UNIVERSAL HEALTH REALTY INCOME TRUST

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UNIVERSAL HEALTH REALTY INCOME TRUST Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2022 | 04:04pm EDT

Overview

We are a real estate investment trust ("REIT") that commenced operations in 1986. We invest in healthcare and human service related facilities currently including acute care hospitals, behavioral health care hospitals, specialty facilities, free-standing emergency departments, childcare centers and medical/office buildings. As of May 1, 2022, we have seventy-six real estate investments or commitments located in twenty-one states consisting of:

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


  • four free-standing emergency departments ("FEDs");


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


  • four preschool and childcare centers, and;


  • three specialty facilities that are currently vacant.

Forward Looking Statements and Certain Risk Factors

You should carefully review all of the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the "SEC"). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks described elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 in Item 1A Risk Factors and in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors, as included herein. Those factors may cause our actual results to differ materially from any of our forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:

   •  Future operations and financial results of our tenants, and in turn ours,
      will likely be materially impacted by numerous factors and future
      developments related to COVID-19. Such factors and developments include, but
      are not limited to, the length of time and severity of the spread of the
      pandemic; the volume of cancelled or rescheduled elective procedures and the
      volume of COVID-19 patients treated by the operators of our hospitals and
      other healthcare facilities; measures our tenants are taking to respond to
      the COVID-19 pandemic; the impact of government and administrative
      regulation, including travel bans and restrictions, shelter-in-place or
      stay-at-home orders, quarantines, the promotion of social distancing,
      business shutdowns and limitations on business activity; vaccine
      requirements; changes in patient volumes at our tenants' hospitals and other
      healthcare facilities due to patients' general concerns related to the risk
      of contracting COVID-19 from interacting with the healthcare system; changes
      in patient volumes and payer mix caused by deteriorating macroeconomic
      conditions (including increases in uninsured and underinsured patients as
      the result of business closings and layoffs); potential disruptions to
      clinical staffing and shortages and disruptions related to supplies required
      for our tenants' employees and patients, including equipment,
      pharmaceuticals and medical supplies, potential increases to expenses
      incurred by our tenants related to staffing, supply chain or other
      expenditures; the impact of our indebtedness and the ability to refinance
      such indebtedness on acceptable terms; disruptions in the financial markets
      and the business of financial institutions as the result of the COVID-19
      pandemic which could impact our ability to access capital or increase
      associated borrowing costs; and changes in general economic conditions
      nationally and regionally in the markets our properties are located
      resulting from the COVID-19 pandemic, including higher sustained rates of
      unemployment and underemployment levels and reduced consumer spending and
      confidence. The nationwide shortage of nurses and other clinical staff and
      support personnel has been a significant operating issues facing our
      healthcare provider tenants, including UHS. In some areas, the labor
      scarcity is putting a strain on the resources of our tenants and their
      staff, which has required them to utilize higher-cost temporary labor and
      pay premiums


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      above standard compensation for essential workers. In addition to
      significantly increasing the labor cost of our tenants, the healthcare
      staffing shortage could also require the operators of our hospital
      facilities to limit the services provided which would have an adverse effect
      on their operating revenues. There may be significant declines in future
      bonus rental revenue earned on one acute care hospital leased to a
      subsidiary of UHS to the extent that the hospital experiences significant
      declines in patient volumes and revenues. These factors may result in the
      inability or unwillingness on the part of some of our tenants to make timely
      payment of their rent to us at current levels or to seek to amend or
      terminate their leases which, in turn, would have an adverse effect on our
      occupancy levels and our revenue and cash flow and the value of our
      properties, and potentially, our ability to maintain our dividend at current
      levels.



   •  Due to COVID-19 restrictions and its impact on the economy, we may
      experience a decrease in prospective tenants which could unfavorably impact
      the volume of new leases, as well as the renewal rate of existing leases.
      The COVID-19 pandemic may delay our construction projects which could result
      in increased costs and delay the timing of opening and rental payments from
      those projects, although no such delays have yet occurred. The COVID-19
      pandemic could also impact our indebtedness and the ability to refinance
      such indebtedness on acceptable terms, as well as risks associated with
      disruptions in the financial markets and the business of financial
      institutions as the result of the COVID-19 pandemic which could impact us
      from a financing perspective; and changes in general economic conditions
      nationally and regionally in the markets our properties are located
      resulting from the COVID-19 pandemic. Although COVID-19 has not previously
      had a material adverse impact on our financial results, we are not able to
      quantify the impact that these factors could have on our future financial
      results and therefore can provide no assurance that developments related to
      the COVID-19 pandemic will not have a material adverse impact on our future
      financial results.


