs”) and ambulatory care centers were permitted to continue operating if they elected to do so.

Although COVID-19 has not had a material adverse impact on our results of operations through June 30, 2020, we believe that the potentially adverse impact that the pandemic may have on the future operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of which are beyond our, or our tenants’, ability to control or predict. Many of our properties are located in states that have experienced significant increases in COVID-19 infections in June, July and early August. Such states include Arizona, California, Florida, Georgia, Nevada and Texas. Such factors include, but are not limited to, the length of time and severity of the spread of the pandemic; the volume of cancelled or rescheduled elective procedures and the volume of COVID-19 patients treated by the operators of our hospitals and other healthcare facilities; measures our tenants are taking to respond to the COVID-19 pandemic; the impact of government and administrative regulation, including travel bans and restrictions, shelter-in-place or stay-at-home orders, quarantines, the promotion of social distancing, business shutdowns and limitations on business activity; changes in patient volumes at our tenants’ hospitals and other healthcare facilities due to patients’ general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system; the impact of stimulus on the health care industry and our tenants; changes in patient volumes and payer mix caused by deteriorating macroeconomic conditions (including increases in uninsured and underinsured patients as the result of business closings and layoffs); potential disruptions to clinical staffing and shortages and disruptions related to supplies required for our tenants’ employees and patients, including equipment, pharmaceuticals and medical supplies, particularly personal protective equipment, or PPE; potential increases to expenses incurred by our tenants related to staffing, supply chain or other expenditures; the impact of our indebtedness and the ability to refinance such indebtedness on acceptable terms; disruptions in the financial markets and the business of financial institutions as the result of the COVID-19 pandemic which could impact our ability to access capital or increase associated borrowing costs; and changes in general economic conditions nationally and regionally in the markets our properties are located resulting from the COVID-19 pandemic, including increased unemployment and underemployment levels and reduced consumer spending and confidence. Since the underlying businesses in each of our properties are operated by the tenants, we can provide no assurance that the businesses will continue to operate in the future, or stay current with their lease obligations.

Bonus rents earned by us on the 3 acute care hospitals leased to wholly-owned subsidiaries of Universal Health Services, Inc., are computed based upon a computation that compares each hospital’s current quarter revenue to the corresponding quarter in the base year, we could therefore experience significant declines in future bonus rental revenue earned on these properties should those

hospitals experience significant declines in patient volumes and revenues. These hospitals believe that, to the extent that they experience revenue declines and increased expenses resulting from the COVID-19 pandemic, as ultimately measured over the life of the pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

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

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 offrom certain subsidiaries ~~from~~of UHS and immediately leasing the properties back to the respective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years with up to ~~six~~6 additional 5-year renewal terms. The current base rentals and lease and ~~rental~~renewal terms for each of the ~~three~~3 hospital facilities leased to subsidiaries of UHS are provided below. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital leases with subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another.

The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 22% and ~~23%~~21% of our consolidated revenues for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and approximately 22% ~~and 24%~~ of our consolidated revenues for the nine months ended September 30, 2017 and 2016, respectively. Including 100% of the revenues generated at the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%, the leases on the UHS hospital facilities accounted for approximately 19% of the combined consolidated and unconsolidated revenue for each of the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016, and approximately 19% and 20% of the combined consolidated and unconsolidated revenue for the nine months ended September 30, 2017 and 2016, respectively.~~2019. In addition, we have ~~seventeen~~17 medical office buildings (“MOBs”), or free-standing emergency departments (“FEDs”), that are either wholly or jointly-owned by us (excluding new construction), that include tenants which are subsidiaries of UHS. The aggregate revenues generated from UHS-related tenants comprised approximately 32% and 30% of our consolidated revenues during the three-month periods ended June 30, 2020 and 2019, respectively, and approximately 32% and 31% of our consolidated revenues during the six-month periods ended June 30, 2020 and 2019, respectively.

Pursuant to the Master Lease Document by and among us and certain subsidiaries of UHS, dated December 24, 1986 (the “Master Lease”), which governs the leases of all hospital properties with subsidiaries of UHS, UHS has the option 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 at the end of the lease terms or any renewal terms at the appraised fair market value. In addition, the Master Lease, as amended ~~during~~in 2006, includes a change of control provision whereby UHS has the right, upon one month’s notice should a change of control of the Trust occur, to purchase any or all of the three leased hospital properties listed below at their appraised fair market value. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer.

The table below details the existing lease terms and renewal options for our three acute care hospitals operated by wholly-owned subsidiaries of UHS:

Hospital Name	Annual Minimum Rent		End of Lease Term	Renewal Term (years)			Annual Minimum Rent		End of Lease Term	Renewal Term (years)
McAllen Medical Center	$	5,485,000	December, 2021		10	(a)	$	5,485,000	December, 2026		5	(a.)
Wellington Regional Medical Center	$	3,030,000	December, 2021		10	(b)	$	3,030,000	December, 2021		10	(b.)
Southwest Healthcare System, Inland Valley Campus	$	2,648,000	December, 2021		10	(b)	$	2,648,000	December, 2021		10	(b.)

~~(a)~~(a.)

UHS has ~~two~~one 5-year renewal ~~options~~option at the existing lease ~~rates~~rate (through 2031).

~~(b)~~(b.)

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

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

~~In April, 2017,~~

We are the ~~recently constructed Henderson Medical Plaza MOB received its certificate~~lessee on 11 ground leases with subsidiaries of ~~occupancy. Henderson Medical Plaza is located~~UHS (for consolidated and unconsolidated investments). The remaining lease terms on the ~~campus~~ground leases with subsidiaries of UHS range from approximately 29 years to approximately 79 years. The annual aggregate lease payments on these properties are approximately $482,000 for the year ended 2020 and $482,000 for each of the ~~Henderson Hospital Medical Center, a~~years ended 2021, 2022, 2023 and 2024, and an aggregate of $27.6 million thereafter. See Note 7 for further disclosure around our lease accounting.

In late July, 2019 and September, 2019 we entered into two separate agreements with entities that are each related to wholly-owned subsidiaries of UHS in connection with newly constructed ~~acute care hospital that is owned~~properties located in Clive, Iowa and ~~operated by~~Denison, Texas. Please see additional disclosure in Note 4, “New Construction, Acquisitions and Dispositions”.

Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and was completed and opened during the fourth quarter of 2016. A ground lease has been executed between the limited liability company that owns the MOB and a subsidiary of UHS, the terms of which include a seventy-five year lease term with two, ten-year renewal options at the lessee’s option at an adjusting lease rate. We have invested $14.3 million on the development and construction of this MOBalthough as of ~~September~~June 30, ~~2017.~~2020 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~~advisory agreement dated December 24, 1986, and as amended and restated as of January 1, 2019 (the “Advisory Agreement”) ~~dated December 24, 1986.~~. Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees, that the Advisor’s performance has been satisfactory.

Our advisory fee isfor the three and six months ended June 30, 2020 and 2019, was computed at 0.70% of our average invested real estate assets, as derived from our condensed consolidated balance ~~sheet. In December of 2016, based~~sheets. Based upon a review of our advisory fee and other general and administrative expenses, as compared to an industry peer group, the ~~Advisory Agreement was renewed~~advisory fee computation remained unchanged for ~~2017 pursuant~~2020, as compared to the ~~same terms as the Advisory Agreement in place during 2016.~~

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, ~~restricted cash, base and bonus rent~~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. In addition, the Advisor is entitled to an annual incentive fee equal to 20% of the amount by which cash available for distribution to shareholders for each year, as defined in the Advisory Agreement, exceeds 15% of our equity as shown on our consolidated balance sheet, determined in accordance with generally accepted accounting principles without reduction for return of capital dividends. The Advisory Agreement defines cash available for distribution to shareholders as net cash flow from operations less deductions for, among other things, amounts required to discharge our debt and liabilities and reserves for replacement and capital improvements to our properties and investments. No incentive fees were paid during the first nine months of 2017 or 2016 since the incentive fee requirements were not achieved. Advisory fees incurred and paid (or payable) to UHS amounted to ~~$908,000~~approximately $1.0 million and ~~$832,000~~$982,000 for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and were based upon average invested real estate assets of ~~$519~~$587 million and ~~$475~~$561 million, ~~for the three-month periods ended September 30, 2017 and 2016,~~ respectively. Advisory fees incurred and paid (or payable) to UHS ~~amounted to $2.6 million and $2.4~~were approximately $2.0 million for each of the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016, respectively,~~2019, and were based upon average invested real estate assets of ~~$504~~$584 million and ~~$453~~$558 million, ~~for the nine-month periods ended September 30, 2017 and 2016,~~ respectively.

~~Officers and Employees:~~ Our officers are all employees of a wholly-owned subsidiary of UHS and although as of September 30, 2017 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.

Share Ownership: As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, UHS owned 5.7% ~~and 5.8%, respectively,~~ 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 ~~leases on~~aggregate revenues generated from the ~~hospital facilities leased to wholly-owned subsidiaries of UHS~~UHS-related tenants comprised ~~approximately 22%~~32% and ~~23%~~30% of our consolidated revenues during the three-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and ~~comprised approximately 22%~~32% and ~~24%~~31% of our consolidated revenues during the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, 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.~~herein.

(3) Dividends and Equity Issuance Program

~~Dividends:~~Dividends and dividend equivalents:

During the second quarter of 2020, we declared dividend and dividend equivalents of approximately $9.5 million, or $.69 per share and we paid dividends of approximately $9.5 million, or $.69 per share, on June 30, 2020. We declared and paid dividends of ~~$9.0~~approximately $9.4 million, or ~~$.66~~$.68 per share, during the ~~third~~second quarter of ~~2017~~2019, which were paid on July 2, 2019. During the six-month period ended June 30, 2020, we declared dividend and ~~$8.8~~dividend equivalents of approximately $18.9 million, or ~~$.65~~$1.375 per share ~~during the third quarter of 2016. We declared~~ and we paid dividends of ~~$26.9~~$18.9 million, or ~~$1.975~~$1.375 per share. During the six-month period ended June 30, 2019, we declared dividends of $18.6 million, or $1.355 per share, $9.4 million of which was paid on July 2, 2019. Dividend equivalents which were accrued during the ~~nine-month~~three and six-month period ~~ended September 30, 2017 and $26.2 million, or $1.945 per share, during~~of 2020 will be paid out upon the ~~nine-month period ended September 30, 2016.~~ vesting of the related restricted stock award.

Equity Issuance Program:

During the ~~third~~second quarter of ~~2017,~~2020, we ~~issued new shares in connection with our~~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 ~~approximately $23.3~~$100 million to or through ~~Merrill Lynch, Pierce, Fenner~~BofA Securities, Inc., Credit Agricole Securities (USA) Inc., Fifth Third Securities, Inc., SunTrust Robinson Humphrey, Inc. and ~~Smith, Incorporated (“Merrill Lynch”), as sales agent and/or principal.~~Wells Fargo Securities, LLC (collectively, the Agents). The common shares ~~were~~will be offered pursuant to the Registration Statement filed with the Securities and Exchange Commission, which became effective ~~during~~in June 2020.

During the ~~fourth~~second quarter of ~~2015.~~

Pursuant to the ATM Program, during the first nine months of 2017, there were 127,499 shares issued at an average price of $74.71 per share (all of which were issued during the third quarter of 2017), which generated approximately $9.1 million of cash net proceeds (net of approximately $400,000, consisting of compensation of $238,000 to Merrill Lynch, as well as $162,000 of other various fees2020 and ~~expenses). Since~~since inception, ~~of this ATM program, including shares issued under a prior Registration Statement filed with the Securities and Exchange Commission in November, 2012,~~ we have issued ~~957,415~~2,704 shares at an average price of ~~$52.22~~$101.30 per share, which generated approximately ~~$47.9 million~~$270,000 of net proceeds (net of approximately ~~$2.1 million,~~$4,000, consisting of compensation ~~of $1.25 million~~ to ~~Merrill Lynch as well as $840,000 of other~~BofA Securities, Inc.). Additionally, we paid or incurred approximately $435,000 in various fees and ~~expenses). As~~expenses related to the commencement of ~~September 30, 2017, we have met~~ our ~~aggregate sales threshold of $23.3 million pursuant to this~~ATM program.

(4) ~~Acquisitions, Dispositions and~~ New Construction, Acquisitions and Dispositions

~~Nine~~Six Months Ended June 30, 2020:

New Construction:

In September, ~~30, 2017:~~

~~Acquisitions:~~

~~During September, 2017,~~2019, we ~~acquired the Las Palmas Del Sol Emergency Center located in El Paso, Texas for~~entered into an agreement whereby we will own a purchase price of approximately $4.2 million. This FED is 100% leased under the terms of a ten year triple net lease that has a remaining lease term of approximately 9 years at the time of purchase, with two, five year renewal options.

During July, 2017, we acquired The Health Center at Hamburg located in Hamburg, Pennsylvania for a purchase price of approximately $4.7 million. This medical office building is 100% leased under the terms of a fifteen year triple net lease and has a remaining lease term of approximately 8.5 years at the time of purchase, with two, five year renewal options.

These acquisitions were planned and executed in accordance with the provisions of Section 1031 of the Internal Revenue Code and therefore we believe they both qualify as tax deferred like-kind exchange transactions, as discussed below, in connection with the below-mentioned divestiture of St. Mary’s Professional Office Building in March, 2017.

The aggregate purchase price for these acquisitions was preliminarily allocated to the assets acquired and liabilities assumed consisting of tangible property and intangible assets and liabilities, based on the fair values estimated at the acquisition dates. The intangible assets consist of the value of the in-place leases at the properties at the time of acquisition, and the intangible liabilities consist of the value of a below-market lease at the time of acquisition. The value of the in-place leases and below-market lease will be amortized over the average remaining lease term of each property at the time of acquisition.

~~Disposition:~~

During March, 2017, Arlington Medical Properties, LLC, a formerly jointly-owned limited liability company in which we held an 85% noncontrolling ownership interest, sold the real estate assets of St. Mary’s Professional Office Building (“St. Mary’s”) as part of a series of planned tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code. St. Mary’s is a multi-tenant medical office building located in Reno, Nevada. A third party member owned the remaining 15% of Arlington Medical Properties LLC, which we acquired prior to the divestiture of St. Mary’s for a purchase price of $7.9 million.

