UNIVERSAL HEALTH REALTY INCOME TRUST

Previous wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote an understanding of our operating results and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to the Consolidated Financial Statements, as included in this Annual Report on Form 10-K. The MD&A contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under Item 1A. Risk Factors, and below in Forward-Looking Statements and Risk Factorsand as included elsewhere in this Annual Report on Form 10-K. This section generally discusses our results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022. For discussion of our result of operations and changes in our financial condition for the year ended December 31, 2022, as compared to the year ended December 31, 2021, please refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operationsin our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on February 27, 2023.

Current wording

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote an understanding of our operating results and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to the Consolidated Financial Statements, as included in this Annual Report on Form 10-K. The MD&A contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under Item 1A. Risk Factors, and below in Forward-Looking Statements and Risk Factorsand as included elsewhere in this Annual Report on Form 10-K. This section generally discusses our results of operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023. For discussion of our result of operations and changes in our financial condition for the year ended December 31, 2023, as compared to the year ended December 31, 2022, please refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operationsin our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on February 27, 2024, which section is incorporated by reference herein.

Previous wording

one specialty facilities that is currently vacant, and;

Current wording

one specialty facility located in Evansville, Indiana, that is currently vacant, and;

Previous wording

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 2 to the consolidated financial statements - Relationship with Universal Health Services, Inc. (“UHS”) and Related Party Transactions, for additional information related to a lease renewal between us and Wellington Regional Medical Center, a wholly-owned subsidiary of UHS.

Current wording

A substantial portion of our revenues are dependent upon one operator, UHS, which comprised approximately 40%, 41% and 40% of our consolidated revenues for the years ended December 31, 2024, 2023 and 2022, respectively. 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.

Previous wording

The increase in interest rates has significantly increased our interest expense thereby reducing our net income and cash provided by operations as well as unfavorably impacting our ability to access the capital markets on favorable terms. In addition, the increased interest rates on our borrowings and/or the increased costs related to new construction could affect our ability to make additional attractive investments. As such, the effects of increased interest rates on our borrowings may unfavorably impact our future expenses and rental revenue and may potentially have a negative impact on future lease renewal terms, the underlying value of our properties, and our ability to grow our portfolio and the value of our common shares.

Current wording

Although interest rates have moderated recently, the increase in interest rates during the past few years has significantly increased our interest expense thereby reducing our net income, cash provided by operating activities and funds from operations, as well as unfavorably impacting our ability to access the capital markets on favorable terms. The increased interest rates on our borrowings and/or the increased costs related to new construction could also affect our ability to make additional attractive investments. The effects of increased interest rates on our borrowings, including the unfavorable impact on the terms of recent and future interest rate swap and/or cap agreements, could unfavorably impact our future rental revenue and expenses, including interest expense, and may potentially have a material unfavorable impact on our future net income, cash provided by operating activities, funds from operations, lease renewal terms, the underlying value of our properties, our ability to grow our portfolio, and the value of our common shares.

Previous wording

In 2021, the rate of inflation in the United States began to increase and has since risen to levels not experienced in over 40 years. Our tenants are experiencing inflationary pressures, primarily in personnel costs, and we anticipate impacts on other cost areas within the next twelve months. The extent of any future impacts from inflation on our tenants’ businesses and results of operations will be dependent upon how long the elevated inflation levels persist and the extent to which the rate of inflation further increases, if at all, neither of which we are able to predict. If elevated levels of inflation were to persist or if the rate of inflation were to accelerate, expenses of our tenants, and our direct operating expenses that are not passed on to our tenants, could increase faster than anticipated and may require utilization of our and our tenants’ capital resources sooner than expected. Further, given the complexities of the reimbursement landscape in which our tenants operate, their payers may be unwilling or unable to increase reimbursement rates to compensate for inflationary impacts. This may impact their ability and willingness to make rental payments.