   •  The Centers for Medicare and Medicaid Services ("CMS") issued an Interim
      Final Rule ("IFR") effective November 5, 2021 mandating COVID-19
      vaccinations for all applicable staff at all Medicare and Medicaid certified
      facilities. Under the IFR, facilities covered by this regulation must
      establish a policy ensuring all eligible staff have received the first dose
      of a two-dose COVID-19 vaccine or a one-dose COVID-19 vaccine prior to
      providing any care, treatment, or other services by December 5, 2021. All
      eligible staff must have received the necessary shots to be fully vaccinated
      - either two doses of Pfizer or Moderna or one dose of Johnson & Johnson -
      by January 4, 2022. The regulation also provides for exemptions based on
      recognized medical conditions or religious beliefs, observances, or
      practices. Under the IFR, facilities must develop a similar process or plan
      for permitting exemptions in alignment with federal law. If facilities fail
      to comply with the IFR by the deadlines established, they are subject to
      potential termination from the Medicare and Medicaid program for
      non-compliance.  In addition, the Occupational Safety and Health
      Administration also issued an Emergency Temporary Standard ("ETS") requiring
      all businesses with 100 or more employees to be vaccinated by January 4,
      2022.  Pursuant to the ETS, those employees not vaccinated by that date will
      need to show a negative COVID-19 test weekly and wear a face mask in the
      workplace.  Legal challenges to these rules ensued, and the U.S. Supreme
      Court has upheld a stay of the ETS requirements but permitted the IFR
      vaccination requirements to go into effect pending additional litigation.
      CMS has indicated that hospitals in states not involved in the Supreme Court
      litigation are expected to be in compliance with IFR vaccination
      requirements consistent with the dates referenced above. Hospitals in states
      that were involved in the Supreme Court litigation must now come into
      compliance with second dose requirements by March 15, 2022. Hospitals in
      Texas must come into compliance with second dose requirements by March 21,
      2022 due to the recent termination of separate litigation there. We cannot
      predict at this time the potential viability or impact of any such
      additional litigation on us or the operators of our
      facilities. Implementation of these rules could have an impact on staffing
      at the operators of our facilities for those employees that are not
      vaccinated in accordance with IFR and ETS requirements, and associated loss
      of revenues and increased costs resulting from staffing issues could have a
      material adverse effect on our financial results or those of the operators.


   •  Recent legislation, including the Coronavirus Aid, Relief, and Economic
      Security Act (the "CARES Act"), the Paycheck Protection Program and Health
      Care Enhancement Act ("PPPHCE Act") and the American Rescue Plan Act of 2021
      ("ARPA"), has provided grant funding to hospitals and other healthcare
      providers to assist them during the COVID-19 pandemic. There is a high
      degree of uncertainty surrounding the implementation of the CARES Act, the
      PPPHCE Act and ARPA, and the federal government may consider additional
      stimulus and relief efforts, but we are unable to predict whether additional
      stimulus measures will be enacted or their impact. There can be no assurance
      as to the total amount of financial and other types of assistance our
      tenants will receive under the CARES Act, the PPPHCE Act and the ARPA, and
      it is difficult to predict the impact of such legislation on our tenants'
      operations or how they will affect operations of our tenants'
      competitors. There can be no assurance as to whether our tenants would be
      required to repay any previously granted funding, due to noncompliance with
      grant terms or otherwise. Moreover, we are unable to assess the extent to
      which anticipated negative impacts on our tenants (and, in turn, us) arising
      from the COVID-19 pandemic will be offset by amounts or benefits received or
      to be received under the CARES Act, the PPPHCE Act and the ARPA.


   •  A substantial portion of our revenues are dependent upon one operator, UHS,
      which comprised approximately 41% and 36% of our consolidated revenues for
      the three-month periods ended March 31, 2022 and 2021, respectively. As
      previously disclosed, on December 31, 2021, a wholly-owned subsidiary of UHS
      purchased the real estate assets of Inland Valley


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      Campus of Southwest Healthcare System from us and in exchange, transferred
      the real estate assets of Aiken Regional Medical Center and Canyon Creek
      Behavioral Health to us. These transactions were approved by the Independent
      Trustees of our Board, as well as the UHS Board of Directors. The aggregate
      annual rental revenue during 2022 pursuant to the leases for the two
      facilities transferred to us is approximately $5.7 million; there is no
      bonus rent component applicable to either of these leases.  Pursuant to the
      terms of the lease on the Inland Valley Campus, we earned $4.5 million of
      lease revenue during year ended December 31, 2021 ($2.6 million in base
      rental and $1.9 million in bonus rental). Please see Note 7 to the condensed
      consolidated financial statements - Lease Accounting, for additional
      information related to this asset purchase and sale transaction between us
      and UHS.