The divestiture of St. Mary’s generated an aggregate of approximately $57.3 million of net cash proceeds to us. These proceeds, which were net of closing costs and the purchase price paid for the minority member’s95% non-controlling ownership interest in Grayson Properties II L.P., which will develop, construct, own and operate the LLC, include repayment to us of a $21.4 million member loan. Our results of operations for the nine-month period ended September 30, 2017 include a net gain of $27.2 million (net of related transaction costs) recorded in connection with this transaction.

~~New Construction:~~

~~During the first quarter of 2016, we began the development and construction of the Henderson~~Texoma Medical Plaza II, an MOB located in Denison, Texas. This MOB, which is scheduled to be completed in late 2020, will be located on the campus of ~~the Henderson Hospital~~Texoma Medical Center, a hospital that is owned and operated by a wholly-owned subsidiary of UHS. A 10-year master flex lease was executed with the wholly-owned subsidiary of UHS for 40,000 rentable square feet, representing over 50% of the rentable square feet of the MOB. The master flex lease commitment is subject to reduction upon the execution of third-party leases on up to 20,000 rentable square feet of the first and second floors of the three-story MOB, and 20,000 rentable square feet on the third floor. In April, 2020, a new, 122-month lease was fully executed with a third-party tenant for approximately 26,000 rentable square feet on the first floor of the MOB. As a result, the master flex lease commitment was reduced to 20,000 of rentable square feet on the third floor of the MOB. After giving effect to this new lease, 61% of the rentable square feet of the MOB is under lease agreements (including the remaining master lease space). Effective June 1, 2020, a $13.1 million third-party construction loan (non-recourse to us) was obtained by the LP, which is ~~owned by a UHS subsidiary~~scheduled to mature on June 1, 2025 and ~~opened~~has an outstanding loan balance of $7.1 million as of June 30, 2020. Additionally, we have committed to invest up to $4.8 million in ~~late October, 2016. The MOB was completed and opened during April, 2017. We have invested $14.3 million on~~equity or member loans in the development and construction of this MOB, NaN of which has been invested as of ~~September~~June 30, ~~2017.~~

~~Nine Months Ended September 30, 2016:~~

~~Acquisition:~~

~~During the nine months ended September 30, 2016, we spent $52.2 million to:~~

~~purchase the Frederick Memorial Hospital Crestwood,~~2020.We account for this LP on an ~~MOB located in Frederick, Maryland, during the third quarter of 2016 for approximately $24.3 million. The property was fully occupied~~unconsolidated basis pursuant to the ~~terms~~equity method since it is not a variable interest entity and we do not have a controlling voting interest.

In July, 2019, Des Moines Medical Properties, LLC, a wholly-owned subsidiary of ~~triple-net leases with~~ours, entered into an ~~average remaining~~agreement to build and lease a newly constructed behavioral health care hospital located in Clive, Iowa. The lease on this facility, which is triple net and has an initial term of 20-years with 5 10-year renewal options, was executed with Clive Behavioral Health, LLC, a joint venture between UHS and Catholic Health Initiatives - Iowa, Corp. (d/b/a Mercy One Des Moines Medical Center). Construction of this hospital, for which we have engaged a wholly-owned subsidiary of UHS to act as project manager for an aggregate fee of approximately ~~12 years at the time of acquisition. This acquisition was planned and executed~~$750,000, is expected to be completed in ~~accordance with the provisions of Section 1031~~late 2020 or early 2021. The hospital lease will commence upon issuance of the ~~Internal Revenue Code~~certificate of occupancy. The approximate cost of the project is estimated to be $37.5 million and ~~therefore we believe that it qualifies~~the initial annual rent is estimated to be approximately $2.7 million. We have invested approximately $17.4 million for land and the development and construction costs of this hospital as ~~a tax-deferred like-kind exchange transaction in connection with the divestiture~~ of ~~St. Mary’s Professional Office Building in March, 2017.~~

purchase the Chandler Corporate Center III located in Chandler, Arizona, during the second quarter of 2016 for approximately $18.0 million. The property was 92% occupied by one tenant pursuant to the terms of a twelve year escalating triple-net lease, with a ten year fair-market value renewal optionJune 30, 2020 (including accrued costs at ~~the time of acquisition. The lease had a remaining lease term of approximately 11.3 years at the time of acquisition.~~June 30, 2020).

~~purchase the Madison Professional Office Building located in Madison, Alabama,~~Acquisitions:

There were 0 acquisitions during the first ~~quarter~~six months of 2016 for approximately $10.1 million (including $150,000 deposit made in 2015). This multi-tenant property was fully occupied with an average remaining lease term of approximately 6.2 years at the time of acquisition.

The aggregate purchase price for these acquisitions was allocated to the assets acquired and liabilities assumed consisting of tangible property and intangible assets and liabilities, based on the fair value at acquisition as detailed in the table below. Previous reported estimated purchase price allocations that have been finalized did not have a material impact on our consolidated financial statements. The intangible assets include the value of in-place leases at the properties at the time of acquisition as well as the above market lease values, if applicable. The value of the in-place leases will be amortized over the average remaining lease terms of approximately 6 to 12 years at the time of acquisition. The above/below market leases, which are reflected below as intangible assets/below-market intangibles will be amortized over the remaining term of the respective leases. The estimated aggregate allocation is as follows:


~~Land~~	~~$6,891~~
~~Buildings and improvements~~	~~39,647~~
~~Intangible assets~~	~~7,094~~
~~Below-market intangibles~~	~~(1,289)~~
~~Deposit~~	~~(150)~~

~~Net cash paid~~	~~$52,193~~

2020.

Dispositions:

There were ~~no divestitures~~0 dispositions during the first ~~nine~~six months of ~~2016.~~2020.

Six Months Ended June 30, 2019:

Acquisitions:

There were 0 acquisitions during the first six months of 2019.

Dispositions:

There were 0 dispositions during the first six months of 2019.

(5) Summarized Financial Information of Equity Affiliates

In accordance with ~~professional standards~~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.

InDistributions received from equity method investees in the ~~Condensed Consolidated Statements~~consolidated statements of ~~Cash Flows, distributions and~~cash flows are classified based upon the nature of the distribution. Returns on investments are presented net of equity in ~~net~~ income ~~are presented net~~from unconsolidated investments as cash flows from operating activities. ~~Cumulative distributions received exceeding cumulative equity in earnings represent returns~~Returns of investments ~~and~~ are classified as cash flows from investing ~~activities in the Condensed Consolidated Statements of Cash Flows.~~activities.

At ~~September~~June 30, ~~2017,~~2020, we have non-controlling equity investments or commitments in ~~four~~5 jointly-owned LLCs/LPs which own ~~MOBs.~~MOBs (including 1 currently under construction which is scheduled to be completed in late 2020). As of ~~September~~June 30, ~~2017,~~2020, we accounted for these LLCs/LPs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities ~~and~~which we are the primary beneficiary nor do ~~not~~we have a controlling voting interest. The majority of these entities are joint-ventures between us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash ~~fundings are~~funding is typically advanced as equity or member loans. These entities maintain property insurance on the properties.

During March, 2017, Arlington Medical Properties, LLC, a formerly jointly-owned limited liability company in which we held an 85% noncontrolling ownership interest, sold the real estate assets of St. Mary’s Professional Office Building (“St. Mary’s”) as part of a series of planned tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code. A third party member owned the remaining 15% of Arlington Medical Properties LLC, which we acquired prior to the divestiture of St. Mary’s.

The following property table represents the ~~four LLCs~~five LLCs/LPs in which we own a ~~noncontrolling~~non-controlling interest (including one that is currently under construction) and were accounted for under the equity method as of ~~September~~June 30, ~~2017:~~2020:


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

(a.)	This LLC has a third-party term loan of $8.0 million, which is non-recourse to us, ~~of $8.5 million~~ outstanding as of ~~September~~June 30, ~~2017.~~2020.

(b.)	This building is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS. This ~~LLC~~LP has a third-party term loan, which is non-recourse to us, of ~~$14.3~~$13.5 million, outstanding as of ~~September~~June 30, ~~2017.~~2020.

(c.)

We have committed to invest up to $2.5 million in equity and debt financing, of which $2.1 million has been funded as of ~~September~~June 30, ~~2017.~~2020. This ~~LLC~~LP has a third-party term loan, which is non-recourse to us, of ~~$5.2~~$4.9 million, outstanding as of ~~September~~June 30, ~~2017.~~2020.

(d.)

This MOB, currently under construction, will be 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, 0ne of which has been funded as of June 30, 2020. This LP entered into a $13.1 million third-party construction loan, which is non-recourse to us and has an outstanding balance of $7.1 million as of June 30, 2020. The LP will develop, construct, own and operate the Texoma Medical Plaza II which is expected to open in late 2020.

(e.)	The LLC is the lessee with a third party lessor under a ground lease for land.

(f.)	The LPs are the lessee, or have committed to a lease, with a UHS-related party for the land related to this property.

Below are the condensed combined statements of income (unaudited) for the ~~LLCs~~four LLCs/LPs (excluding one that owns an MOB that is currently under construction) accounted for under the equity method ~~during the three~~at June 30, 2020 and nine months ended September 30, 2017 and 2016. The nine months ended September 30, 2017 include the financial results of Arlington Medical Properties, LLC, through the March 13, 2017 divestiture date. The three and nine months ended September 30, 2016, include the financial results of Arlington Medical Properties, LLC for the entire three and nine months ended September 30, 2016.2019.

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2020		2019		2020		2019
	(amounts in thousands)				(amounts in thousands)				(amounts in thousands)				(amounts in thousands)
Revenues	$	2,426	$	3,776	$	8,419	$	11,437	$	2,497	$	2,531	$	5,013	$	4,991
Operating expenses		933		1,329		3,122		4,025		1,019		994		2,047		2,006
Depreciation and amortization		483		646		1,547		1,910		447		485		889		883
Interest, net		342		636		1,241		1,928		316		322		634		644
Net income	$	668	$	1,165	$	2,509	$	3,574	$	715	$	730	$	1,443	$	1,458
Our share of net income (a.)	$	384	$	1,110	$	1,959	$	3,396
Our share of net income									$	419	$	454	$	854	$	884

~~(a.)~~

Our share of net income for the three months ended September 30, 2016 includes approximately $291,000 of interest income earned by us on an advance made to Arlington Medical Properties, LLC. This advance was repaid to us effective with the previously mentioned Arlington Medical Properties, LLC transaction during March, 2017, therefore there was no interest income earned by us on this advance during the three months ended September 30, 2017. Our share of net income for the nine months ended September 30, 2017 and 2016 includes approximately $284,000 and $880,000, respectively, of interest income earned by us on the advance made to Arlington Medical Properties, LLC.

Below are the condensed combined balance sheets (unaudited) for the ~~four~~five above-mentioned ~~LLCs~~LLCs/LPs (including one LP that currently owns an MOB under construction) that were accounted for under the equity method as of ~~September~~June 30, ~~2017 and the five LLCs (including Arlington Medical Properties, LLC, which was divested during the first quarter of 2017) that were accounted for under the equity method as of December 31, 2016:~~

September 30,
2017

December 31,
2016

(amounts in thousands)

Net property, including CIP

$
33,123

$
60,970

Other assets

3,672

4,598

Total assets

$
36,795

$
65,568

Liabilities

$
2,686

$
3,334

Mortgage notes payable, non-recourse to us

27,979

28,367

Advances payable to us

-

21,638

Equity

6,130

12,229

Total liabilities and equity

$
36,795

$
65,568

Our share of equity in and advances to LLCs reflected as:

   Investments in LLCs

$
4,695

$
13,955

   Advances to LLCs

-

21,638

Investments in and advances to LLCs before

   amounts included in accrued expenses and other liabilities

4,695

35,593

   Amounts included in accrued expenses and other liabilities

(1,790
)

(1,862
)
Our share of equity in and advances to LLCs, net

$
2,905

$
33,731

~~As of September 30, 2017,~~2020 and December 31, ~~2016,~~2019:

	June 30, 2020			December 31, 2019
	(amounts in thousands)
Net property, including construction in progress	$	37,313		$	33,207
Other assets (a.)		7,590			7,452
Total assets	$	44,903		$	40,659

Other liabilities (a.)	$	6,138		$	6,785
Mortgage notes payable, non-recourse to us		33,428			26,650
Equity		5,337			7,224
Total liabilities and equity	$	44,903		$	40,659

Investments in LLCs before amounts included in
accrued expenses and other liabilities	$	4,408		$	6,918
Amounts included in accrued expenses and other liabilities		(1,655	)		(1,856	)
Our share of equity in LLCs, net	$	2,753		$	5,062

(a.) Other assets and other liabilities as of both June 30, 2020 and December 31, 2019 includes approximately $3.7 million 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.

As of June 30, 2020, and December 31, 2019, aggregate principal amounts due on mortgage notes payable by unconsolidated ~~LLCs,~~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

9/30/2017

12/31/2016

Maturity Date
FTX MOB Phase II

$
5,234

$
5,301

October, 2017 (b.)
Grayson Properties

14,252

14,438

September, 2021
Brunswick Associates

8,493

8,628

December, 2024

$
27,979

$
28,367

	Mortgage Loan Balance (a.)
Name of LLC/LP	6/30/2020		12/31/2019		Maturity Date
FTX MOB Phase II (5.00% fixed rate mortgage loan) (b.)	$	4,852	$	4,926	October, 2020
Grayson Properties (5.034% fixed rate mortgage loan)		13,515		13,658	September, 2021
Brunswick Associates (3.64% fixed rate mortgage loan)		7,967		8,066	December, 2024
Grayson Properties II (3.70% fixed rate construction loan) (c.)		7,094		-	June, 2025
	$	33,428	$	26,650

(a.)

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

~~(b.)~~

(b.)

This loan ~~matured on October 1, 2017, and was renewed and extended~~is scheduled to mature within the next twelve months, at which time the venture intends to refinance pursuant to a ~~fixed interest rate of 5% with a revised maturity date of October 1, 2020.~~new mortgage loan.

