For years, Universal Health Services ( UHS) has relied on a real estate investment trust -- spawned and now run by the company itself -- for deeply discounted lease rates on hospitals and medical office buildings.

However, the hospital operator could see that lucrative arrangement come to an end. The REIT, known as Universal Health Realty Income Trust ( UHT), or UHT, recently fielded a buyout offer from an unidentified party that could seek true market rates for the Universal leases. UHT rejected that offer, without explanation, but still looks like a ripe takeover candidate to some.

Currently, Universal owns just 6.7% of UHT and has only one director -- Chairman Alan Miller -- on UHT's board. However, Universal relies on its own executives to run UHT and even pockets an annual fee, totaling more than $1 million, for its services. Under that arrangement, Universal has long managed to secure cheap lease rates for much of UHT's property. Up to now, Universal -- which provides more than half of UHT's revenue -- has always ranked as the REIT's largest tenant.

But some investors, citing the recent buyout offer, believe that Universal could lose control of the REIT. UHT originally responded to that offer by rewarding shareholders with a raised dividend on its own. However, the company still pays a smaller dividend than some of its peers and, some people say, pockets less from its Universal leases than another owner probably would.

Ultimately, some critics believe, Universal has been operating UHT in a manner that benefits its own shareholders at the expense of UHT itself. And UHT's decision to avoid new ownership -- which could have unlocked the real value of many UHT properties -- has raised fresh questions about the closely intertwined companies.

"There could be some attention given to the close ties between UHS and UHT," Merrill Lynch analyst David Tsoupros acknowledged, when upgrading UHT to buy following last month's buyout offer. "These close ties were once commonplace but have become increasingly rare in the post-Sarbanes-Oxley world."

Universal, which declined the opportunity to comment for this story, saw its stock drop $1.35 Friday to $57.76. UHT, which surged on last month's dividend increase, added 48 cents to $34.48. Both stocks have outperformed the broader market over the past year.

Close Ties

Universal formally established UHT in 1986. At that time, the company named only one person -- besides its own chairman -- as a UHT director. That person, Daniel Cain, currently fails to qualify as an independent director because he pocketed a $200,000 "finder's fee" from a transaction involving UHT in 2003. However, UHT lists its remaining four directors, added in more recent years, as independent.

Still, UHT counts little else as its own. Miller chairs and runs both Universal and UHT. Universal Controller Charles Boyle doubles as CFO of the REIT. Cheryl Ramagano serves as treasurer of both companies. And Bruce Gilbert is the sole general counsel for Universal and UHT.

Indeed, UHT's proxy states that all of the REIT's officers work for Universal as well. And Universal itself has acknowledged the power it wields over UHT as a result.

"We conduct the trust's day-to-day affairs, provide administrative services and present investment opportunities," Universal disclosed in its latest annual report. Thus, "management believes that it has the ability to exercise significant influence over the trust."

For Universal, at least, that arrangement has so far worked out quite well.

Untapped Value

Tsoupros, one of only two analysts who regularly follow UHT, has offered specific details.

In the beginning, he wrote, Universal leased virtually all of UHT's real estate. Even today, he noted, Universal still leases plenty.

For example, he said, Universal leases five of UHT's seven hospitals. Moreover, he said, the minimum rent generated by those hospitals totals just $11.5 million even though true market rates would bring in an estimated $46.6 million.

"We believe the value of UHT's properties is significantly greater than the value of the leases," Tsoupros said. "This is particularly true for those properties operated by Universal Health Services."

Tsoupros upgraded UHT because he viewed the recent buyout offer as an important "value-creating event." For starters, he noted, the offer has already led to a 10% increase in the company's dividend. And he said further dividend hikes could follow.

Alternatively, of course, UHT could wind up with an independent owner that might seek higher lease rates in the future. So far, the company has yet to disclose who made the first offer. But some investors believe that Ventas ( VTR) -- a much larger health care REIT -- could have been the one and, while shunned, may be unwilling to give up just yet. If so, Ventas CEO Debra Cafaro's background in real estate law could come in handy when renegotiating the Universal leases. Ventas declined to comment for this story.

Whatever happens, some -- including Tsoupros -- believe that UHT could ultimately become worth more.

"We believe the emergence of an unsolicited bid for the company could lead to value being created for shareholders," Tsoupros wrote, "either if a deal for the company is done or if UHT management chooses to unlock some of the significant value embedded in the REIT's portfolio."