   •  We cannot assure you that subsidiaries of UHS will renew the leases on the
      hospital facilities and free-standing emergency departments, upon the
      scheduled expirations of the existing lease terms. In addition, if
      subsidiaries of UHS exercise their options to purchase the respective leased
      hospital facilities and FEDs, and do not enter into a substitution
      arrangement upon expiration of the lease terms or otherwise, our future
      revenues and results of operations could decrease if we were unable to earn
      a favorable rate of return on the sale proceeds received, as compared to the
      rental revenue currently earned pursuant to these leases. Please see Note 7
      to the consolidated financial statements - Lease Accounting, for additional
      information related to a lease renewal between us and Wellington Regional
      Medical Center, a wholly-owned subsidiary of UHS.


   •  In certain of our markets, the general real estate market has been
      unfavorably impacted by increased competition/capacity and decreases in
      occupancy and rental rates which may adversely impact our operating results
      and the underlying value of our properties.


   •  A number of legislative initiatives have recently been passed into law that
      may result in major changes in the health care delivery system on a national
      or state level to the operators of our facilities, including UHS. No
      assurances can be given that the implementation of these new laws will not
      have a material adverse effect on the business, financial condition or
      results of operations of our operators.


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


   •  A subsidiary of UHS is our Advisor and our officers are all employees of a
      wholly-owned subsidiary of UHS, which may create the potential for conflicts
      of interest.


   •  Lost revenues resulting from the exercise of purchase options, lease
      expirations and renewals and other transactions (see Note 7 to the condensed
      consolidated financial statements - Lease Accounting for additional
      disclosure related to lease expirations and subsequent vacancies that
      occurred during the second and third quarters of 2019 and the fourth quarter
      of 2021 on three specialty hospital facilities).


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


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


   •  The outcome and effects of known and unknown litigation, government
      investigations, and liabilities and other claims asserted against us, UHS or
      the other operators of our facilities. UHS and its subsidiaries are subject
      to legal actions, purported shareholder class actions and shareholder
      derivative cases, governmental investigations and regulatory actions and the
      effects of adverse publicity relating to such matters. Since UHS comprised
      approximately 41% of our consolidated revenues during the three months ended
      March 31, 2022, and since a subsidiary of UHS is our Advisor, you are
      encouraged to obtain and review the disclosures contained in the Legal
      Proceedings section of Universal Health Services, Inc.'s Forms 10-Q and
      10-K, as publicly filed with the Securities and Exchange Commission. Those
      filings are the sole responsibility of UHS and are not incorporated by
      reference herein.


   •  Failure of UHS or the other operators of our hospital facilities to comply
      with governmental regulations related to the Medicare and Medicaid licensing
      and certification requirements could have a material adverse impact on our
      future revenues and the underlying value of the property.


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


   •  A continuation in the deterioration in general economic conditions which has
      resulted in increases in the number of people unemployed and/or insured and
      likely increase the number of individuals without health insurance. Under
      these


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      circumstances, the operators of our facilities may experience declines in
      patient volumes which could result in decreased occupancy rates at our
      medical office buildings.


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


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


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


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


   •  The issues facing the health care industry that affect the operators of our
      facilities, including UHS, such as: changes in, or the ability to comply
      with, existing laws and government regulations; unfavorable changes in the
      levels and terms of reimbursement by third party payors or government
      programs, including Medicare (including, but not limited to, the potential
      unfavorable impact of future reductions to Medicare reimbursements resulting
      from the Budget Control Act of 2011, as discussed in the next bullet point
      below) and Medicaid (most states have reported significant budget deficits
      that have, in the past, resulted in the reduction of Medicaid funding to the
      operators of our facilities, including UHS); demographic changes; the
      ability to enter into managed care provider agreements on acceptable terms;
      an increase in uninsured and self-pay patients which unfavorably impacts the
      collectability of patient accounts; decreasing in-patient admission trends;
      technological and pharmaceutical improvements that may increase the cost of
      providing, or reduce the demand for, health care, and; the ability to
      attract and retain qualified medical personnel, including physicians.