(c.)

This construction loan has a maximum balance of $13.1 million and requires unpaid interest on the outstanding principal balance to be paid on a monthly basis through December 1, 2022. Principal and accrued interest monthly payments will commence on January 1, 2023.

Pursuant to the operating and/or partnership agreements of the ~~four~~five LLCs/LPs in which we continue to hold non-controlling ownership interests, the third-party member and/or 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

~~In August, 2016,~~Accounting for Lease Concessions Granted in Connection with the COVID-19 Outbreak

On April 8, 2020, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") held a public meeting and shortly afterwards issued a question-and-answer ("Q&A") document which was intended to provide accounting relief for lease concessions related to the COVID-19 pandemic. The accounting relief permits an entity to choose to forgo the evaluation of the enforceable rights and obligations of a lease contract, which is a requirement of Accounting Standards Codification Topic 842, Leases, as long as the total rent payments after the lease concessions are substantially the same, or less than, the total payments previously required by the lease. An entity may account for COVID-19 related lease concessions either (i) as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or (ii) as a lease modification. To the extent that a rent concession is granted as a deferral of payments, but the total lease payments are substantially the same, lessors are allowed to account for the concession as if no change had been made to the original lease contract.

Based on the Q&A, an entity is not required to account for all lease concessions related to the effects of the COVID-19 pandemic under one elected option, however, the entity is required to apply the elected option consistently to leases with similar characteristics and in similar circumstances. The COVID-19 pandemic did not start to adversely impact the economic conditions in the United States until late March 2020 and did not have a material effect on our operations or financial results during the three or six months ended June 30, 2020.

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

Reference Rate Reform

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

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU ~~No. 2016-15, Classification~~2016-13, "Financial Instruments - Credit Losses," which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of ~~Certain Cash Receipts~~financial instruments. Instruments in scope include loans, held-to-maturity debt securities, and ~~Cash Payments,~~net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which ~~adds or~~ clarifies ~~guidance~~that operating lease receivables are outside the scope of the ~~classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is~~new standard. The standard was effective for ~~annual and interim reporting periods~~us in fiscal years beginning after December 15, ~~2017, with early~~2019. The adoption ~~permitted. We are currently evaluating the impact~~ of this ~~ASU~~guidance did not have a material impact on our ~~statement of cash flows.~~consolidated financial statements.

~~In February 2016,~~(7) Lease Accounting

As Lessor:

We lease our operating properties to customers under agreements that are classified as operating leases. We recognize the ~~FASB~~ ~~issued ASU 2016-02, Leases (Topic 842), which sets out~~total minimum lease payments provided for under the ~~principles for the recognition, measurement, presentation and disclosure of~~ leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or 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. AWe 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 as our leases qualify as operating leases, we accounted for and presented rental revenue and tenant reimbursements as a single component under Lease revenue in our condensed consolidated statements of income for the three and six months ended June 30, 2020 and 2019.

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, 2020 and 2019 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 lease term. 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,
	2020		2019		2020		2019
UHS facilities:
Base rents	$	4,294	$	4,115	$	8,538	$	8,289
Bonus rents		1,417		1,352		2,797		2,746
Tenant reimbursements		270		184		527		409
Lease revenue - UHS facilities	$	5,981	$	5,651	$	11,862	$	11,444



Non-related parties:
Base rents		10,387		10,660		20,765		21,020
Tenant reimbursements		2,456		2,518		4,920		4,889
Lease revenue - Non-related parties	$	12,843	$	13,178	$	25,685	$	25,909

As Lessee:

We are the lessee ~~is also required~~with various third parties, including subsidiaries of UHS, in connection with ground leases for land at 14 of our consolidated properties. Our right-of-use land assets represent our right to ~~record a~~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 a lease liability are not recognized for ~~all~~ leases with ~~a term of greater than 12 months regardless of their classification. Leases with a~~an initial term of 12 months or less, ~~will be~~as these short-term leases are accounted for similar to ~~existing~~previous guidance for operating leases. We do not currently have any ground leases ~~today. The new standard requires lessors to account~~with an initial term of 12 months or less. As of June 30, 2020, our condensed consolidated balance sheet includes right-of-use land assets of approximately $8.9 million and ground lease liabilities of approximately $8.9 million. There were no newly leased assets for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. We are currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on our financial position or results of operations.

~~In 2014, the FASB issued ASU 2014-09,~~ ~~Revenue From Contracts With Customers~~ ~~(“ASU 2014-09”),~~ which ~~outlines~~ a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitledright-of-use asset was recorded in exchange for ~~those goods or services.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as~~a new lease liability during the sale of real estate or equipment. In 2015, the FASB provided for a one-year deferral of the effective date for ASU 2014-09, which is now effective for us beginning January 1, 2018. We expect to adopt the standard using the modified retrospective approach, which requires a cumulative-effect adjustment to equity as of the date of adoption. We do not expect this adoption to have a significant impact on our consolidated financial statements, as a substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.six months ended June 30, 2020.

In January, 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We expect that future property acquisitions will generally qualify as asset acquisitions under the standard, which permits the capitalization of acquisition costs to the underlying assets. We adopted this new guidance effective January 1, 2017. This new guidance is not expected to have a significant impact on our financial statements.

~~(7)~~(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 ~~$250~~$350 million revolving credit ~~agreement,~~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 May 24, 2016,~~In June 2020, we ~~amended our~~entered into the first amendment (the “First Amendment”) to the revolving credit agreement (“Credit Agreement”), pursuant to which, among other things, ~~increase~~an additional tranche of revolving credit commitments in the ~~borrowing capacity~~amount of $50 million, designated as the “Revolving B Facility”, was established thereby increasing the aggregate revolving credit commitment to ~~$250~~$350 million from ~~$185 million previously.~~$300 million. The ~~amended~~ Credit Agreement, as amended, which is scheduled to mature in March ~~2019, includes~~2022, provides for a revolving credit facility in an aggregate principal amount of $350 million, including a $40 million ~~sub limit~~sublimit for letters of credit and a ~~$20~~$30 million ~~sub limit~~sublimit for swingline/short-term loans. The Credit Agreement also provides ~~a one-time option~~for options to extend the maturity date for an2 additional ~~one year period, and an option to increase the total facility borrowing capacity up to an additional $50 million, subject to lender agreement.~~six month periods. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in and liens on all equity interests in certain of the Trust’s wholly-owned subsidiaries. The remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to giving effect to the First Amendment, has been designated as the “Revolving A Facility”.

Borrowings made pursuant to the ~~Credit Agreement~~Revolving A Facility will bear interest, at our option, at one, two, three, or ~~six month~~six-month LIBOR plus an applicable margin ranging from ~~1.50%~~1.10% to ~~2.00%~~1.35% or at the Base Rate plus an applicable margin ranging from ~~0.50%~~0.10% to ~~1.00%~~0.35%. The Credit Agreement defines “Base Rate” as the ~~greatest~~greater of: (a) the administrative agent’s prime rate; (b) the federal funds effective rate plus 1/2 of 1%, and; (c) one month LIBOR plus 1%. A ~~commitment~~facility fee of ~~0.20%~~0.15% to ~~0.40% (depending on our total leverage ratio)~~0.35% will be charged on the ~~average unused portion~~total commitment of the ~~revolving credit commitments.~~Revolving A Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the ~~commitment~~facility fee are based upon our ~~ratio of debt to~~ total ~~capital.~~leverage ratio. At ~~September~~June 30, ~~2017,~~2020, the applicable margin over the LIBOR rate was ~~1.625%~~1.20%, the margin over the Base Rate was ~~0.625%~~0.20%, and the ~~commitment~~facility fee was ~~0.25%~~0.20%.

Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three, or six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an applicable margin ranging from 0.85% to 1.10%. The Credit Agreement defines “Base Rate” as the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate plus 1/2 of 1% and (c) one month LIBOR plus 1%. The initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At ~~September~~June 30, ~~2017,~~2020, the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was 0.95% and the facility fee was 0.20%.

At June 30, 2020, we had ~~$176.7~~$221.3 million of outstanding borrowings and ~~$1.5~~$5.6 million of letters of credit outstanding under our Credit Agreement. We had ~~$71.8~~$123.1 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of ~~September~~June 30, ~~2017.~~2020. There are no0 compensating balance requirements. At December 31, 2019, we had $213.0 million of outstanding borrowings outstanding against our revolving credit agreement and $87.0 million of available borrowing capacity.

The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding the Trust’s ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants at ~~September~~June 30, ~~2017.~~2020 and December 31, 2019. 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, 2020			December 31, 2019
Tangible net worth	> =$125,000	$	153,292		$	167,181
Total leverage	< 60%		43.6	%		42.3	%
Secured leverage	< 30%		9.0	%		9.1	%
Unencumbered leverage	< 60%		40.2	%		38.5	%
Fixed charge coverage	> 1.50x	4.3x			4.0x

~~Covenant~~

~~September 30,~~

~~2017~~

~~Tangible net worth~~

~~> =$136,170~~

~~$191,638~~

~~Total leverage~~

~~< 60%~~

~~41.6~~

~~Secured leverage~~

~~< 30%~~

~~12.8~~

~~Unencumbered leverage~~

~~< 60%~~

~~38.1~~

~~Fixed charge coverage~~

~~> 1.50x~~

~~3.7x~~

As indicated on the following table, we have ~~twelve~~various mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of ~~September~~June 30, ~~2017, with a combined outstanding balance of $83.7 million, excluding net debt premium of $310,000 and net financing fees of $553,000~~2020 (amounts in thousands):

Facility Name	Outstanding Balance (in thousands)(a)			Interest Rate			Maturity Date
Summerlin Hospital Medical Office Building II fixed rate mortgage loan (b.)	$	10,834			5.50	%	October, 2017
Phoenix Children’s East Valley Care Center fixed rate mortgage loan (c.)		6,087			5.88	%	December, 2017
Centennial Hills Medical Office Building floating rate mortgage loan (d.)		9,830			4.48	%	January, 2018
Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan (d.)		4,153			4.48	%	February, 2018
Rosenberg Children’s Medical Plaza fixed rate mortgage loan (d.)		8,013			4.85	%	May, 2018
Vibra Hospital-Corpus Christi fixed rate mortgage loan		2,650			6.50	%	July, 2019
								Outstanding Balance (in thousands) (a.)			Interest Rate			Maturity Date
700 Shadow Lane and Goldring MOBs fixed rate mortgage loan		6,107			4.54	%	June, 2022	$	5,547			4.54	%	June, 2022
BRB Medical Office Building fixed rate mortgage loan		6,174			4.27	%	December, 2022		5,614			4.27	%	December, 2022
Desert Valley Medical Center fixed rate mortgage loan		4,980			3.62	%	January, 2023		4,587			3.62	%	January, 2023
2704 North Tenaya Way fixed rate mortgage loan		7,040			4.95	%	November, 2023		6,653			4.95	%	November, 2023
Summerlin Hospital Medical Office Building III fixed rate mortgage loan		13,199			4.03	%	April, 2024		13,158			4.03	%	April, 2024
Tuscan Professional Building fixed rate mortgage loan		4,640			5.56	%	June, 2025		3,216			5.56	%	June, 2025
Phoenix Children’s East Valley Care Center fixed rate mortgage loan									8,841			3.95	%	January, 2030
Rosenberg Children's Medical Plaza fixed rate mortgage loan									12,621			4.42	%	September, 2033
Total, excluding net debt premium and net financing fees		83,707							60,237
Less net financing fees		(553	)						(533	)
Plus net debt premium		310							167
Total mortgages notes payable, non-recourse to us, net	$	83,464						$	59,871

(a.)

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

~~(b.)~~

~~During October, 2017, upon its maturity, this $10.8 million fixed rate mortgage loan was fully repaid utilizing borrowings under our Credit Agreement.~~

~~(c.)~~

~~This loan is scheduled to mature in December, 2017, at which time we intend to refinance with a new $9.4 million, 3.95% fixed rate mortgage loan with a maturity date of December, 2029.~~

~~(d.)~~

This loan is scheduled to mature within the next twelve months, at which time we will decide whether to refinance pursuant to a new mortgage loan or repay utilizing borrowings under our Credit Agreement.

~~On July 3, 2017, upon its maturity, the $6.6 million floating rate mortgage loan on the Auburn Medical Office Building II was fully repaid utilizing borrowings under our Credit Agreement.~~

~~On June 1, 2017, upon its maturity, the $4.5 million fixed rate mortgage loan on the Medical Center of Western Connecticut was fully repaid utilizing borrowings under our Credit Agreement.~~

~~On April 3, 2017, upon its maturity, the $20.2 million fixed rate mortgage loan on the Peace Health Medical Clinic was fully repaid utilizing borrowings under our Credit Agreement.~~

On March 31, 2017, upon its maturity, a $10.3 million floating rate mortgage loan on Summerlin Hospital Medical Office Building III was fully repaid. In April, 2017, we refinanced this property with a $13.2 million fixed rate mortgage, as shown above.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages ~~have~~outstanding as of June 30, 2020 had a combined fair value of approximately ~~$85.0~~$62.4 million. At December 31, 2019, 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 was $61.1 million and had a combined fair value of approximately $63.1 million. The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair value hierarchy as ~~of September 30, 2017.~~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.

~~At December 31, 2016,~~Financial Instruments:

In March 2020, we ~~had fifteen mortgages, all~~entered into an interest rate swap agreement on a total notional amount of ~~which were non-recourse~~$55 million with a fixed interest rate of a 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, ~~included in our consolidated balance sheet.~~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 a 1.4975% that we designated as a cash flow hedge. The ~~combined outstanding balance~~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 ~~these fifteen mortgages was $114.2 million (excluding net debt premium of $436,000~~1.4975% and ~~net financing fees of $381,000), and had a combined fair value of approximately $115.7 million.~~

~~Financial Instruments:~~one-month LIBOR.