Current wording

During the past few years, our tenants have experienced inflationary pressures, primarily in personnel and certain other costs. In addition, certain of our tenants have experienced staffing shortages that has, at various times, required the hiring of expensive temporary personnel and/or enhanced wages and benefits to recruit and retain nurses and other clinical staff and support personnel. The impact of inflation and/or staffing shortages, which had a material unfavorable impact on the operating results of certain of our tenants during 2022, moderated to a certain degree during 2023 and 2024. However, the extent of any future impacts from inflation on our tenants’ businesses and results of operations will be dependent upon how long the elevated inflation levels persist and the extent to which the rate of inflation further increases, if at all, neither of which we are able to predict. If elevated levels of inflation were to persist or if the rate of inflation were to accelerate, expenses of our tenants, and our direct operating expenses that are not passed on to our tenants, could increase faster than anticipated and may require utilization of our and our tenants’ capital resources sooner than expected. Further, given the complexities of the reimbursement landscape in which our tenants operate, their payers may be unwilling or unable to increase reimbursement rates to compensate for inflationary impacts. This may impact their ability and willingness to make rental payments.

Previous wording

On January 19, 2024, President Biden signed into law H.R. 2872 which provides fiscal year 2024 appropriations to federal agencies for continuing projects and activities funded in four of the 12 annual appropriations bills through March 1, 2024. The remaining eight annual appropriations bills are funded through March 8, 2024. We cannot predict whether or not there will be future legislation averting a federal government shutdown, however, the operating results and results of operations of certain of our tenants, and therefore potentially ours, could be materially unfavorably impacted by a federal government shutdown.

Current wording

President Biden signed into law fiscal year 2025 appropriations to federal agencies for continuing projects and activities through March 14, 2025. We cannot predict whether or not there will be future legislation averting a federal government shutdown, however, the operating results and results of operations of certain of our tenants, and therefore potentially ours, could be materially unfavorably impacted by a federal government shutdown.

Previous wording

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 year ended December 31, 2023, 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.

Current wording

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. From time to time, UHS and its subsidiaries are subject to legal actions, purported shareholder class actions, shareholder derivative cases, governmental investigations and regulatory actions and the effects of adverse publicity relating to such matters. Since UHS comprised approximately 40% of our consolidated revenues during the year ended December 31, 2024, 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.

Previous wording

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

Current wording

Government regulations, including changes in the reimbursement levels under the Medicare and Medicaid programs. In addition, the United States has recently enacted and proposed to enact significant new tariffs, which could adversely impact our and our tenants’ business, financial condition and results of operations as a result of the increased costs on our and their operations and supply chains due to tariffs.

Previous wording

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 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. The most recent legislation extended these reductions through 2032. 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.

Current wording

The Budget Control Act of 2011 imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits including Medicare payment reductions of up to 2% per fiscal year. Current legislation extended those cuts through 2032. 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.

Previous wording

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 has undertaken and 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 American Rescue Plan Act of 2021's expansion of subsidies to purchase coverage through an exchange, which the Inflation Reduction Act of 2022, passed on August 16, 2022, continues through 2025, is anticipated to increase exchange enrollment. It is also anticipated that these policies, to the extent that they remain as implemented, may create additional cost and reimbursement pressures on hospitals, including ours. In addition, while attempts to repeal the entirety of the ACA have not been successful to date, a key provision of the ACA was eliminated as part of the Tax Cuts and Jobs Act and on December 14, 2018, a federal U.S. District Court Judge in Texas ruled the entire ACA is unconstitutional. That ruling was ultimately appealed to the United States Supreme Court, which decided in California v. Texas that the plaintiffs in the matter lacked standing to bring their constitutionality claims. On September 7, 2022, the Patient Protection and Affordable Care Act, as amended by the Health and Education Reconciliation Act (collectively, the “Legislation”) faced its most recent challenge when a Texas Federal District Court judge, in the case of Braidwood Management v. Becerra, ruled that certain Legislation provisions violate the Appointments Clause of the U.S. Constitution and the Religious Freedom Restoration Act. The government has appealed the decision to the U.S. Circuit Court of Appeals for the Fifth Circuit. Any future efforts to challenge, replace or replace the Legislation or expand or substantially amend its provision is unknown.

