Relationship with Universal Health Realty Income Trust and Related Party Transactions

9 Months Ended

Sep. 30, 2013

Relationship with Universal Health Realty Income Trust and Related Party Transactions

(2) Relationship with Universal Health Realty Income Trust and Related Party Transactions

Relationship with Universal Health Realty Income Trust:

At September 30, 2013, we held approximately 6.2% of the outstanding shares of Universal Health Realty Income Trust (the “Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services and present investment opportunities. In addition, certain of our officers and directors are also officers and/or directors of the Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our investment in the Trust using the equity method of accounting. We earned an advisory fee from the Trust, which is included in net revenues in the accompanying condensed consolidated statements of income, of $603,000 and $540,000 during the three-month periods ended September 30, 2013 and 2012, respectively, and $1.8 million and $1.6 million during the nine-month periods ended September 30, 2013 and 2012, respectively. Our pre-tax share of income from the Trust was $86,000 and $31,000 for the three-month periods ended September 30, 2013 and 2012, respectively, and $599,000 and $922,000 for the nine-month periods ended September 30, 2013 and 2012, respectively. The carrying value of this investment was $8.4 million and $9.3 million at September 30, 2013 and December 31, 2012, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. The market value of this investment, based on the closing price of the Trust’s stock on the respective dates, was $33.0 million at September 30, 2013 and $39.9 million at December 31, 2012.

Total rent expense under the operating leases on the hospital facilities with the Trust was $4.0 million and $4.1 million during the three-month periods ended September 30, 2013 and 2012, respectively, and $12.0 million and $12.2 million for the nine month periods ended September 30, 2013 and 2012, respectively. In addition, certain of our subsidiaries are tenants in several medical office buildings owned by limited liability companies in which the Trust holds either 100% ownership interests or non-controlling majority ownership interests.

The table below details the renewal options and terms for each of our four hospital facilities leased from the Trust:

Hospital Name	Type of Facility	Annual Minimum Rent		End of Lease Term		Renewal Term (years)
McAllen Medical Center	Acute Care	$	5,485,000		December, 2016		15	(a)
Wellington Regional Medical Center	Acute Care	$	3,030,000		December, 2016		15	(b)
Southwest Healthcare System, Inland Valley Campus	Acute Care	$	2,648,000		December, 2016		15	(b)
The Bridgeway	Behavioral Health	$	930,000		December, 2014		10	(c)

(a) We have three 5-year renewal options at existing lease rates (through 2031).

(b) We have one 5-year renewal option at existing lease rates (through 2021) and two 5-year renewal options at fair market value lease rates (2022 through 2031).

(c) We have two 5-year renewal options at fair market value lease rates (2015 through 2024).

Other Related Party Transactions:

In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and agreements on the lives of our chief executive officer and his wife. As a result of these agreements, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $25 million in premiums and certain trusts, owned by our chief executive officer, would pay approximately $8 million in premiums. Based on the projected premiums mentioned above, and assuming the policies remain in effect until the death of the insureds, we will be entitled to receive death benefit proceeds of no less than $33 million representing the $25 million of aggregate premiums paid by us as well as the $8 million of aggregate premiums paid by the trusts. These agreements did not have a material effect on our consolidated financial statements or results of operations during 2012 or the first nine months of 2013.

A member of our Board of Directors and member of the Executive Committee is Of Counsel to the law firm used by us as our principal outside counsel. This Board member is also the trustee of certain trusts for the benefit of our Chief Executive Officer (“CEO”) and his family. This law firm also provides personal legal services to our CEO.