During the third quarter of ~~2013,~~2019, we entered into an interest rate ~~cap~~swap agreement on a total notional amount of ~~$10~~$50 million with a fixed interest rate of a 1.144% that we designated as a cash flow hedge. The interest rate swap became effective on September 16, 2019 and is scheduled to mature on September 16, 2024. If the one-month LIBOR is above 1.144%, the counterparty pays us, and if

the one-month LIBOR is less than 1.144%, we pay the counterparty, the difference between the fixed rate of 1.144% and one-month LIBOR.

We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based on quotes from third parties. We consider those inputs to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging activities. At June 30, 2020, the fair value of our interest rate swaps was a net liability of $4.9 million which is included in accrued expenses and other liabilities on the accompanying condensed consolidated balance sheet. During the second quarter of 2020, we paid or accrued approximately $182,000 in net payments made to the counterparty by us, adjusted for the previous quarter accrual, pursuant to the terms of the swaps (consisting of approximately $201,000 in payments, adjusted for the previous quarter accrual, or accruals made to the counterparty by us, offset by approximately $19,000 paid to us by the counterparty). During the first six months of 2020, we paid or accrued approximately $131,000 in net payments made to the counterparty by us, adjusted for the previous quarter accrual, pursuant to the terms of the swaps (consisting of approximately $222,000 in payments, adjusted for the previous quarter accrual, or accruals made to the counterparty by us, offset by approximately $91,000 of payments paid to us by the counterparty). From inception of the swap agreements through June 30, 2020 we paid or accrued approximately $23,000 in net payments made to the counterparty by us pursuant to the terms of the swap (consisting of approximately $199,000 in payments or accruals made to us by the counterparty, offset by approximately $222,000 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.

During the third quarter of 2016, we entered into an additional interest rate cap agreement on a total notional amount of $30 million whereby we paid a premium of ~~$136,000. During the first quarter of 2014, we entered into two additional~~$55,000. This interest rate cap ~~agreements on a total notional amount of $20 million whereby we paid premiums of $134,500.~~became effective in October, 2016 and expired in March, 2019. In exchange for the premium ~~payments,~~payment, the counterparties agreed to pay us the difference between ~~1.50%~~1.5% and one-month LIBOR if one-month LIBOR rises above ~~1.50%~~1.5% during the term of the cap. From inception through the ~~January, 2017~~March, 2019 expiration, nowe received approximately $205,000 in payments ~~were~~ made to us by the counterparties ($61,000 of which was received during the first three months of 2019 and $144,000 of which was received during 2018) pursuant to the terms of ~~these caps.~~ this cap.

During the second quarter of 2016, we entered into an interest rate cap on the total notional amount of $30 million whereby we paid a premium of $115,000. This interest rate cap became effective in January, 2017 and expired in March 2019. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.50% and one-month LIBOR if one-month LIBOR rises above 1.50% during the term of the cap. ~~This interest rate cap became effective~~From inception through the March, 2019 expiration, we received approximately $205,000 in ~~January, 2017, coinciding with the expiration of the above-mentioned interest rate caps and expires in March, 2019.~~

During the third quarter of 2016, we entered into an additional interest rate cap agreement on a total notional amount of $30 million whereby we paid a premium of $55,000. In exchange for the premium payment,payments made to us by the counterparties ~~agreed to pay us the difference between 1.5% and one-month LIBOR if one-month LIBOR rises above 1.5%~~($61,000 of which was received during the ~~term~~first three months of 2019 and $144,000 of which was received during 2018) pursuant to the terms of this cap. ~~This interest rate cap became effective in October, 2016 and expires in March, 2019.~~

~~(8)~~(9) Segment Reporting

Our primary business is investing in and leasing healthcare and human service facilities through direct ownership or through joint ventures, which aggregate into a single reportable segment. We actively manage our portfolio of healthcare and human service facilities and may from time to time make decisions to sell lower performing properties not meeting our long-term investment objectives. The proceeds of sales are typically reinvested in new developments or acquisitions, which we believe will meet our planned rate of return. It is our intent that all healthcare and human service facilities will be owned or developed for investment purposes. Our revenue and net income are generated from the operation of our investment portfolio.

Our portfolio is located throughout the United States, however, we do not distinguish or group our operations on a geographical basis for purposes of allocating resources or measuring performance. We review operating and financial data for each property on an individual basis; therefore, we define an operating segment as our individual properties. Individual properties have been aggregated

into ~~one~~1 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.

~~(9) Impact of Hurricane Harvey~~

~~In late August, 2017, five of our medical office buildings listed below located in~~ No individual property meets the ~~Houston, Texas area incurred extensive water damage as a result of Hurricane Harvey. Since the hurricane, each of these properties remain temporarily closed and non-operational as we continue~~requirements necessary to ~~assess the damage before restoring the properties to an operational condition. Although we can provide no assurance on the estimated re-opening dates, it is expected that the buildings will~~ be closed through the remainder of 2017 and into the first half of 2018. In the aggregate, these properties comprised approximately 2% of our consolidated revenues during the six months ended June 30, 2017.

As discussed below, we believe we are entitled to insurance recovery proceeds for substantially all of the costs incurred related to the remediation, repair and reconstruction of each of these properties, subject to certain deductibles and other limitations. In addition, during the period that these properties are non-operational, we believe we are entitled to business interruption insurance recoveries for the lost income related to each of these properties, subject to certain deductibles and other limitations.

~~Properties damaged and closed from Hurricane Harvey:~~

~~Cypresswood Professional Center –~~ ~~located in Spring, Texas and consisting of two MOBs.~~

~~Professional Buildings at King’s Crossing –~~ ~~located in Kingwood, Texas and consisting of two MOBs.~~

~~Kelsey-Seybold Clinic at King’s Crossing –~~ ~~located in Kingwood, Texas and consisting of one MOB.~~

~~Hurricane related expenses and recoveries:~~

At the time of the hurricane, we maintained insurance policies with a commercial insurance carrier providing for property damage coverage, subject to certain deductibles and other limitations, of up to $20 million in the aggregate applicable to the impacted properties and up to $50 million in the aggregate for business interruption coverage pursuant to a shared limit policy. Additionally, we have insurance coverage under the National Flood Insurance Program providing for property damage coverage of up to $500,000 per each of the 5 buildings, subject to certain deductibles and other limitations. When all property insurance coverage and deductibles applicable to the above-mentioned hurricane damaged buildings are considered we believe we are entitled to recovery of substantially all hurricane related expenses and reconstruction costs, less an aggregate net deductible of $25,000. In addition, pursuant to the business interruption policy, we believe we are entitled to substantially all lost income at these properties resulting from the hurricane, less an aggregate deductible of $100,000. However, we can provide no assurance that we will ultimately collect, after satisfaction of the applicable deductibles, substantially all of the hurricane related expenses and reconstruction costs and the lost income resulting from the related interruption of business at the impacted properties.

Included in our financial results for the three and nine-month periods ended September 30, 2017 are hurricane related expenses of approximately $3.4 million consisting of $2.2 million related to property damage and $1.2 million related to remediation and demolition expenses. Also included in our financial results for the three and nine-month periods ended September 30, 2017 are hurricane related insurance recoveries of approximately $3.4 million ($1.5 million of which was received in September, 2017), reflecting probable recovery of our preliminary estimate of hurricane related expenses which we believe are less than the total commercial insurance proceeds due to us in connection with property damage and related expenses. As of September 30, 2017, our financial statements do not include any business interruption insurance recoveries, however, we expect that business interruption insurance recoveries will be recognized in future periods when recovery proceeds are probable and/or insurance carrier notifications are received.

The hurricane related expenses and insurance recoveries recorded to date are based upon our preliminary damage assessments of the real property at each of the above-mentioned properties. However, due to the nature and extent of the damage to the each property and the surrounding communities, a complete and final assessment to determine the exact nature and extent of the losses at each property has not yet been completed. We are therefore unable to assess the ultimate damage sustained at each property, the ultimate repair cost of the damaged property or the amount of total insurance recoveries we may ultimately receive. Although we believe that our ultimate insurance recoveries for claims related to hurricane losses will exceed the combined net book value of the damaged property and the incurred hurricane related expenses, the timing and amount of such proceeds cannot be determined at this time, since it will be based upon factors such as ultimate replacement costs of damaged assets and the ultimate value of the business interruption claims. Therefore, it is likely that we will record additional hurricane related expenses and hurricane insurance recoveries in future periods related to Hurricane Harvey, which could be material. its own segment.

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, ~~rehabilitation~~behavioral health care hospitals, ~~sub-acute facilities, medical office buildings (“MOBs”),~~specialty hospitals, free-standing emergency departments, childcare centers and ~~childcare centers.~~medical/office buildings. As of ~~October~~July 31, ~~2017,~~2020, we have ~~sixty-eight~~seventy-one real estate investments or commitments located in twenty states consisting of:

~~six hospital facilities consisting of three acute care, one rehabilitation and two sub-acute;~~

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seven hospital facilities consisting of three acute care, one behavioral health care (currently under construction), one rehabilitation (currently vacant) and two sub-acute (one of which is currently vacant);

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

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

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

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fifty-six medical/office buildings, including five owned by unconsolidated limited liability companies (“LLCs”)/limited liability partnerships (“LPs”), one of which is currently under construction, and;

~~four pre-school and childcare centers.~~

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four preschool and childcare centers.

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 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. In some cases, you can identify those so-called “forward-looking statements” by 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. 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 ~~outlined~~incorporated by reference in Item 1A Risk Factors and described elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 in Item 1A Risk Factors and in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward Looking Statements. 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:

a substantial portion of our revenues are dependent upon one operator, Universal Health Services, Inc. (“UHS”). We cannot assure you that subsidiaries of UHS will renew the leases on our three acute care hospitals (which are scheduled to expire in December, 2021) and two FEDs at existing lease rates or fair market value lease rates. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities and FEDs upon expiration of the lease terms, 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;

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Future operations and financial results of our tenants, and in turn ours, will likely be materially impacted by numerous factors and future developments related to COVID-19. Such factors and developments include, but are not limited to, the length of time and severity of the spread of the pandemic; the volume of cancelled or rescheduled elective procedures and the volume of COVID-19 patients treated by the operators of our hospitals and other healthcare facilities; measures our tenants are taking to respond to the COVID-19 pandemic; the impact of government and administrative regulation, including travel bans and restrictions, shelter-in-place or stay-at-home orders, quarantines, the promotion of social distancing, business shutdowns and limitations on business activity; changes in patient volumes at our tenants’ hospitals and other healthcare facilities due to patients’ general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system; the impact of stimulus on the health care industry and our tenants; changes in patient volumes and payer mix caused by deteriorating macroeconomic conditions (including increases in uninsured and underinsured patients as the result of business closings and layoffs); potential disruptions to clinical staffing and shortages and disruptions related to supplies required for our tenants’ employees and patients, including equipment, pharmaceuticals and medical supplies, particularly personal protective equipment, or PPE; potential increases to expenses incurred by our tenants related to staffing, supply 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. There may be significant declines in future bonus rental revenue earned on our hospital properties leased to subsidiaries of UHS to the extent that each hospital continues to experience significant decline in patient volumes and revenues. These factors may result in the inability or unwillingness on the part of some of our tenants to make timely payment of their rent to us at current levels or to seek to amend or terminate their leases which,

in 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;

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.

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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. We are not able to fully quantify the impact that these factors will have on our financial results during 2020, but developments related to the COVID-19 pandemic are likely to have a material adverse impact on our future financial results.

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;

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

~~a 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;~~

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A substantial portion of our revenues are dependent upon one operator, UHS, which comprised approximately 32% and 30% of our consolidated revenues for the three-month periods ended June 30, 2020 and 2019, respectively, and approximately 32% and 31% if our consolidated revenues for the six-month periods ended June 30, 2020 and 2019, respectively. We cannot assure you that subsidiaries of UHS will renew the leases on our three acute care hospitals (two of which are scheduled to expire in December, 2021 and one of which is scheduled to expire in December, 2026) and two FEDs at existing lease rates or fair market value lease rates. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital facilities and FEDs upon expiration of the lease terms, 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.

~~lost revenues resulting from the exercise of purchase options, lease expirations and renewals, loan repayments and other restructuring;~~

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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.

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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.

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

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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.

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Lost revenues resulting from the exercise of purchase options, lease expirations and renewals and other restructuring (see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Hospital Leases, for additional disclosure related to lease expirations and subsequent vacancies that occurred during the second and third quarters of 2019 on two hospital facilities that, on a combined basis, comprised approximately 2% of our consolidated revenues during each of the years ended December 31, 2018 and 2017).

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

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~~the~~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 ~~pending~~ legal actions, purported shareholder class actions and shareholder derivative cases, governmental investigations and regulatory ~~actions.~~actions and the effects of adverse publicity relating to such matters. Since UHS comprised approximately ~~31%~~32% and ~~33%~~30% of our consolidated revenues ~~for~~during the ~~nine-month period~~three-month periods ended ~~September~~June 30, ~~2017~~2020 and 2019, respectively, and 32% and 31% of our consolidated revenues during the ~~year~~six-month periods ended ~~December 31, 2016,~~June 30, 2020 and 2019, 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;~~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;

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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 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;

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The potential unfavorable impact on our business of the deterioration in national, regional and local economic and business conditions, including a further worsening of credit and/or capital market conditions, which may adversely affect our ability to obtain capital which may be required to fund the future growth of our business and refinance existing debt with near term maturities.

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

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

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

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

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;

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

~~the impact of property values and results of operations of severe weather conditions, including the effects of Hurricane Harvey on several of our properties in Texas;~~

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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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Government regulations, including changes in the reimbursement levels under the Medicare and Medicaid programs.

the issues facing the health care industry that affect the operators of our facilities, including UHS, such as: changes in, or the ability to comply with, existing laws and government regulations; unfavorable changes in the levels and terms of reimbursement by third party payors or government programs, including Medicare (including, but not limited to, the potential unfavorable impact of future reductions to Medicare reimbursements resulting from the Budget Control Act of 2011, as discussed 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;

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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.