Current wording

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”). The Biden administration had undertaken executive actions to strengthen the ACA, including issuing 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 American Rescue Plan Act of 2021's expansion of subsidies to purchase coverage through an exchange, which the Inflation Reduction Act of 2022, passed on August 16, 2022, continues through 2025, has increased exchange enrollment. However, the prior President Trump administration had taken various steps having the effect of reducing enrollment through the exchange, so the likelihood of subsidy extension and other exchange-expansion activities is questionable. While attempts to repeal the entirety of the ACA have not been successful to date, a key provision of the ACA was eliminated as part of the Tax Cuts and Jobs Act and on December 14, 2018, a federal U.S. District Court Judge in Texas ruled the entire ACA is unconstitutional. That ruling was ultimately appealed to the United States Supreme Court, which decided in California v. Texas that the plaintiffs in the matter lacked standing to bring their constitutionality claims. On September 7, 2022, the ACA faced its most recent challenge when a Texas Federal District Court judge, in the case of Braidwood Management v. Becerra, ruled that certain provisions violate the Appointments Clause of the U.S. Constitution and the Religious Freedom Restoration Act. The decision was appealed to the U.S. Court of Appeals for the Fifth Circuit, which on June 21, 2024 affirmed the District Court’s ruling regarding preventive services recommended by United States Preventive Services Task Force being unconstitutional. However, the Fifth Circuit overturned the nationwide injunction imposed by the District Court, preserving access to the majority of preventive services in dispute for now. The U.S. Government appealed and on January 10, 2025, the U.S. Supreme Court agreed to hear the matter. Any future efforts to challenge, replace or replace the ACA or expand or substantially amend its provision is unknown.

Previous wording

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 8 to the condensed consolidated financial statements – Summarized Financial Information of Equity Affiliatesfor additional disclosure related to a fourth quarter, 2021 transaction between us and the minority partner in Grayson Properties, LP.

Current wording

We hold non-controlling equity interests in four LLCs/LPs, pursuant to the operating and/or partnership agreements of which 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 at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member 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.

Previous wording

For the year ended December 31, 2023, net income was $15.4 million as compared to $21.1 million during 2022. The $5.7 million decrease was primarily attributable to:

Current wording

For the year ended December 31, 2024, net income was $19.2 million as compared to $15.4 million during 2023. The $3.8 million increase was primarily attributable to:

Previous wording

$2.6 million net increase resulting from an aggregate net increase in income generated at various properties, including an increase resulting from a $762,000 reduction in the non-demolition related operating expenses incurred in connection with the property located in Chicago, Illinois, partially offset by decrease resulting from a $232,000 loss on the divestiture of real estate assets recorded during the fourth quarter of 2023 in connection with the sale of a specialty facility located in Corpus Christi, Texas (see Note 3 to the consolidated financial statements-Purchase and Sale Transaction, Acquisitions, Divestitures and New Construction).

Current wording

an increase of $232,000 resulting from a loss on divestiture of real estate assets recorded during the fourth quarter of 2023 in connection with the sale of a specialty facility located in Corpus Christ, Texas (see Note 3 to the consolidated financial statements-Purchase and Sale Transaction, Acquisitions, Divestitures and New Construction), and;

Previous wording

$6.2 million decrease due to an increase in interest expense due to increases in our average borrowing rate and average outstanding borrowings;

Current wording

a decrease of $1.9 million resulting from an increase in interest expense due primarily to increases in our average borrowing rate (which gives effect to various interest rate swap agreements) and our average outstanding borrowings pursuant to the terms of our revolving credit agreement.

Previous wording

Revenues increased by $5.0 million, or 5.5%, during 2023, as compared to 2022. The increase during 2023, as compared to 2022, was due primarily to: (i) the aggregate net increase generated at various properties, including revenues generated at a newly constructed and recently opened MOB located in Reno Nevada, and the newly acquired MOB located in McAllen, Texas, partially offset by; (ii) a $1.25 million decrease related to a settlement and release agreement executed during the fourth quarter of 2022 in connection with the specialty hospital located in Chicago, Illinois.

Current wording

Revenues increased by $3.4 million, or 3.6%, during 2024, as compared to 2023. The increase during 2024, as compared to 2023, was due primarily to an aggregate net increase generated at various properties, including revenues generated at a newly constructed MOB located in Reno Nevada, that opened during the first quarter of 2023, and the revenues generated at an MOB located in McAllen, Texas, that was acquired during the third quarter of 2023.