   •  The Budget Control Act of 2011 imposed annual spending limits for most
      federal agencies and programs aimed at reducing budget deficits by $917
      billion between 2012 and 2021, according to a report released by the
      Congressional Budget Office. Among its other provisions, the law established
      a bipartisan Congressional committee, known as the Joint Select Committee on
      Deficit Reduction (the "Joint Committee"), which was tasked with making
      recommendations aimed at reducing future federal budget deficits by an
      additional $1.5 trillion over 10 years. The Joint Committee was unable to
      reach an agreement by the November 23, 2011 deadline and, as a result,
      across-the-board cuts to discretionary, national defense and Medicare
      spending were implemented on March 1, 2013 resulting in Medicare payment
      reductions of up to 2% per fiscal year with a uniform percentage reduction
      across all Medicare programs. The Bipartisan Budget Act of 2015, enacted on
      November 2, 2015, continued the 2% reductions to Medicare reimbursement
      imposed under the Budget Control Act of 2011. Recent legislation has
      suspended payment reductions through December 31, 2021 in exchange for
      extended cuts through 2030. Subsequent legislation extended the payment
      reduction suspension through March 31, 2022, with a 1% payment reduction
      from then until June 30, 2022 and the full 2% payment reduction
      thereafter. We cannot predict whether Congress will restructure the
      implemented Medicare payment reductions or what other federal budget deficit
      reduction initiatives may be proposed by Congress going forward. We also
      cannot predict the effect these enactments will have on the operators of our
      properties (including UHS), and thus, our business.


   •  An increasing number of legislative initiatives have been passed into law
      that may result in major changes in the health care delivery system on a
      national or state level. Legislation has already been enacted that has
      eliminated the penalty for failing to maintain health coverage that was part
      of the original Patient Protection and Affordable Care Act (the "ACA").
      President Biden is expected to undertake executive actions that will
      strengthen the ACA and may reverse the policies of the prior administration.
      To date, the Biden administration has issued executive orders implementing a
      special enrollment period permitting individuals to enroll in health plans
      outside of the annual open enrollment period and reexamining policies that
      may undermine the ACA or the Medicaid program. The ARPA's expansion of
      subsidies to purchase coverage through an exchange is anticipated to
      increase exchange enrollment. The Trump Administration had directed the
      issuance of final rules: (i) enabling the formation of association health
      plans that would be exempt from certain ACA requirements such as the
      provision of essential health benefits; (ii) expanding the availability of
      short-term, limited duration health insurance, (iii) eliminating
      cost-sharing reduction payments to insurers that would otherwise offset
      deductibles and other out-of-pocket expenses for health plan enrollees at or
      below 250 percent of the federal poverty level; (iv) relaxing requirements
      for state innovation waivers that could reduce enrollment in the individual
      and small group markets and lead to additional enrollment in short-term,
      limited duration insurance and association health plans; and (v)
      incentivizing the use of health reimbursement arrangements by employers to
      permit employees to purchase health insurance in the individual market. The
      uncertainty resulting from these Executive Branch policies had led to
      reduced Exchange enrollment in 2018, 2019 and 2020, and is expected to
      further worsen the individual and small group market risk pools in future
      years. It is also anticipated that these policies, to the extent that they
      remain as implemented, may create additional cost and reimbursement
      pressures on hospitals, including ours. In addition, while attempts to
      repeal the entirety of the ACA have not been successful to date, a key
      provision of the ACA was eliminated as part of the Tax Cuts and Jobs Act and
      on December 14, 2018, a federal U.S. District Court


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      Judge in Texas ruled the entire ACA is unconstitutional. That ruling was
      appealed and on December 18, 2019, the Fifth Circuit Court of Appeals voted
      2-1 to strike down the ACA individual mandate as unconstitutional. The case
      was ultimately appealed to the United States Supreme Court, which decided in
      California v. Texas that the plaintiffs in the matter lacked standing to
      bring their constitutionality claims. As a result, the Legislation will
      continue to remain law, in its entirety, likely for the foreseeable
      future.


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


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


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


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


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


   •  Should we be unable to comply with the strict income distribution
      requirements applicable to REITs, utilizing only cash generated by operating
      activities, we would be required to generate cash from other sources which
      could adversely affect our financial condition.


   •  Our ownership interest in four LLCs/LPs in which we hold non-controlling
      equity interests. In addition, pursuant to the operating and/or partnership
      agreements of the four LLCs/LPs in which we continue to hold non-controlling
      ownership interests, the third-party member and the Trust, at any time,
      potentially subject to certain conditions, have the right to make an offer
      ("Offering Member") to the other member(s) ("Non-Offering Member") in which
      it either agrees to: (i) sell the entire ownership interest of the Offering
      Member to the Non-Offering Member ("Offer to Sell") at a price as determined
      by the Offering Member ("Transfer Price"), or; (ii) purchase the entire
      ownership interest of the Non-Offering Member ("Offer to Purchase") at the
      equivalent proportionate Transfer Price. The Non-Offering Member has 60 to
      90 days to either: (i) purchase the entire ownership interest of the
      Offering Member at the Transfer Price, or; (ii) sell its entire ownership
      interest to the Offering Member at the equivalent proportionate Transfer
      Price. The closing of the transfer must occur within 60 to 90 days of the
      acceptance by the Non-Offering Member. Please see Note 5 to the condensed
      consolidated financial statements - Summarized Financial Information of
      Equity Affiliates for additional disclosure related to a fourth quarter,
      2021 transaction between us and the minority partner in Grayson Properties,
      LP.