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Pending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law 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. The CARES Act suspended payment reductions between May 1 and December 31, 2020, in exchange for extended cuts through 2030. 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.

in August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. The 2011 Act 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. The 2011 Act provides for new spending on program integrity initiatives intended to reduce fraud and abuse under the Medicare program. 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 2011 Act. We cannot predict whether Congress will restructure the implemented Medicare payment reductions or what federal other deficit reduction initiatives may be proposed by Congress going forward. We also cannot predict the effect these enactments will have on operators (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

•

~~in March, 2010,~~failing to maintain health coverage that was part of the ~~Health Care and Education Reconciliation Act of 2010 and the~~original Patient Protection and Affordable Care Act (the “ACA”) ~~were enacted into law~~ and ~~created significant changes~~Healthcare and Education Reconciliation Act of 2010 (collectively referred to as the “Legislation”). President Trump has already taken executive actions: (i) requiring all federal agencies with authorities and responsibilities under the Legislation to “exercise all authority and discretion available to them to waiver, defer, grant exemptions from, or delay” parts of the Legislation that place “unwarranted economic and regulatory burdens” on states, individuals or health care providers; (ii) the issuance of a final rule in June, 2018 by the Department of Labor to enable the formation of association health plans that would be exempt from certain Legislation requirements such as the provision of essential health benefits; (iii) the issuance of a final rule in August, 2018 by the Department of Labor, Treasury, and Health and Human Services to expand the availability of short-term, limited duration health insurance, ~~coverage~~(iv) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of-pocket expenses for ~~U.S. citizens as well as material revisions to~~health plan enrollees at or below 250 percent of the federal ~~Medicare~~poverty level; (v) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and ~~state Medicaid programs.~~small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans; (vi) the issuance of a final rule in June, 2019 by the Departments of Labor, Treasury, and Health and Human Services that would incentivize the use of health reimbursement arrangements by employers to permit employees to purchase health insurance in the individual market, and; (vii) directing the issuance of federal rulemaking by executive agencies to increase transparency of healthcare price and quality information. The ~~two combined primary goals of~~uncertainty resulting from these ~~acts are~~Executive Branch policies has led to ~~provide for increased access~~reduced Exchange enrollment in 2018 and 2019 and is expected to ~~coverage for healthcare~~further worsen the individual and ~~to reduce healthcare-related expenses. Medicare, Medicaid~~small group market risk pools in future years. It is also anticipated that these and ~~other health care industry changes are scheduled to be implemented at various times during this decade. Initiatives~~future policies may create additional cost and reimbursement pressures on hospitals, including ours. In addition, while attempts to repeal the ~~ACA, in whole or in part, to delay elements~~entirety of ~~implementation or funding, and to offer amendments or supplements to modify its provisions, have been persistent. The ultimate outcomes of legislative attempts to repeal or amend~~ the ACA have not been successful to date, a key provision of the ACA was repealed as part of the Tax Cuts and ~~legal challenges~~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 stayed and has been appealed. On December 18, 2019, the 5^th Circuit Court of Appeals voted 2-1 to strike down the ACA individual mandate as unconstitutional and sent the case back to the U.S. District Court in Texas to determine which ACA provisions should be stricken with the mandate. On March 2, 2020, the U.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by the State of California and the United States House of Representatives, asking the Supreme Court to review the ruling by the Fifth Circuit Court of Appeals. Oral argument is expected in late 2020, and a ruling is not expected until after the November 2020 election. We are unable to predict the final outcome of this matter which has caused greater uncertainty regarding the future status of the ACA. If all or any parts of the ACA are ~~unknown. Recent Congressional~~ultimately found to be unconstitutional, it could have a material adverse effect on the business, financial condition and ~~Presidential election~~ results ~~created a political environment in which there have been repeated attempts to repeal or replace substantial portions~~of operations of the ~~ACA;~~ operators of our properties, and, thus, our business.

in May, 2017, the U.S. House of Representatives voted to adopt legislation ( the “AHCA”) to replace portions of the ACA. The legislation featured provisions that would have, in material part (i) eliminated the individual and large employer mandates to obtain or provide health insurance coverage, respectively; (ii) permitted insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase coverage; (iii) provided tax credits towards the purchase of health insurance, with a phase-out of tax credits according to income level; (iv) expanded health savings accounts; (v) imposed a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transitioned federal funding to a block grant; and (vi) permitted states to seek a waiver of certain federal requirements that would allow such states to define essential health benefits differently from federal standards and that would have allowed certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. Between June and September, 2017, the U.S. Senate evaluated various forms of proposed legislation substantially similar to the AHCA. The most recently evaluated healthcare bill would have provided block grants to states to use for health care, repealed the expansion of Medicaid under the ACA, and eliminated the tax credits that assist people purchasing insurance on the ACA exchanges. As of the date of this report, the Senate has not passed any of the various proposed forms of healthcare legislation. It is uncertain when or if any other bills similar to the AHCA or other bills amending or repealing all of portions of the ACA will be enacted. Effective September 30, 2017, the Senate lost the ability to adopt healthcare legislation by simple majority under reconciliation without another vote approving that process. However, Congress may seek to include legislative provisions similar to those adopted in the AHCA and as otherwise described herein in the fiscal year 2018 budget resolution or other omnibus legislation;

on October 11, 2017 President Trump signed an executive order directing the formation of association health plans that would be exempt from certain ACA requirements such as the essential health benefits mandate. The executive order also: (i) provides for expanded access to short-term health plans that are limited under the ACA; (ii) seeks to expand how workers use employer-funded accounts to purchase their own policies; and (iii) calls for an analysis of ways to limit consolidation within the insurance and health care industries;

additionally, on October 12, 2017, President Trump announced that ACA cost-sharing reduction payments will no longer be made to insurers. Cost sharing reduction payments help offset deductibles and other out-of-pocket expenses for exchange health insurance coverage for approximately seven million individuals earning up to 250 percent of the federal poverty level. The Congressional Budget Office previously reported that if cost sharing reduction payments were to end, premiums for silver-level plans would increase by 20 percent in 2018. Eighteen states and the District of Columbia filed suit in the U.S. District Court for the Northern District of California challenging the Administration’s action and asking the court to issue a preliminary injunction, which was subsequently denied by the court, mandating that the Administration continue to make cost sharing reduction payments. The Senate Committee on Health, Education, Labor, and Pensions announced a bipartisan proposal intended to continue cost sharing reduction payments, but no such legislation has been passed to date;

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 our operators from other REITs;~~

the operators of our facilities face competition from other health care providers, including physician owned facilities and other competing facilities, including certain facilities operated by UHS but the real property of which is not owned by us. Such competition is experienced in markets including, but not limited to, McAllen, Texas, the site of our McAllen Medical Center, a 370-bed acute care hospital, and Riverside County, California, the site of our Southwest Healthcare System-Inland Valley Campus, a 132-bed acute care hospital;

•

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.

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

•

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

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

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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;

•

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.

in November 2017, the Tax Cuts and Jobs Act was introduced in the U.S. House of Representatives which, if enacted, would make significant changes to income taxation of individuals, corporations and estates. At this time, we are unable to predict whether any of these proposed tax changes will be enacted or, if enacted, whether they will have a material adverse impact on our financial condition and results of operations;

•

Our ownership interest in five LLCs/LPs in which we hold non-controlling equity interests. In addition, pursuant to the operating and/or partnership agreements of the four LLCs/LPs in which we continue to hold non-controlling ownership interests, the third-party member and the Trust, at any time, potentially subject to certain conditions, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell

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;

~~fluctuations in the value of our common stock, and;~~

the entire ownership interest of the Offering Member to the Non-Offering Member (“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 to 90 days of the acceptance by the Non-Offering Member.

•

Fluctuations in the value of our common stock.

~~other factors referenced herein or in our other filings with the Securities and Exchange Commission.~~

•

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

We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following:

~~Revenue Recognition:~~ Our revenues consist primarily of rentals received from tenants, which are comprised of minimum rent (base rentals), bonus rentals and reimbursements from tenants for their pro-rata share of expenses such as common area maintenance costs, real estate taxes and utilities.

The minimum rent for our six hospital facilities, which is paid monthly, is fixed over the term of the respective leases which are scheduled to expire in 2019 (2 hospitals) or 2021 (4 hospitals). In addition, for the three hospital facilities leased to subsidiaries of UHS, bonus rents are paid on a quarterly basis, based upon a computation that compares the hospitals’ current quarter net revenues to the corresponding quarter in the base year. Rental income recorded by our other properties, including our consolidated and unconsolidated MOBs, relating to leases in excess of one year in length, is recognized using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rent adjustments is dependent on many factors including the nature and amount of any rental concessions granted to new tenants, stipulated rent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-line adjustments to rental revenue may vary from period-to-period. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred.

~~Real Estate Investments:~~ Land, buildings and capital improvements are recorded at cost and stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations or replacements, which improve or extend the life of an asset, are capitalized and depreciated over their estimated useful lives.

Purchase Accounting for Acquisition of Investments in Real Estate: Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with current accounting guidance,, we account for our property acquisitions as acquisitions of assets, which requires the capitalization of acquisition costs to the underlying assets and prohibits the recognition of goodwill or bargain purchase gains. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above market rate assumed loans, or loan discounts, in the case of below market assumed loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacement costs adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are also determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property based on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and unreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The capitalized above-market lease values are amortized as a reduction of rental

income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases.

Asset Impairment:We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market price of the property, a change in the expected holding period for the property, a significant adverse change in how the property is being used or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of the property, or a history of operating or cash flow losses of the property. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition and compare that estimate to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. ~~These losses have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.~~ The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether the carrying value of a property is recoverable, our strategy of holding properties over the long-term directly decreases the likelihood of their carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test, the affected assets must be reduced to their fair value.

We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs that a market participant would use based on the highest and best use of the asset, which is similar to the income approach that is commonly utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside broker opinions of value or third party appraisals.

In considering whether to classify a property as held for sale, we consider factors such as whether management has committed to a plan to sell the property, the property is available for immediate sale in its present condition for a price that is reasonable in relation to its current value, the sale of the property is probable, and actions required for management to complete the plan indicate that it is unlikely that any significant changes will made to the plan. If all the criteria are met, we classify the property as held for sale. Upon being classified as held for sale, depreciation and amortization related to the property ceases and it is recorded at the lower of its carrying amount or fair value less cost to sell. The assets and related liabilities of the property are classified separately on the consolidated balance sheets for the most recent reporting period. Only those assets held for sale that constitute a strategic shift or that will have a major effect on our operations are classified as discontinued operations.

An other than temporary impairment of an investment in an unconsolidated LLC is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flow. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income.

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

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

Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording of provision for investment losses.

Results of Operations

During the three-month period ended ~~September~~June 30, ~~2017,~~2020, net income ~~increased to $4.0~~was $4.7 million, as compared to ~~$3.8~~$4.3 million during the ~~third~~second quarter of ~~2016.~~2019. The ~~$142,000~~$439,000 increase was ~~primarily~~ attributable to:

a $157,000 decrease due to increased interest expense resulting primarily from an increase in our average cost of funds under our revolving credit agreement, partially offset by the repayment of three third-party mortgages (during the second and third quarters of 2017) utilizing funds borrowed under our revolving credit agreement which bear interest at a comparatively lower interest rate;
•
$694,000 decrease resulting from lease expirations on two hospital facilities located in Corpus Christi, Texas, and Evansville, Indiana, that occurred on June 1, 2019 and September 30, 2019, respectively (each facility has remained vacant since the respective date of lease expiration);

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$765,000 increase resulting from a decrease in interest expense, primarily due to a decrease in our average cost of borrowings under our revolving credit agreement, partially offset by an increase in our average outstanding borrowings, and;

~~a $726,000 decrease in equity in income of LLCs, due primarily to the March, 2017 divestiture of St. Mary’s;~~

~~a $350,000 increase due to a decrease in transaction cost expense, and;~~

~~$675,000 of other combined net increases due to the increased net income generated at various properties, including the properties acquired during 2016.~~

•

$368,000 of other combined net increases.

During the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2020, net income ~~increased to $39.6~~was $9.3 million, as compared to ~~$12.8~~$8.5 million during the ~~first nine months~~six-month period of ~~2016.~~2019. The ~~$26.8 million~~$781,000 increase was ~~primarily~~ attributable to:

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$1.25 million decrease resulting from lease expirations on two hospital facilities located in Corpus Christi, Texas, and Evansville, Indiana, that occurred on June 1, 2019 and September 30, 2019, respectively (each facility has remained vacant since the respective date of lease expiration);

•

$250,000 decrease resulting from a gain on the sale of land recorded during the first six months of 2019;

•

$373,000 increase resulting from a decrease in depreciation and amortization expense;

•

$1.1 million increase resulting from a decrease in interest expense, primarily due to a decrease in our average cost of borrowings under our revolving credit agreement, partially offset by an increase in our average outstanding borrowings, and;

•

$763,000 of other combined net increases.

~~a $27.2 million increase due~~Total revenues decreased $45,000, or 0.2% during the three-month period ended June 30, 2020, as compared to the ~~gain on Arlington transaction recorded~~comparable quarter of 2019, and increased $50,000, or 0.1% during the ~~first quarter of 2017 (in connection with the March, 2017 Arlington Medical Properties, LLC transaction,~~six-month period ended June 30, 2020, as ~~discussed herein);~~

an $885,000 decrease due to increased interest expense resulting primarily from an increase in our average cost of funds under our revolving credit agreement, partially offset by the repayment of three third-party mortgages (during the second and third quarters of 2017) utilizing funds borrowed under our revolving credit agreement which bear interest at a comparatively lower interest rate;

~~a $370,000 increase due to a decrease in transaction cost expense, and;~~

~~$105,000 of other combined net increases due~~compared to the ~~increased net income generated at various properties, including the properties acquired during 2016.~~comparable period of 2019.

Included in our other operating expenses are expenses related to the consolidated medical office buildings and two vacant hospital facilities (as discussed herein), which totaled ~~$4.4~~$4.7 million and ~~$4.1~~$4.5 million for the three-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and ~~$13.0~~$9.4 million and ~~$12.1~~$9.0 million for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. ~~The increase in operating expenses during the three and nine-month periods ended September 30, 2017 as compared to the prior year periods is partially due to new acquisitions as discussed above.~~ 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 ~~tenant reimbursement~~lease revenue in our condensed consolidated statements of income. Included in our operating expenses for the three and six months ended June 30, 2020, is $183,000 and $381,000, respectively, of aggregate operating expenses related to the two above-mentioned vacant hospital facilities located in Corpus Christi, Texas, and Evansville, Indiana.