Previous wording

Our other operating expenses include expenses related to the consolidated medical office buildings as well as the vacant land and vacant specialty facilities (as discussed herein). Other operating expenses incurred in connection with these properties totaled $27.8 million (including $1.1 million of demolition expenses incurred as of December 31, 2023) and $25.0 million (including $332,000 of demolition expenses incurred as of December 31, 2022), respectively. A large portion of the expenses associated with our 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 during which the related expenses are incurred. Our operating expenses include approximately $2.3 million (including $1.1 million of demolition expenses) during 2023, and $2.3 million (including $332,000 of demolition expenses) during 2022, of aggregate operating expenses related to the vacant parcel of land located in Chicago, Illinois and the two vacant specialty facilities located in Evansville, Indiana, and Corpus Christi, Texas (which was divested in December, 2023).

Current wording

Our other operating expenses include expenses related to the consolidated MOBs as well as the vacant land and the vacant specialty facility (as discussed herein). Other operating expenses incurred in connection with these properties totaled $25.8 million (net of a $610,000 prior period property tax reduction) and $27.8 million (including $1.1 million of demolition expenses) during 2024 and 2023, respectively. A large portion of the expenses associated with our 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 during which the related expenses are incurred.

Previous wording

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 and losses on the sale of incidental assets that occurred during the periods presented. As discussed above, our operating expenses, net income and our FFO include the impact of the demolition expenses related to the vacant parcel of land located in Chicago, Illinois, which amounted to approximately $1.1 million during 2023 and $332,000 during 2022. 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.

Current wording

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 and losses on the sale of incidental assets that occurred during the periods presented. 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.

Previous wording

Our FFO decreased by $4.3 million during 2023, as compared to 2022, due to: (i) a net decrease of $5.7 million in net income, as discussed above, partially offset by; (ii) a $1.2 million increase resulting from an increase in depreciation and amortization expense on consolidated and unconsolidated affiliates, and; (iii) a $232,000 increase resulting from the loss recorded during 2023 on the divestiture of real estate assets.

Current wording

Our FFO increased by $3.3 million during 2024, as compared to 2023, due to: (i) an increase of $3.8 million in net income, as discussed above, partially offset by; (ii) a $232,000 decrease resulting from the loss on divestiture of real estate assets recorded during 2023, and; (iii) a $299,000 decrease resulting from a decrease in depreciation and amortization expense incurred by consolidated and unconsolidated affiliates.

Previous wording

During 2023, we had a total of 73 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 22% of the aggregate rentable square feet of these properties (19% related to renewed leases and 3% related to new leases). During 2022, we had a total of 46 new or renewed leases related to the medical office buildings in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 13% of the aggregate rentable square feet of these properties (9% related to renewed leases and 4% related to new leases)

Current wording

During 2024, we had a total of 58 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 13% of the aggregate rentable square feet of these properties (10% related to renewed leases and 3% related to new leases). During

Previous wording

Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, increased by approximately 4% and 2% during 2023 and 2022, respectively. The weighted-average tenant improvement costs associated with new or renewed leases was approximately $7 and $23 per square foot during 2023 and 2022, respectively. The weighted-average tenant improvement costs associated with new leases in 2022 are impacted by the tenant improvements pursuant to new leases on the newly constructed Sierra Medical Plaza I, which was substantially completed in March, 2023. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 3% of base rental revenue over the term of the leases during each of 2023 and 2022. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.3% and 0.4% of the future aggregate base rental revenue over the lease terms during 2023 and 2022, respectively. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due.

Current wording

Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, increased by approximately 3% and 4% during 2024 and 2023, respectively. The weighted-average tenant improvement costs associated with new or renewed leases was approximately $7 per square foot during each of 2024 and 2023. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 3% of base rental revenue over the term of the leases during each of 2024 and 2023. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.3% of the future aggregate base rental revenue over the lease terms during each of 2024 and 2023. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due.

Previous wording

As disclosed below in Quantitative and Qualitative Disclosures About Market Risk-Market Risks Associated with Financial Instruments, on December 1, 2023, we entered into a fourth interest rate swap with a notional amount of $25 million. During 2023, net interest was paid to us from the counterparties pursuant to four interest rate swaps with a combined notional amount of $165 million. During 2022, net interest was paid to us from the counterparties pursuant to three interest rates swaps with a combined notional amount of $140 million.