  • Fluctuations in the value of our common stock.


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

Given these uncertainties, risks and assumptions, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition, including the operating results of our lessees and the facilities leased to subsidiaries of UHS, could differ materially from those expressed in, or implied by, the forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Critical Accounting Policies and Estimates

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.


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

Purchase Accounting for Acquisition of Investments in Real Estate: Purchase accounting is applied to the assets and liabilities related to most real estate investments acquired from third parties. In accordance with current accounting guidance, we account for most of 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 most 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. Please see additional disclosure below regarding "Financing Assets".

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.

Financing Assets: As discussed in Note 2 - Relationship with UHS and Related Party Transactions, on December 31, 2021 we entered into an asset purchase and sale agreement with UHS and certain of its affiliates. Pursuant to the agreement, which was amended during the first quarter of 2022, UHS purchased from us the real estate assets of the Inland Valley Campus of Southwest Healthcare System ("Inland Valley") and transferred to us the real estate assets of Aiken Regional Medical Center ("Aiken") and Canyon Creek Behavioral Health ("Canyon Creek"). In connection with this transaction, Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases (with us as lessor), as amended during the first quarter of 2022, for initial lease terms of approximately twelve years, ending on December 31, 2033. As a result of UHS' purchase option within the lease agreements of Aiken and Canyon Creek, the transaction is accounted for as a failed sale leaseback in accordance with U.S. GAAP and we have accounted for the transaction with UHS as a financing arrangement. A portion of the monthly lease payment to us from UHS will be recorded to interest income based upon an imputed interest rate and the remainder will reduce the outstanding financing receivable. In connection with this transaction, our Consolidated Balance Sheets at March 31, 2022 and December 31, 2021, reflect financing receivables of $83.7 million and $82.4 million, respectively. As of March 31, 2022 there are no indicators of impairment and the financing receivable will be assessed for recoverability in accordance with our asset impairment policy.

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


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cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether the carrying value of a property is recoverable, our strategy of holding properties over the long-term directly decreases the likelihood of their carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test, the affected assets must be reduced to their fair value.

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

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

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

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

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

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

Results of Operations

During the three-month period ended March 31, 2022, net income was $5.4 million, as compared to $5.6 million during the first quarter of 2021. The $181,000 decrease was attributable to:

        • a decrease of $884,000 related to a vacant specialty hospital located in
          Chicago, Illinois, on which, as discussed in Note 7 to the consolidated
          financial statements, the lease expired on December 31, 2021;


        • a net increase of $431,000 resulting from the asset purchase and sale
          agreement with UHS that occurred on December 31, 2021, as discussed in
          Note 7 to the consolidated financial statements;


        • an increase of $335,000 resulting from the impact of the fair market
          value lease renewal on Wellington Regional Medical Center, which became
          effective on January 1, 2022, as discussed in Note 7 to the consolidated
          financial statements, and;


  • $63,000 of other combined net decreases.


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Revenues increased $1.5 million to $22.2 million during the three-month period ended March 31, 2022, as compared to $20.7 million during the first quarter of 2021. The increase during the first quarter of 2022, as compared to the first quarter of 2021, was due to: (i) a $919,000 increase due to the recording on a consolidated basis of Grayson Properties, LP (effective as of November 1, 2021 as discussed in Note 5 to the consolidated financial statements), resulting from our purchase of the 5% minority ownership interest in the entity; (ii) a $335,000 increase resulting from the fair market value lease renewal on Wellington Regional Medical Center, which became effective on January 1, 2022; (iii) a $253,000 net increase resulting from the December 31, 2021 asset purchase and sale agreement with UHS whereby we divested the real estate assets of the Inland Valley Campus of Southwest Healthcare System and acquired the real estate assets of Aiken Regional Medical Center and Canyon Creek Behavioral Health; (iv) a $359,000 aggregate net increase generated at various properties, including the impact of acquisitions and divestitures, partially offset by; (v) a $390,000 decrease resulting from the December 31, 2021 lease expiration on the specialty hospital located in Chicago, Illinois. Although our revenues and expenses increased during the first quarter of 2022, as compared to the first quarter of 2021, resulting from the recording of Grayson Properties, LP on a consolidated basis effective as of November 1, 2021, there was no significant impact on our net income resulting from the change from the unconsolidated/equity method basis.