Funds from operations (“FFO”) is a widely recognized measure of performance for ~~REITs.~~Real Estate Investment Trusts (“REITs”). We believe that FFO and FFO per diluted share, ~~and adjusted funds from operations (“AFFO”) and AFFO per diluted share,~~ which are non-GAAP financial measures, ~~(“GAAP” is Generally Accepted Accounting Principles in the United States of America),~~ are helpful to our investors as measures of our operating performance. We compute FFO, as reflected ~~below,~~on the attached Supplemental Schedules, in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO adjusts for the effects of gains, such as gains on transactions ~~that occurred~~ during the periods presented. ~~AFFO was also computed for~~To the ~~three~~extent a REIT recognizes a gain or loss with respect to the sale of incidental assets, such as the sale of land peripheral to operating properties, the REIT has the option to exclude or include such gains and ~~nine-month periods ended September 30, 2017, as discussed herein, since we believe it is helpful~~losses in the calculation of FFO. We have opted to exclude gains and losses from sales of incidental assets in our ~~investors since it adjusts for the hurricane accounting impact on our financial statements.~~calculation of FFO. FFO ~~and AFFO do~~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 ~~and AFFO~~ 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 ~~and AFFO~~ for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Net income

$
3,960

$
3,818

$
39,555

$
12,769

Depreciation and amortization expense on consolidated
   investments

6,189

5,781

18,378

16,549

Depreciation and amortization expense on unconsolidated
   affiliates

302

463

981

1,378

Gain on Arlington transaction

-

-

(27,196
)

-

Funds From Operations

$
10,451

$
10,062

$
31,718

$
30,696

Hurricane related expenses

3,398

-

3,398

-

Hurricane insurance recoveries

(3,398
)

-

(3,398
)

-

Adjusted Funds From Operations

$
10,451

$
10,062

$
31,718

$
30,696

Weighted average number of shares and equivalents
   outstanding - Diluted

13,621

13,575

13,595

13,431

Funds From Operations per diluted share

$
0.77

$
0.74

$
2.33

$
2.29

Adjusted Funds From Operations per diluted share

$
0.77

$
0.74

$
2.33

$
2.29

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	4,700	$	4,261	$	9,254	$	8,473
Depreciation and amortization expense on consolidated investments		6,381		6,426		12,761		13,134
Depreciation and amortization expense on unconsolidated affiliates		293		291		579		574
Gain on sale of land		-		-		-		(250	)
Funds From Operations	$	11,374	$	10,978	$	22,594	$	21,931
Weighted average number of shares outstanding - Basic		13,739		13,730		13,737		13,729
Weighted average number of shares outstanding - Diluted		13,761		13,749		13,759		13,748
Funds From Operations per diluted share	$	0.83	$	0.80	$	1.64	$	1.60

Our FFO ~~and AFFO~~ increased ~~by $389,000,~~$396,000, or $.03 per diluted share, during the ~~three-month period ended~~second quarter of 2020, as compared to the second quarter of 2019. The net increase was primarily due to: (i) an unfavorable impact of $694,000, or $.05 per diluted share, related to the above-mentioned vacancies at two of our hospitals as a result of lease expirations on June 1, 2019 and September 30, ~~2017, and $1.0 million,~~2019 (excluding the related interest expense impact); (ii) a favorable impact of $765,000, or $.06 per diluted share, resulting from a decrease in interest expense, resulting primarily from a decrease in our average cost of borrowings pursuant to our revolving credit agreement, partially offset by an increase in our average outstanding borrowings, and; (iii) other combined net increases of $325,000, or $.02 per diluted share.

Our FFO increased $663,000, or $.04 per diluted share, during the ~~nine-month~~first six months of 2020, as compared to the first six months of 2019, primarily due to: (i) an unfavorable impact of $1.25 million, or $.09 per diluted share, related to the above-mentioned vacancies at two of our hospitals as a result of lease expirations on June 1, 2019 and September 30, 2019 (excluding the related interest expense impact); (ii) a favorable impact of $1.1 million, or $.08 per diluted share, resulting from a decrease in interest expense, resulting primarily from a decrease in our average cost of borrowings pursuant to our revolving credit agreement, partially offset by an increase in our average outstanding borrowings, and; (iii) other combined net increases of $768,000, or $.05 per diluted share.

Other Operating Results

Interest Expense:

As reflected in the schedule below, interest expense was $2.0 million and $2.8 million during the three-month periods ended June 30, 2020 and 2019, respectively and $4.3 million and $5.5 million during the six-month periods ended June 30, 2020 and 2019, respectively (amounts in thousands):


	Three Months Ended June 30, 2020				Three Months Ended June 30, 2019			Six Months Ended June 30, 2020				Six Months Ended June 30, 2019
Revolving credit agreement	$	1,075			$	1,962		$	2,698			$	3,905
Mortgage interest		654				674			1,312				1,392
Interest rate swaps/caps expense/(income), net		182		(b.)		-			131		(b.)		(122	)	(a.)
Amortization of financing fees		172				157			329				323
Amortization of fair value of debt		(13	)			(13	)		(26	)			(26	)
Capitalized interest on major projects		(61	)			-			(126	)			-
Other interest		7				1			7				1
Interest expense, net	$	2,016			$	2,781		$	4,325			$	5,473

(a.)

Represents interest paid to us by the counterparties pursuant to two interest rate caps with a combined notional amount of $60 million, which expired in March, 2019.

(b.)

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

Interest expense decreased by approximately $765,000 during the three-month period ended ~~September~~June 30, ~~2017,~~2020, as compared to the comparable ~~periods~~period of ~~2016. The $389,000 and $1.0 million increases~~2019, due primarily to: (i) a $887,000 decrease in ~~FFO and AFFO~~the interest expense on our revolving credit agreement resulting from a decrease in our average cost of borrowings pursuant to our revolving credit agreement (1.7% during the three ~~and nine-month periods~~months ended ~~September~~June 30, ~~2017, respectively,~~2020 as compared to 3.7% in the comparable quarter of 2019), partially offset by an increase in our average outstanding borrowings ($215.5 million during the three months ended June 30, 2020 as compared to $195.9 million in the

comparable 2019 quarter); (ii) a $182,000 net increase in interest rate swap expense, resulting from payments made by us to the counterparties pursuant to the terms of the swap agreements (combined notional amount of $140 million) during the second quarter of 2020; (iii) a $61,000 decrease in interest expense related to capitalized interest on major projects, and; (iv) $1,000 of other combined net increases in interest expense.

Interest expense decreased by approximately $1.1 million during the six-month period ended June 30, 2020, as compared to the ~~three and nine-month periods ended September 30, 2016, were~~comparable period of 2019, due primarily ~~attributable~~ to: (i) a ~~net increase~~$1.2 million decrease in the ~~income (before depreciation and amortization expense) generated at~~interest expense on our ~~properties, including the properties acquired at various times during 2016 and 2017; (ii)~~revolving credit agreement resulting from a decrease in ~~transaction~~our average cost ~~expense, as mentioned above, offset by; (iii) an unfavorable impact~~ of ~~approximately $140,000, or $.01 per diluted share, as a result of the temporary closure of the hurricane impacted properties, as discussed below.~~

~~Hurricane Harvey Impact~~

~~In late August, 2017, five of~~borrowings pursuant to our medical office buildings listed below located in the Houston, Texas area incurred extensive water damage as a result of Hurricane Harvey. Since the hurricane, each of these properties remain temporarily closed and non-operational as we continue to assess the damage before restoring the properties to an operational condition. Although we can provide no assurance

on the estimated re-opening dates, it is expected that the buildings will be closed through the remainder of 2017 and into the first half of 2018. In the aggregate, these properties comprised approximately 2% of our consolidated revenues and funds from operationsrevolving credit agreement (2.2% during the six months ended June 30, ~~2017.~~ 2020 as compared to 3.7% in the comparable six-month period of 2019), partially offset by an increase in our average outstanding borrowings ($214.4 million during the six months ended June 30, 2020 as compared to $195.0 million in the comparable 2019 six month-period); (ii) a $253,000 net increase in interest rate swap/caps expense during the six-months ended June 30, 2020 as compared to the comparable period in 2019; (iii) a $80,000 decrease in mortgage interest expense, resulting primarily from the repayment of a mortgage loan during the second quarter of 2019; (iv) a $126,000 decrease in interest expense related to capitalized interest on major projects, and; (v) $12,000 of other combined net increases in interest expense.

COVID-19 Impact

The COVID-19 pandemic began to significantly impact the United States in mid-March, 2020. As ~~discussed below,~~a result of various policies implemented by the federal and state governments, and varying by individual state, many non-essential businesses in the nation were closed for varying time periods. With the exception of the operators of our four preschool and childcare centers, which were closed from mid-March until mid-June, we believe ~~we are entitled~~that most of the tenants occupying our hospitals, medical office buildings (“MOBs”) and ambulatory care centers were permitted to ~~insurance recovery proceeds for~~continue operating if they elected to do so.

Tenants representing approximately 98% of our occupied square footage have paid their June rent. We believe that as of June 30, 2020, substantially all of our tenants have resumed operations of their businesses. However, many of our properties are located in states that have experienced significant increases in COVID-19 infections in June, July and early August. Such states include Arizona, California, Florida, Georgia, Nevada and Texas. Although COVID-19 has not had a material adverse impact on our results of operations through June 30, 2020, we believe that the ~~costs incurred related~~potentially adverse impact that the pandemic may have on our future operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of which are beyond our, or our tenants’, ability to control or predict. Since the ~~remediation, repair and reconstruction of~~underlying businesses in each of ~~these properties, subject to certain deductibles and other limitations. In addition, during the period that these~~our properties are ~~non-operational, we believe we are entitled to business interruption insurance recoveries for~~operated by the ~~lost income related to each of these properties, subject to certain deductibles and other limitations.~~

~~Properties damaged and closed from Hurricane Harvey:~~

~~Cypresswood Professional Center –~~ ~~located in Spring, Texas and consisting of two MOBs.~~

~~Professional Buildings at King’s Crossing –~~ ~~located in Kingwood, Texas and consisting of two MOBs.~~

~~Kelsey-Seybold Clinic at King’s Crossing –~~ ~~located in Kingwood, Texas and consisting of one MOB.~~

~~Hurricane related expenses and recoveries:~~

At the time of the hurricane, we maintained insurance policies with a commercial insurance carrier providing for property damage coverage, subject to certain deductibles and other limitations, of up to $20 million in the aggregate applicable to the impacted properties and up to $50 million in the aggregate for business interruption coverage pursuant to a shared limit policy. Additionally, we have insurance coverage under the National Flood Insurance Program providing for property damage coverage of up to $500,000 per each of the 5 buildings, subject to certain deductibles and other limitations. When all property insurance coverage and deductibles applicable to the above-mentioned hurricane damaged buildings are considered, we believe we are entitled to recovery of substantially all hurricane related expenses and reconstruction costs, less an aggregate net deductible of $25,000. In addition, pursuant to the business interruption policy, we believe we are entitled to substantially all lost income at these properties resulting from the hurricane, less an aggregate deductible of $100,000. However,tenants, we can provide no assurance that the businesses will continue to operate in the future, or stay current with their lease obligations.

Since the bonus rents earned by us on the three acute care hospitals leased to wholly-owned subsidiaries of Universal Health Services, Inc., are computed based upon a computation that compares each hospital’s current quarter revenue to the corresponding quarter in the base year, we ~~will ultimately collect, after satisfaction of~~could experience significant declines in future bonus rental revenue earned on these properties should those hospitals continue to experience significant declines in patient volumes and revenues. These hospitals believe that, to the ~~applicable deductibles, substantially all of the hurricane related~~extent that they experience revenue declines and increased expenses ~~and reconstruction costs and the lost income~~ resulting from the ~~related interruption~~COVID-19 pandemic, as ultimately measured over the life of ~~business at~~ the ~~impacted properties.~~

~~Included in our~~pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Our financial ~~results~~statements for the three and ~~nine-month~~six-month periods ended June 30, 2020 include bonus rental attributable to revenues recorded by these three hospitals in connection with CARES Act grants.

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

Lease Expirations/Vacancies of Two Hospital Facilities

As previously disclosed, the tenants in two of our hospital facilities had provided notice to us that they did not intend to renew the leases upon the scheduled expiration of the respective facilities. The leases on these two hospital facilities, located in Evansville, Indiana, and Corpus Christi, Texas, expired on May 31, 2019 and June 1, 2019, respectively. Prior to the vacancy of the property on September 30, ~~2017 are hurricane related expenses~~2019, the former tenant of ~~approximately $3.4 million consisting~~the hospital located in Evansville, Indiana, entered into a short-term lease with us, which covered the period of ~~$2.2 million related~~June 1, 2019 through September 30, 2019, at a substantially increased lease rate as compared to ~~property damage~~the original lease rate.

The combined lease revenue generated at these facilities amounted to $537,000 and ~~$1.2 million related to remediation and demolition expenses. Also included in our financial results for~~$900,000 during the three and ~~nine-month~~six-month periods ended June 30, 2019, respectively. The hospital located in Evansville, Indiana, has remained vacant since September 30, ~~2017 are hurricane related insurance recoveries of approximately $3.4 million ($1.5 million of which was received~~2019 and the hospital located in ~~September, 2017), reflecting probable recovery of our preliminary estimate of hurricane related expenses which we believe are less than the total commercial insurance proceeds due~~Corpus Christi, Texas, has remained vacant since June 1, 2019.

We continue to us in connection with property damage and related expenses. As of September 30, 2017, our financial statements do not include any business interruption insurance recoveries, however, we expect that business interruption insurance recoveries will be recognized in future periods when recovery proceeds are probable and/or insurance carrier notifications are received.