Current wording

Please see below in Quantitative and Qualitative Disclosures About Market Risk-Market Risks Associated with Financial Instruments, for disclosure regarding our various interest rate swap agreements. Two interest rate swap agreements, with a combined aggregate notional amount of $85 million, expired in September, 2024 (consisting of a $35 million notional amount with a fixed interest rate of 1.4975% and a $50 million notional amount with a fixed interest rate of 1.144%). In October, 2024, those agreements were replaced with an interest rate swap agreement on a total notional amount of $85 million with a fixed interest rate of 3.2725%. During 2024 and 2023, net interest was paid to us from the counterparties pursuant to our interest rate swaps that were active during each period.

Previous wording

Interest expense increased by $6.2 million during 2023, as compared to 2022, due to: (i) a $11.4 million increase in interest expense on our revolving credit agreement primarily resulting from increases in our average cost of borrowings (6.64% average effective rate during 2023 as compared to 3.28% average effective rate during 2022), and in our average outstanding borrowings ($309.3 million during 2023 as compared to $277.9 million during 2022); (ii) a $4.8 million favorable change in interest rate swap income; (iii) a $583,000 decrease in mortgage interest expense; (iv) a $173,000 increase in interest expense due to a decrease capitalized interest on a major project that was substantially completed during the first quarter of 2023, and; (v) a $28,000 increase in amortization of financing fees and fair value of debt.

Current wording

Interest expense increased by $1.9 million during 2024, as compared to 2023, due to: (i) a $2.3 million increase in interest expense on our revolving credit agreement primarily resulting from increases in our average cost of borrowings (average borrowing rates, including commitment fee, of 6.78% during 2024 as compared to 6.64% during 2023), and in our average outstanding borrowings ($336.9 million during 2024 as compared to $309.3 million during 2023); (ii) a $149,000 increase due to a decrease in capitalized interest on a major project that was substantially completed during the first quarter of 2023; (iii) a $65,000 increase in amortization of financing fees and fair value of debt; (iv) a $49,000 increase due to a decrease in interest rate swap income, partially offset by; (v) a $690,000 decrease in mortgage interest expense due primarily to repayments of various fixed rate mortgages upon maturity during 2024 and 2023 utilizing borrowings under our revolving credit agreement. Please see Note 5 to the consolidated financial statements - Debt and Financial Instruments, for additional disclosure.

Previous wording

Please refer to Note 4 to the consolidated financial statements - Lease Accounting, for additional information regarding certain of our hospital facilities including the lease renewal in December, 2021, for Wellington Regional Medical Center located in West Palm Beach, Florida, information related to a vacant facility located in Evansville, Indiana, and a vacant parcel of land located in Chicago, Illinois, and disclosure regarding the asset purchase and sale agreement, as amended, with wholly-owned subsidiaries of UHS that was completed on December 31, 2021.

Current wording

Please refer to Note 4 to the consolidated financial statements - Lease Accounting, for additional information regarding certain of our hospital facilities including information related to a vacant facility located in Evansville, Indiana, and a vacant parcel of land located in Chicago, Illinois.

Previous wording

The healthcare industry is very labor intensive and salaries and benefits related to the employees of our tenants are subject to inflationary pressures, as are supply costs, construction costs and medical equipment and other costs. The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue 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 above standard compensation for essential workers. The staffing shortage has required certain of our tenants to enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel or required them to hire expensive temporary personnel. Our tenants have also experienced general inflationary cost increases related to medical supplies as well as certain other operating expenses. Many of these factors, which had a material unfavorable impact on the operating results of certain of our tenants during 2022, moderated to a certain degree during 2023.

Current wording

The healthcare industry is very labor intensive and salaries and benefits related to the employees of our tenants are subject to inflationary pressures, as are supply costs, construction costs and medical equipment and other costs. In the past, staffing shortages have, at times, required our tenants to hire expensive temporary personnel and/or enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel. Our tenants have also experienced general inflationary cost increases related to certain other operating expenses. Many of these factors, which had a material unfavorable impact on the operating results of certain of our tenants during 2022, moderated to a certain degree during 2023 and 2024.