Included in our other operating expenses are expenses related to the consolidated medical office buildings and three vacant specialty facilities. Other operating expenses totaled $6.0 million and $4.8 million for the three-month periods ended March 31, 2022 and 2021, respectively. The $1.2 million increase in our other operating expenses during the first quarter of 2022, as compared to the first quarter of 2021, was due primarily to $494,000 of operating expenses incurred during the first quarter of 2022 at a vacant specialty facility located in Chicago, Illinois, on which the lease expired on December 31, 2021 (the operating expenses for this facility were the tenant's responsibility through the lease expiration date) and $452,000 of other operating expenses recorded during the first quarter of 2022 in connection with Grayson Properties, LP, which as discussed above, was recorded on a consolidated basis effective as of November 1, 2021. A large portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses or included in base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as lease revenue in our condensed consolidated statements of income.

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

Below is a reconciliation of our reported net income to FFO for the three-month periods ended March 31, 2022 and 2021 (in thousands):

                                                            Three Months Ended
                                                                 March 31,
                                                             2022          2021
Net income                                                $    5,405     $  5,586

Depreciation and amortization expense on consolidated

  Investments                                                  6,709        6,787

Depreciation and amortization expense on unconsolidated

  Affiliates                                                     295          362
Funds From Operations                                     $   12,409     $ 12,735

Weighted average number of shares outstanding - Diluted 13,785 13,771 Funds From Operations per diluted share

                   $     0.90     $   0.92


Our FFO decreased $326,000, or $.02 per diluted share, during the first quarter of 2022, as compared to the first quarter of 2021. The net decrease was primarily due to: (i) the decrease in net income of $181,000, or $.02 per diluted share, as discussed above, and; (ii) a $145,000 decrease in depreciation and amortization expense incurred on our consolidated and unconsolidated affiliates.



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Other Operating Results

Interest Expense:

As reflected in the schedule below, interest expense was $2.2 million and $2.1 million during the three-month periods ended March 31, 2022 and 2021, respectively (amounts in thousands):

                                         Three Months      Three Months
                                             Ended             Ended
                                           March 31,         March 31,
                                             2022              2021
Revolving credit agreement               $       1,168     $         967
Mortgage interest                                  612               635
Interest rate swaps expense, net (a.)              287               309
Amortization of financing fees                     178               216
Amortization of fair value of debt                 (13 )             (13 )
Capitalized interest on major projects             (21 )               -
Other interest                                      11                19
Interest expense, net                    $       2,222     $       2,133



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

Interest expense increased by $89,000 during the three-month period ended March 31, 2022, as compared to the comparable quarter of 2021, due primarily to: (i) a $201,000 increase in the interest expense on our revolving credit agreement primarily resulting from an increase in our average outstanding borrowings ($270.2 million during the three months ended March 31, 2022 as compared to $239.2 million in the comparable quarter of 2021) as well as an increase in our average cost of borrowings pursuant to our revolving credit agreement (1.76% average effective rate during the first quarter of 2022, as compared to 1.64% average effective rate during the comparable quarter of 2021), partially offset by; (ii) a $38,000 decrease in amortization of financing fees and fair value of debt; (iii) a $22,000 decrease in interest rate swap expense; (iv) a $21,000 decrease due to an increase in capitalized interest on a major project; (v) a $23,000 decrease in mortgage interest expense, and; (vi) $8,000 of other combined net decreases in interest expense.

Disclosures Related to Certain Facilities

Please refer to Note 7 to the consolidated financial statements - Lease Accounting, for additional information regarding certain of our hospital facilities including Wellington Regional Medical Center; Aiken Regional Medical Center; Canyon Creek Behavioral Health; Evansville, Indiana; Corpus Christi, Texas; Chicago, Illinois, and; PeaceHealth Medical Clinic.

Liquidity and Capital Resources

Net cash provided by operating activities


Net cash provided by operating activities was $11.7 million during the
three-month period ended March 31, 2022 as compared to $11.3 million during the
comparable period of 2021. The $454,000 million net increase was attributable
to:
       •  an unfavorable change of $312,000 due to a decrease in net income
          plus/minus the adjustments to reconcile net income to net cash provided
          by operating activities (depreciation and amortization, amortization
          related to above/below market leases, amortization of debt premium,
          amortization of deferred financing costs and stock-based compensation),
          as discussed above;


  • an unfavorable change of $81,000 in lease receivable;


       •  a favorable change of $489,000 in tenant reserves, deposits and deferred
          and prepaid rents;


  • an unfavorable change of $117,000 in leasing costs paid, and;


       •  other combined net favorable change of $475,000, resulting primarily
          from the timing of deposits made on acquisitions and prepaid expense
          payments.