The hurricane related expenses and insurance recoveries recorded to date are based upon our preliminary damage assessments of the real property at each of the above-mentioned properties. However, due to the nature and extent of the damage to themarket each property for lease to new tenants. However, should these properties continue to remain owned and vacant for an extended period of time, or should we experience decreased lease rates on future leases, as compared to prior/expired lease rates, or incur substantial renovation costs to make the ~~surrounding communities, a complete and final assessment to determine the exact nature and extent~~properties suitable for other operators/tenants, our future results of the losses at each property has not yet been completed. We are therefore unable to assess the ultimate damage sustained at each property, the ultimate repair cost of the damaged property or the amount of total insurance recoveries we may ultimately receive. Although we believe that our ultimate insurance recoveries for claims related to hurricane losses will exceed the combined net book value of the damaged property and the incurred hurricane related expenses, the timing and amount of such proceeds cannot be determined at this time, since it will be based upon factors such as ultimate replacement costs of damaged assets and the ultimate value of the business interruption claims. Therefore, it is likely that we will record additional hurricane related expenses and hurricane insurance recoveries in future periods related to Hurricane Harvey, whichoperations could be ~~material.~~materially unfavorably impacted.

Liquidity and Capital Resources

Net cash provided by operating activities

Net cash provided by operating activities was ~~$33.6~~$23.2 million during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2020 as compared to ~~$29.8~~$21.5 million during the comparable period of ~~2016.~~2019. The ~~$3.9~~$1.8 million net increase was attributable to:

a favorable net change of $1.6 million due to an increase in net income plus/minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, amortization of debt premium, stock-based compensation, hurricane related expenses and recoveries and gain on Arlington transaction), as discussed above in Results of Operations;

~~a favorable change of $2.9 million in tenant reserves, deposits and deferred and prepaid rents;~~

•

A favorable change of $758,000 due to an increase in net income plus/minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation and gain on sale of land), as discussed above;

•

~~an unfavorable~~a favorable change of ~~$416,000~~$527,000 in ~~rent receivable, and;~~accrued expenses and other liabilities;

•

a favorable change of $204,000 in leasing costs paid;

~~other combined net unfavorable changes of $182,000.~~
•
a favorable change of $910,000 in tenant reserves, deposits and deferred and prepaid rents, and;

•

other combined net unfavorable changes of $645,000.

Net cash ~~provided by/(~~used ~~in)~~in investing activities

Net cash ~~provided by investing activities was $39.6 million during the nine months ended September 30, 2017 as compared to $64.2 million of net cash~~ used in investing activities was $11.3 million during the ~~nine~~first six months ~~ended September 30, 2016.~~of 2020 as compared to $3.0 million during the first six months of 2019.

During the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2020 we funded: (i) ~~$532,000~~$13.3 million in additions to real estate investments including $10.1 million of construction costs related to a newly constructed, 108-bed behavioral health care hospital located in Clive, Iowa, that is scheduled to be completed in late 2020 or early 2021, and tenant improvements at various MOBs, and; (ii) $3.2 million in equity investments in ~~various~~ unconsolidated ~~LLCs;~~LLCs. In addition, during the six-months ended June 30, 2020, we received $5.2 million of cash distributions from our unconsolidated LLCs, consisting of proceeds generated from a construction loan obtained by Grayson Properties II during the second quarter of 2020.

During the six-month period ended June 30, 2019 we funded: (i) $598,000 in equity investments in unconsolidated LLCs, and; (ii) ~~$11.0~~$3.0 million in capital additions to real estate investments including ~~construction costs for the Henderson Medical Plaza MOB (this MOB opened in April, 2017), as well as~~ tenant improvements at various MOBs; (iii) $7.9 million paid to acquire the minority interest in a majority-owned LLC (Arlington Medical Properties, LLC), and; (iv) $9.0 million in connection with the July and September, 2017 acquisitions of the Health Center of Hamburg and the Las Palmas FED, respectively, as discussed above.MOBs. In addition, during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019 we received: (i) ~~$65.2 million~~$245,000 of ~~net~~ cash proceeds ~~generated in connection with~~from the divestiture of ~~St. Mary’s Professional Office Building, as discussed herein (net of closing costs~~); land, and; (ii) ~~$1.5 million in connection with partial hurricane insurance recoveries; (iii) $216,000 of installment repayments of member loan advanced to an LLC, and; (iv) $1.1 million~~$348,000 of cash distributions ~~in excess of income received from our unconsolidated LLCs.~~ The $65.2 million of net cash proceeds generated in connection with the divestiture of St. Mary’s Professional Office Building includes repayment of a $21.4 million previously extended member loan that was provided by us to Arlington Medical Properties, LLC when we held an 85% noncontrolling ownership interest in the LLC.

During the nine-month period ended September 30, 2016, we funded: (i) $5.5 million in equity investments in various unconsolidated LLCs, including $4.8 million to purchase an additional 10% equity interest in the Arlington Medical Plaza LLC; (ii) $7.1 million in capital additions to real estate investments primarily related to tenant improvements at various MOBs as well as construction costs for the Henderson Medical Plaza MOB, as discussed above; (iii) $420,000 consisting of a deposit on real estate assets, and; (iv) $52.2 million to acquire the real estate assets of three properties. In addition, during the nine-month period ended September 30, 2016, we received: (i) $634,000 of installment repayments of an outstanding member loan that was provided by us to Arlington Medical Properties, LLC, and; (ii) $318,000 of cash distributions in excess of income received from our unconsolidated LLCs.

Net cash ~~(used in)/provided by~~used in financing activities

Net cash used in financing activities was ~~$73.2~~$11.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, as compared to ~~$34.6~~$17.5 million ~~of net cash provided by financing activities~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019.

During the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2020, we paid: (i) ~~$24.8~~$907,000 on mortgage notes payable that are non-recourse to us; (ii) $362,000 of financing costs related to the revolving credit agreement, including amendment fees incurred during the second quarter of 2020, and; (iii) $18.9 million of dividends. Additionally, during the six months ended June 30, 2020, we received: (i) $8.3 million of

net borrowings on our revolving credit agreement, and; (ii) $223,000 of net cash from the issuance of shares of beneficial interest, as discussed below.

During the six-month period ended June 30, 2019, we paid: (i) $4.9 million of net outstanding borrowings under our revolving credit agreement; (ii) ~~$43.7~~$3.4 million on mortgage notes payable that are non-recourse to us, including the repayment of ~~an aggregate of $41.6~~$2.5 million related to a previously outstanding mortgage ~~notes~~note payable on ~~three properties~~one property that ~~were~~was funded utilizing borrowings under our revolving credit agreement; (iii) ~~$290,000~~$35,000 of financing costs related to the revolving credit agreement, ~~and new mortgage notes payable that are non-recourse to us,~~ and; ~~(iv) $26.9~~(iii) $9.3 million of ~~dividends.~~dividends (excluded $9.4 million of dividends declared on June 12, 2019 that was paid on July 2, 2019). Additionally, during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we ~~received: (i) $13.2 million of proceeds from a new mortgage note payable that is non-recourse to us, and; (ii) $9.3 million~~received $61,000 of net cash from the issuance of shares of beneficial ~~interest, including $9.1 million of net cash proceeds received in connection with our ATM Program, as discussed below.~~interest.

During the nine-month period ended September 30, 2016, we: (i) received $50.1 million of additional net borrowings on our revolving credit agreement, and; (ii) received $13.4 million of net cash from the issuance of shares of beneficial interest, including cash proceeds generated pursuant to the ATM program. Additionally, during the nine months ended September 30, 2016, we paid: (i) $2.4 million on mortgage notes payable that are non-recourse to us; (ii) $307,000 of financing costs paid related to the amendment of our revolving credit agreement, (iii) $26.2 million of dividends, and; (iv) $30,000 of partial settlements of dividend equivalent rights.

~~During the third~~second quarter of ~~2017,~~2020, we ~~issued new shares in connection with our~~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 ~~approximately $23.3~~$100 million to or through ~~Merrill Lynch, Pierce, Fenner~~BofA Securities, Inc., Credit Agricole Securities (USA) Inc., Fifth Third Securities, Inc., SunTrust Robinson Humphrey, Inc. and ~~Smith, Incorporated (“Merrill Lynch”), as sales agent and/or principal. The common shares were offered pursuant to~~Wells Fargo Securities, LLC (collectively, the ~~Registration Statement filed with the Securities and Exchange Commission, which became effective during the fourth quarter of 2015.~~

Agents). Pursuant to ~~the~~this ATM Program, during the ~~first nine months of 2017, there were 127,499 shares issued at an average price of $74.71 per share (all of which were issued during the third~~second quarter of 2017), which generated approximately $9.1 million of cash net proceeds (net of approximately $400,000, consisting of compensation of $238,000 to Merrill Lynch, as well as $162,000 of other various fees and expenses). Since inception of this ATM program, including shares2020, we issued ~~under a prior Registration Statement filed with the~~

~~Securities and Exchange Commission in November, 2012, we have issued 957,415~~2,704 shares at an average price of ~~$52.22~~$101.30 per share which generated approximately $47.9 million of net proceeds (net of approximately $2.1 million, consisting of compensation of $1.25 million to Merrill Lynch as well as $840,000 of other various fees and expenses). During the first nine months of 2016, we issued 249,016 shares at an average price of $55.30 per share (all of which was issued during the second quarter of 2016) which generated approximately $13.2 million$270,000 of net cash proceeds (net of ~~approximately $558,000, consisting of~~ compensation to BofA Securities, Inc. of approximately ~~$344,000 to Merrill Lynch as well as $214,000 of other~~$4,000). Additionally, we paid or incurred approximately $435,000 in various fees and ~~expenses). As of September 30, 2017, we have met our aggregate sales threshold of $23.3 million pursuant to this program. We have used the proceeds generated pursuant~~expenses related to the commencement of our ATM program to reduce amounts outstanding under our revolving credit agreement. After such repayment of debt, we may re-borrow funds under our revolving credit agreement for general operating purposes, including working capital, capital expenditures, acquisitions, dividend payments and the refinance of third-party debt.program.

Additional cash flow and dividends paid information for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:

As indicated on our condensed consolidated statement of cash flows, we generated net cash provided by operating activities of ~~$33.6~~$23.2 million and ~~$29.8~~$21.5 million during the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. As also indicated on our statement of cash flows, ~~noncash~~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 ~~hurricane related expenses~~ and ~~recoveries and the~~ gain ~~recorded during the first nine months of 2017~~on transaction (as applicable) are the primary differences between our net income and net cash provided by operating activities during each period. ~~In addition, as reflected in the cash flows from investing activities section, we received $1.1~~

We declared and paid dividends of $18.9 million ~~and $318,000~~ during the ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016, respectively,~~declared dividends of ~~cash distributions~~$18.6 million during the six months ended June 30, 2019 ($9.4 million of which was paid in ~~excess~~July, 2019). During the first six months of ~~income from various unconsolidated LLCs which represents our share of~~2020, the ~~net cash flow distributions from these entities. The cash distributions in excess of income represent operating cash flows net of capital expenditures and debt repayments made by the LLCs.~~

~~We therefore generated $34.7 million and $30.1~~$23.2 million of net cash ~~during the nine months ended September 30, 2017 and 2016, respectively, related to the~~provided by operating activities of our properties recorded on a consolidated and an unconsolidated basis. We paid dividends of $26.9 million and $26.2 million during the nine months ended September 30, 2017 and 2016, respectively. During the first nine months of 2017, the $34.7 million of net cash generated related to the operating activities of our properties was approximately ~~$7.8~~$4.3 million greater than the ~~$26.9~~ $18.9��million of dividends paid during the first ~~nine~~six months of ~~2017.~~2020. During the first ~~nine~~six months of ~~2016,~~2019, the ~~$30.1~~$21.5 million of net cash ~~generated related to the~~provided by operating activities ~~of our properties~~ was ~~$3.8~~approximately $2.9 million greater ~~than~~that the ~~$26.2~~$18.6 million of dividends ~~paid~~declared during the first ~~nine~~six months of ~~2016.~~2019.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019. From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs, as outlined above.

In determining and monitoring our dividend level on a quarterly basis, our management and Board of Trustees consider many factors in determining the amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain our REIT status; (ii) the current and projected operating results of our properties, including those owned in LLCs, and; (iii) our future capital commitments and debt repayments, including those of our LLCs. Based upon the information discussed above, as well as consideration of projections and forecasts of our future operating cash flows, management and the Board of Trustees have determined that our operating cash flows have been sufficient to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to our projected future results of operations.

We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing ~~$250~~$350 million revolving credit agreement (which ~~has $71.8~~had $123.1 million of available borrowing capacity, net of outstanding borrowings and letters of credit as of ~~September~~June 30, ~~2017)~~2020); (ii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by our consolidated and unconsolidated LLCs/LPs; (iii) the issuance of equity pursuant to our 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

~~On May 24, 2016,~~In June 2020, we ~~amended our~~entered into the first amendment (the “First Amendment”) to the revolving credit agreement (“Credit Agreement”), pursuant to which, among other things, ~~increase~~an additional tranche of revolving credit commitments in the ~~borrowing capacity~~amount of $50 million, designated as the “Revolving B Facility”, was established thereby increasing the aggregate revolving credit commitment to ~~$250~~$350 million from ~~$185 million previously.~~$300 million. The ~~amended~~ Credit Agreement, as amended, which is scheduled to mature in March ~~2019, includes~~2022, provides for a revolving credit facility in an aggregate principal amount of $350 million, including a $40 million ~~sub limit~~sublimit for letters of credit and a ~~$20~~$30 million ~~sub limit~~sublimit for swingline/short-term loans. The Credit Agreement also provides ~~a one-time option~~for options to extend the maturity date for antwo additional ~~one year period, and an option to increase the total facility borrowing capacity up to an additional $50 million, subject to lender agreement.~~six month periods. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in and liens on all equity interests in certain of the Trust’s wholly-owned subsidiaries. The remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to giving effect to the First Amendment, has been designated as the “Revolving A Facility”.

Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three, or six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an applicable margin ranging from 0.85% to 1.10%. The Credit Agreement defines “Base Rate” as the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate plus 1/2 of 1% and (c) one month LIBOR plus 1%. The initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At June 30, 2020, the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was 0.95% and the facility fee was 0.20%.