Previous wording

Net cash provided by operating activities was $42.9 million during 2023 as compared to $46.8 million during 2022. The $3.9 million net decrease was attributable to:

Current wording

Net cash provided by operating activities was $46.9 million during 2024 as compared to $42.9 million during 2023. The $4.0 million net increase was attributable to:

Previous wording

an unfavorable change of $4.3 million due to a decrease in net income plus/minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation expense and loss on divestiture of real estate assets), as discussed above;

Current wording

a favorable change of $3.4 million due to an increase in net income plus/minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation expense and loss on divestiture of real estate assets), as discussed above;

Previous wording

an unfavorable change of $437,000 in tenant reserves, deposits and deferred and prepaid rents, and;

Current wording

a favorable change of $496,000 in tenant reserves, deposits and deferred and prepaid rents;

Previous wording

Net cash used in investing activities was $19.1 million during 2023 as compared to $36.7 million during 2022.

Current wording

Net cash used in investing activities was $13.9 million during 2024 as compared to $19.1 million during 2023.

Previous wording

During 2022, $36.7 million of net cash was used in investing activities as follows:

Current wording

During 2024, $13.9 million of net cash was used in investing activities as follows:

Previous wording

spent $94,000 in equity investments in an unconsolidated LLC.

Current wording

spent $5.9 million in equity investments in unconsolidated LLCs, and;

Previous wording

received $875,000 of cash in excess of income from LLCs, and;

Current wording

received $1.1 million of cash in excess of income from LLCs.

Previous wording

Net cash used in financing activities was $23.2 million during 2023 as compared to $25.0 million during 2022.

Current wording

Net cash used in financing activities was $34.2 million during 2024 as compared to $23.2 million during 2023.

Previous wording

The $25.0 million of cash used in financing activities during 2022 consisted of:

Current wording

The $34.2 million of cash used in financing activities during 2024 consisted of:

Previous wording

paid $39.2 million of dividends, including $60,000 of previously accrued dividends;

Current wording

paid $40.4 million of dividends, including $87,000 of previously accrued dividends;

Previous wording

received $26.2 million of net borrowings on our revolving credit agreement;

Current wording

received $22.3 million of net borrowings on our revolving credit agreement;

Previous wording

paid $12.2 million on mortgage notes payable that are non-recourse to us, including a $5.1 million repayment of a fixed rate mortgage loan that matured during the fourth quarter of 2022 and a $5.1 million repayment of a fixed rate mortgage loan that matured during the second quarter of 2022;

Current wording

paid $13.6 million on mortgage notes payable that are non-recourse to us, including a $12.2 million repayment of a fixed rate mortgage loan that matured during the second quarter of 2024;

Previous wording

received $177,000 of net cash from the issuance of shares of beneficial interest, and;

Current wording

paid $131,000, net of cash received for the issuance of shares of beneficial interest, in fees related to our ATM Program.

Previous wording

As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of $42.9 million during 2023 and $46.8 million during 2022. As also indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs and stock-based compensation expense, gains or losses on divestitures of real estate assets (as applicable), as well as changes in certain assets and liabilities, are the primary differences between our net income and net cash provided by operating activities for each year.

Current wording

As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of $46.9 million during 2024 and $42.9 million during 2023. As also indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs and stock-based compensation expense, gains or losses on divestitures of real estate assets (as applicable), as well as changes in certain assets and liabilities, are the primary differences between our net income and net cash provided by operating activities for each year. We declared and paid dividends of $40.4 million during 2024 and $39.8 million during 2023.

Previous wording

We declared and paid dividends of $39.8 million during 2023 and $39.2 million during 2022. During 2023, the $42.9 million of net cash provided by operating activities was approximately $3.2 million greater than the $39.8 million of dividends paid during 2023. During 2022, the $46.8 million of net cash provided by operating activities was approximately $7.6 million greater than the $39.2 million of dividends paid during 2022.

Current wording

During 2024, the $46.9 million of cash provided by operating activities was approximately $6.5 million greater than the $40.4 million of dividends paid during 2024. During 2023, the $42.9 million of net cash provided by operating activities was approximately $3.2 million greater than the $39.8 million of dividends paid during 2023.

Previous wording

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 $45.3 million of available borrowing capacity, net of outstanding borrowings and letters of credit as of December 31, 2023); (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, and/or; (iv) the issuance of other long-term debt.

Current wording

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 $425 million revolving credit agreement (which had $76.1 million of available borrowing capacity, net of outstanding borrowings as of December 31, 2024); (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 other long-term debt, and/or; (iv) the issuance of equity. In April, 2024 we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission pursuant to which we may offer up to $100 million of securities pursuant to supplemental prospectuses which we may file from time to time.