Net cash used in investing activities

Net cash used in investing activities was $18.3 million during the first three months of 2022 as compared to $12.2 million during the first three months of 2021.


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During the three-month period ended March 31, 2022 we funded: (i) $13.6 million, including transaction costs, on the acquisitions of the Beaumont Heart and Vascular Center in March, 2022, and; the 140 Thomas Johnson Drive medical office building in January, 2022, as discussed in Note 4 to the consolidated financial statements-Acquisitions and Divestitures; (ii) $3.5 million in additions to real estate investments including construction costs related to the Sierra Medical Plaza I medical office building located in Reno, Nevada, that is scheduled to be completed during the first quarter of 2023, as well as tenant improvements at various MOBs, and; (iii) $1.3 million as part of the asset purchase and sale agreement with UHS, as discussed in Note 2 to the consolidated financial statements-Relationship with UHS and Related Party Transactions. In addition, during the three-months ended March 31, 2022, we received approximately $160,000 of cash in excess of income from LLCs.

During the three-month period ended March 31, 2021 we funded: (i) $7.0 million in additions to real estate investments including construction costs related to Clive Behavioral Health, a newly constructed behavioral health hospital that was substantially completed in late December, 2020, as well as tenant improvements at various MOBs; (ii) $3.5 million in a member loan to an unconsolidated LP; (iii) $200,000 deposit on a real estate acquisition, and; (iv) $1.5 million in equity investments in unconsolidated LLCs.

Net cash (used in)/ provided by financing activities

Net cash used in financing activities was $7.0 million during the three months ended March 31, 2022, as compared to $1.4 million of cash provided by financing activities during the three months ended March 31, 2021.

During the three-month period ended March 31, 2022, we paid: (i) $536,000 on mortgage notes payable that are non-recourse to us; (ii) $26,000 of financing costs related to the revolving credit agreement, and; (iii) $9.7 million of dividends. Additionally, during the three months ended March 31, 2022, we received: (i) $3.2 million of net borrowings on our revolving credit agreement, and; (ii) $55,000 of net cash from the issuance of shares of beneficial interest.

During the three-month period ended March 31, 2021, we paid: (i) $510,000 on mortgage notes payable that are non-recourse to us; (ii) $35,000 of financing costs related to the revolving credit agreement, and; (iii) $9.6 million of dividends. Additionally, during the three months ended March 31, 2021, we received: (i) $11.5 million of net borrowings on our revolving credit agreement, and; (ii) $56,000 of net cash from the issuance of shares of beneficial interest.

During 2020, we commenced an at-the-market ("ATM") equity issuance program, pursuant to the terms of which we may sell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of $100 million to or through our agent banks. No shares were issued pursuant to this ATM equity program during the first three months of 2022 and no shares were issued pursuant to this ATM equity program during the year ended December 31, 2021.

Additional cash flow and dividends paid information for the three-month periods ended March 31, 2022 and 2021:

As indicated on our condensed consolidated statement of cash flows, we generated net cash provided by operating activities of $11.7 million and $11.3 million during the three-month periods ended March 31, 2022 and 2021, respectively. As also indicated on our statement of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs and stock-based compensation expense are the primary differences between our net income and net cash provided by operating activities during each period.

We declared and paid dividends of $9.7 million and $9.6 million during the three-month periods ended March 31, 2022 and 2021, respectively. During the first three months of 2022, the $11.7 million of net cash provided by operating activities was approximately $2.0 million greater than the $9.7 million of dividends paid during the first three months of 2022. During the first three months of 2021, the $11.3 million of net cash provided by operating activities was approximately $1.7 million greater than the $9.6 million of dividends paid during the first three months of 2021.

As indicated in the cash flows from investing activities and cash flows from financing activities sections of the statements of cash flows, there were various other sources and uses of cash during the three months ended March 31, 2022 and 2021. From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs, as outlined above.

In determining and monitoring our dividend level on a quarterly basis, our management and Board of Trustees consider many factors in determining the amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain our REIT status; (ii) the current and projected operating results of our properties,


                                       31

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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 $375 million revolving credit agreement (which had $96.7 million of available borrowing capacity, net of outstanding borrowings and letters of credit as of March 31, 2022); (ii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by our consolidated and unconsolidated LLCs/LPs; (iii) the issuance of equity pursuant to our ATM program, and/or; (iv) the issuance of other long-term debt.