At ~~September~~June 30, ~~2017,~~2020, we had ~~$176.7~~$221.3 million of outstanding borrowings and ~~$1.5~~$5.6 million of letters of credit outstanding under our Credit Agreement. We had ~~$71.8~~$123.1 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of ~~September~~June 30, ~~2017.~~2020. There are no compensating balance requirements. At December 31, 2019, we had $213.0 million of outstanding borrowings outstanding against our revolving credit agreement and $87.0 million of available borrowing capacity.

The 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~~	~~September 30,~~ ~~2017~~
~~Tangible net worth~~	~~> =$136,170~~	~~$191,638~~
~~Total leverage~~	~~< 60%~~		~~41.6~~	%
~~Secured leverage~~	~~< 30%~~		~~12.8~~	%
~~Unencumbered leverage~~	~~< 60%~~		~~38.1~~	%
~~Fixed charge coverage~~	~~> 1.50x~~	~~3.7x~~

	Covenant	June 30, 2020			December 31, 2019
Tangible net worth	> =$125,000	$	153,292		$	167,181
Total leverage	< 60%		43.6	%		42.3	%
Secured leverage	< 30%		9.0	%		9.1	%
Unencumbered leverage	< 60%		40.2	%		38.5	%
Fixed charge coverage	> 1.50x	4.3x			4.0x

Facility Name	Outstanding Balance (in thousands)(a)			Interest Rate			Maturity Date	Outstanding Balance (in thousands) (a.)			Interest Rate			Maturity Date
Summerlin Hospital Medical Office Building II fixed rate mortgage loan (b.)	$	10,834			5.50	%	October, 2017
Phoenix Children’s East Valley Care Center fixed rate mortgage loan (c.)		6,087			5.88	%	December, 2017
Centennial Hills Medical Office Building floating rate mortgage loan (d.)		9,830			4.48	%	January, 2018
Sparks Medical Building/Vista Medical Terrace floating rate mortgage loan (d.)		4,153			4.48	%	February, 2018
Rosenberg Children’s Medical Plaza fixed rate mortgage loan (d.)		8,013			4.85	%	May, 2018
Vibra Hospital-Corpus Christi fixed rate mortgage loan		2,650			6.50	%	July, 2019
700 Shadow Lane and Goldring MOBs fixed rate mortgage loan		6,107			4.54	%	June, 2022	$	5,547			4.54	%	June, 2022
BRB Medical Office Building fixed rate mortgage loan		6,174			4.27	%	December, 2022		5,614			4.27	%	December, 2022
Desert Valley Medical Center fixed rate mortgage loan		4,980			3.62	%	January, 2023		4,587			3.62	%	January, 2023
2704 North Tenaya Way fixed rate mortgage loan		7,040			4.95	%	November, 2023		6,653			4.95	%	November, 2023
Summerlin Hospital Medical Office Building III fixed rate mortgage loan		13,199			4.03	%	April, 2024		13,158			4.03	%	April, 2024
Tuscan Professional Building fixed rate mortgage loan		4,640			5.56	%	June, 2025		3,216			5.56	%	June, 2025
Phoenix Children’s East Valley Care Center fixed rate mortgage loan									8,841			3.95	%	January, 2030
Rosenberg Children's Medical Plaza fixed rate mortgage loan									12,621			4.42	%	September, 2033
Total, excluding net debt premium and net financing fees		83,707							60,237
Less net financing fees		(553	)						(533	)
Plus net debt premium		310							167
Total mortgages notes payable, non-recourse to us, net	$	83,464						$	59,871

(a.)

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

~~(b.)~~

~~During October, 2017, upon its maturity, this $10.8 million fixed rate mortgage loan was fully repaid utilizing borrowings under~~

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, 2020 had a combined fair value of approximately $62.4 million. At December 31, 2019, 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 was $61.1 million and had a combined fair value of approximately $63.1 million.

Changes in market rates on our ~~Credit Agreement.~~

~~(c.)~~

~~This loan is scheduled to mature in December, 2017, at which time we intend to refinance with a new $9.4 million, 3.95% fixed rate mortgage loan with a maturity date of December, 2029.~~

~~(d.)~~

~~On July 3, 2017, upon its maturity, the $6.6 million floating rate mortgage loan on the Auburn Medical Office Building II was fully repaid utilizing borrowings under our Credit Agreement.~~

~~On June 1, 2017, upon its maturity, the $4.5 million~~ fixed rate ~~mortgage loan~~debt impacts the fair value of debt, but it has no impact on ~~the Medical Center of Western Connecticut was fully repaid utilizing borrowings under our Credit Agreement.~~

~~On April 3, 2017, upon its maturity, the $20.2 million fixed rate mortgage loan on the Peace Health Medical Clinic was fully repaid utilizing borrowings under our Credit Agreement.~~

On March 31, 2017, upon its maturity, a $10.3 million floating rate mortgage loan on Summerlin Hospital Medical Office Building III was fully repaid. In April, 2017, we refinanced the property with a $13.2 million fixed rate mortgage, as shown above.interest incurred or cash flow.

Off Balance Sheet Arrangements

As of ~~September~~June 30, ~~2017,~~2020, we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit at ~~September~~June 30, ~~2017~~2020 totaled ~~$1.5~~$5.6 million ~~and were~~ related to ~~Centennial Hills Medical Properties.~~Grayson Properties II. As of December 31, 2019, we did not have any off balance sheet arrangements other than equity and debt financing commitments.

Acquisition and Divestiture Activity

Please see Note 4 to the condensed 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, ~~2016.~~2019. There have been no material changes in the quantitative and qualitative disclosures during the first ~~nine~~six months of ~~2017.~~2020, 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 a 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 a 1.4975% that we designated as a cash flow hedge. The interest rate swap became effective on January 15, 2020 and is scheduled to mature on September 16, 2024. If the one-month LIBOR is above 1.4975%, the counterparty pays us, and if the one-month LIBOR is less than 1.4975%, we pay the counterparty, the difference between the fixed rate of 1.4975% and one-month LIBOR.

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

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, 2020, the fair value and carrying-value of our debt is approximately $283.6 million and $281.5 million, respectively. As of that date, the fair value exceeds the carrying-value by approximately $2.1 million.

The table below presents information about our financial instruments that are sensitive to changes in interest rates. The interest rate swaps include the $50 million swap agreement entered into during the third quarter of 2019, the $35 million swap agreement entered into in January, 2020 and the $55 million swap agreement entered into in March, 2020. For debt obligations, the amounts of which are as of June 30, 2020, 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)	2020			2021			2022			2023			2024			Thereafter			Total
Long-term debt:
Fixed rate:
Debt(a)	$	1,005		$	2,081		$	12,197		$	11,892		$	13,550		$	19,512		$	60,237
Average interest rates		4.3	%		4.3	%		4.4	%		4.4	%		4.4	%		4.3	%		4.3	%
Variable rate:
Debt(b)	$	—		$	—		$	221,250		$	—		$	—		$	—		$	221,250
Average interest rates		1.4	%		1.4	%		1.4	%	—			—			—				1.4	%
Interest rate swaps:
Notional amount(c)	$	—		$	—		$	—		$	—		$	85,000		$	55,000		$	140,000
Interest rates	—			—			—			—				1.3	%		0.57	%		1.0	%

(a)

Consists of non-recourse mortgage notes payable.

(b)

Includes $221.3 million of outstanding borrowings under the terms of our $350 million revolving credit agreement.

(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, 2020 that is subject to interest rate fluctuations, and giving effect to the above-mentioned interest rate swap, each 1% change in interest rates would impact our net income by approximately $812,500.

Item 4. Controls and Procedures

As of ~~September~~June 30, ~~2017,~~2020, under the supervision and with the participation of our management, including the Trust’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities 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.

There have been no changes in our internal control over financial reporting or in other factors during the first ~~nine~~six months of ~~2017~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. ~~OTHE~~ROTHER INFORMATION

UNIVERSAL HEALTH REALTY INCOME TRUST

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, ~~2016 includes a listing~~2019 and our Form 10-Q for the quarterly period ended March 31, 2020 (the “first quarter 2020 Form 10-Q”) include listings of risk factors to be considered by investors in our securities. ~~There~~Except for the risk factors disclosed in Part II, Item 1A of the first quarter 2020 Form 10-Q, which is hereby incorporated by reference into the Part II, Item 1A of this Form 10-Q, 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, ~~2016.~~2019.

Item 6. Exhibits

~~(a.) Exhibits:~~

(a.)

Exhibits:


10.1		First Amendment, dated as of June 5, 2020 to Credit Agreement, dated as of March 27, 2018 between Universal Health Realty Income Trust, certain subsidiaries of Universal Health Realty Income Trust, certain banks and financial institutions from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent, previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 3, 2020, is incorporated herein by reference.

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

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.~~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.~~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.~~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.~~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~~

~~EXHIBIT~~ ~~INDEX~~

~~Exhibit~~ ~~No.~~		~~Description~~

~~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~~		~~XBRL Instance Document~~

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document~~

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation~~ Linkbase Document

~~101.DEF~~ 104		The cover page from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 has been formatted in Inline XBRL ~~Taxonomy Extension Definition Linkbase Document~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

~~Signatures~~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: ~~November 8, 2017~~August 7, 2020		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)

3336

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Revenues:
Base rental - UHS facilities	$	4,242		$	4,066		$	12,625		$	12,226
Base rental - Non-related parties		10,167			9,273			30,253			27,118
Bonus rental - UHS facilities		1,126			1,118			3,656			3,557
Tenant reimbursements and other - Non-related parties		2,440			2,168			6,872			5,984
Tenant reimbursements and other - UHS facilities		219			176			683			603
		18,194			16,801			54,089			49,488
Expenses:
Depreciation and amortization		6,321			5,893			18,761			16,872
Advisory fees to UHS		908			832			2,648			2,380
Other operating expenses		4,877			4,663			14,505			13,603
Transaction costs		(19	)		331			107			477
Hurricane related expenses		3,398			-			3,398			-
Hurricane insurance recoveries		(3,398	)		-			(3,398	)		-
		12,087			11,719			36,021			33,332
Income before equity in income of unconsolidated limited liability companies ("LLCs"), interest expense and gain		6,107			5,082			18,068			16,156
Equity in income of unconsolidated LLCs		384			1,110			1,959			3,396
Gain on Arlington transaction		-			-			27,196			-
Interest expense, net		(2,531	)		(2,374	)		(7,668	)		(6,783	)
Net income	$	3,960		$	3,818		$	39,555		$	12,769
Basic earnings per share	$	0.29		$	0.28		$	2.91		$	0.95
Diluted earnings per share	$	0.29		$	0.28		$	2.91		$	0.95

Weighted average number of shares outstanding - Basic		13,621			13,575			13,595			13,426
Weighted average number of share equivalents		-			-			-			5
Weighted average number of shares and equivalents outstanding - Diluted		13,621			13,575			13,595			13,431

	Nine months ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	39,555		$	12,769
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,804			16,920
Amortization of debt premium		(126	)		(166	)
Stock-based compensation expense		390			354
Hurricane related expenses		3,398			—
Hurricane insurance recoveries		(3,398	)		—
Gain on Arlington transaction		(27,196	)		—
Changes in assets and liabilities:
Rent receivable		(913	)		(497	)
Accrued expenses and other liabilities		89			203
Tenant reserves, deposits and deferred and prepaid rents		3,527			604
Accrued interest		(6	)		47
Leasing costs paid		(475	)		(452	)
Other, net		(22	)		(30	)
Net cash provided by operating activities		33,627			29,752
Cash flows from investing activities:
Investments in LLCs		(532	)		(5,454	)
Repayments of advances made to LLC		216			634
Cash distributions in excess of income from LLCs		1,060			318
Additions to real estate investments, net		(10,983	)		(7,104	)
Cash proceeds received from divestiture of property, net		65,220			—
Hurricane insurance recoveries for damaged real estate property		1,500			—
Deposit on real estate assets		—			(420	)
Net cash paid for acquisition of properties		(9,040	)		(52,193	)
Cash paid to acquire minority interests in majority-owned LLCs		(7,890	)		—
Net cash provided by/(used in) investing activities		39,551			(64,219	)
Cash flows from financing activities:
Net (repayments)/borrowings on line of credit		(24,800	)		50,100
Repayments of mortgage notes payable		(43,656	)		(2,407	)
Proceeds from mortgage notes payable		13,200			—
Financing costs paid		(290	)		(307	)
Dividends paid		(26,921	)		(26,231	)
Partial settlement of dividend equivalent rights		—			(30	)
Issuance of shares of beneficial interest, net		9,307			13,430
Net cash (used in)/provided by financing activities		(73,160	)		34,555
Increase in cash and cash equivalents		18			88
Cash and cash equivalents, beginning of period		3,930			3,894
Cash and cash equivalents, end of period	$	3,948		$	3,982
Supplemental disclosures of cash flow information:
Interest paid	$	7,359		$	6,491

	September 30, 2017			December 31, 2016
	(amounts in thousands)
Net property, including CIP	$	33,123		$	60,970
Other assets		3,672			4,598
Total assets	$	36,795		$	65,568

Liabilities	$	2,686		$	3,334
Mortgage notes payable, non-recourse to us		27,979			28,367
Advances payable to us		-			21,638
Equity		6,130			12,229
Total liabilities and equity	$	36,795		$	65,568

Our share of equity in and advances to LLCs reflected as:
Investments in LLCs	$	4,695		$	13,955
Advances to LLCs		-			21,638
Investments in and advances to LLCs before
amounts included in accrued expenses and other liabilities		4,695			35,593
Amounts included in accrued expenses and other liabilities		(1,790	)		(1,862	)
Our share of equity in and advances to LLCs, net	$	2,905		$	33,731

	Mortgage Loan Balance (a.)
Name of LLC/LP	9/30/2017		12/31/2016		Maturity Date
FTX MOB Phase II	$	5,234	$	5,301	October, 2017 (b.)
Grayson Properties		14,252		14,438	September, 2021
Brunswick Associates		8,493		8,628	December, 2024
	$	27,979	$	28,367