We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our revolving credit agreement and access to the capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including providing sufficient capital to allow us to make distributions necessary to enable us to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.

Credit facilities and mortgage debt

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

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

Borrowings under the Credit Agreement will bear interest annually at a rate equal to, at our option, at either LIBOR (for one, three, or six months) or the Base Rate, plus in either case, a specified margin depending on our ratio of debt to total capital, as determined by the formula set forth in the Credit Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and 0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for LIBOR loans and 0.25% for Base Rate loans. The Credit Agreement defines "Base Rate" as the greatest of (a) the Administrative Agent's prime rate, (b) the federal funds effective rate plus 1/2 of 1% and (c) one month LIBOR plus 1%. The Trust will also pay a quarterly revolving facility fee ranging from 0.15% to 0.35% (depending on the Trust's ratio of debt to asset value) on the revolving committed amount of the Credit Agreement. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods.

The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At March 31, 2022, the applicable margin over the LIBOR rate was 1.20%, the margin over the Base Rate was 0.20% and the facility fee was 0.20%.

At March 31, 2022, we had $275.1 million of outstanding borrowings and $3.2 million of letters of credit outstanding under our Credit Agreement. We had $96.7 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of March 31, 2022. There are no compensating balance requirements. At December 31, 2021, we had $271.9 million of outstanding borrowings, $3.2 million of outstanding letters of credit and $99.9 million of available borrowing capacity.

The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit


                                       32

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Agreement also contains restrictive covenants regarding the Trust's ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts then outstanding under the Credit Agreement. We are in compliance with all of the covenants in the Credit Agreement at March 31, 2022 and were in compliance with all of the covenants in the Credit Agreement at December 31, 2021. We also believe that we would remain in compliance if, based on the assumption that the majority of the potential new borrowings will be used to fund investments, the full amount of our commitment was borrowed.


The following table includes a summary of the required compliance ratios, giving
effect to the covenants contained in the Credit Agreement (dollar amounts in
thousands):
                                      March 31,     December 31,
                         Covenant        2022           2021
Tangible net worth      > =$125,000   $  225,799   $      225,355
Total leverage                < 60%         42.4 %           43.1 %
Secured leverage              < 30%          7.2 %            7.4 %
Unencumbered leverage         < 60%         41.3 %           41.9 %
Fixed charge coverage       > 1.50x         4.8x             4.8x



As indicated on the following table, we have various mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of March 31, 2022 (amounts in thousands):



                                                Outstanding
                                                  Balance             Interest          Maturity
Facility Name                               (in thousands) (a.)         Rate              Date
700 Shadow Lane and Goldring MOBs fixed
rate
  mortgage loan (b.)                       $               5,152            4.54 %        June, 2022
BRB Medical Office Building fixed rate
mortgage loan (c.)                                         5,222            4.27 %    December, 2022
Desert Valley Medical Center fixed rate
mortgage loan (c.)                                         4,316            3.62 %     January, 2023
2704 North Tenaya Way fixed rate
mortgage loan                                              6,377            4.95 %    November, 2023
Summerlin Hospital Medical Office
Building III fixed
  rate mortgage loan                                      12,745            4.03 %       April, 2024
Tuscan Professional Building fixed rate
mortgage loan                                              2,190            5.56 %        June, 2025
Phoenix Children's East Valley Care
Center fixed rate
  mortgage loan                                            8,401            3.95 %     January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan                                        12,213            4.42 %   September, 2033
Total, excluding net debt premium and
net financing fees                                        56,616
   Less net financing fees                                  (348 )
   Plus net debt premium                                      78
Total mortgages notes payable,
non-recourse to us, net                    $              56,346



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


   (b.) This loan is scheduled to mature in the second quarter of 2022, at which
        time we intend on paying off the remaining principal balance utilizing
        borrowings under our Credit Agreement.


   (c.) 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 by utilizing borrowings under our Credit Agreement.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as of March 31, 2022 had a combined fair value of approximately $57.0 million. At December 31, 2021, we had various mortgages, all of which were non-recourse to us, included in our condensed consolidated balance sheet. The combined outstanding balance of these various mortgages at December 31, 2021 was $57.2 million and had a combined fair value of approximately $59.4 million.

Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact on interest incurred or cash flow.

Off Balance Sheet Arrangements

As of March 31, 2022, we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit at March 31, 2022 totaled $3.2 million related to Grayson Properties II.


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

Acquisition and Divestiture Activity

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

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