UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		62 — 1507028 (I.R.S. Employer Identification No.)

3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)

(615) 269-8175
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of April 30, 2009, 59,308,941 shares of the Registrant’s Common Stock were outstanding.

 

 

HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-Q

March 31, 2009

TABLE OF CONTENTS

			Page
Part I — Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Income			2
Condensed Consolidated Statements of Cash Flows			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			27
Part II — Other Information
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 6. Exhibits			30
Signature			31
EX-31.1
EX-31.2
EX-32

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)

		March 31,				December 31,
		2009				2008
ASSETS
Real estate properties:
Land		$	111,563			$	107,555
Buildings, improvements and lease intangibles			1,850,423				1,792,402
Personal property			17,121				16,985
Construction in progress			105,842				84,782
			2,084,949				2,001,724
Less accumulated depreciation			(391,643	)			(367,360	)
Total real estate properties, net			1,693,306				1,634,364
Cash and cash equivalents			12,376				4,138
Mortgage notes receivable			53,295				59,001
Assets held for sale and discontinued operations, net			12,180				90,233
Other assets, net			76,311				77,044
Total assets		$	1,847,468			$	1,864,780
LIABILITIES AND EQUITY
Liabilities:
Notes and bonds payable		$	950,807			$	940,186
Accounts payable and accrued liabilities			50,644				45,937
Liabilities held for sale and discontinued operations			5				32,821
Other liabilities			49,757				49,589
Total liabilities			1,051,213				1,068,533
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $.01 par value; 150,000,000 shares authorized; 59,308,285
and 59,246,284 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively			593				592
Additional paid-in capital			1,492,005				1,490,535
Accumulated other comprehensive loss			(6,461	)			(6,461	)
Cumulative net income			757,739				736,874
Cumulative dividends			(1,449,549	)			(1,426,720	)
Total stockholders’ equity			794,327				794,820
Noncontrolling interests			1,928				1,427
Total equity			796,255				796,247
Total liabilities and equity		$	1,847,468			$	1,864,780

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Three Months Ended March 31, 2009 and 2008
(Dollars in thousands, except per share data)
(Unaudited)

		2009				2008
REVENUES
Master lease rent		$	15,737			$	15,773
Property operating			42,910				32,115
Straight-line rent			351				(61	)
Mortgage interest			489				525
Other operating			3,509				3,850
			62,996				52,202
EXPENSES
General and administrative			6,967				6,045
Property operating			23,363				18,251
Bad debts, net of recoveries			435				145
Depreciation			15,753				11,489
Amortization			1,481				585
			47,999				36,515
OTHER INCOME (EXPENSE)
Re-measurement gain of equity interest upon acquisition			2,701				—
Interest expense			(10,074	)			(10,878	)
Interest and other income, net			155				136
			(7,218	)			(10,742	)
INCOME FROM CONTINUING OPERATIONS			7,779				4,945
DISCONTINUED OPERATIONS
Income from discontinued operations			514				1,249
Impairments			(22	)			(29	)
Gain on sales of real estate properties			12,609				637
INCOME FROM DISCONTINUED OPERATIONS			13,101				1,857
NET INCOME			20,880				6,802
Less: Net income attributable to noncontrolling interests			(15	)			(3	)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	20,865			$	6,799
Basic Earnings Per Common Share
Income from continuing operations		$	0.13			$	0.10
Discontinued operations			0.23				0.04
Net income attributable to common stockholders		$	0.36			$	0.14
Diluted Earnings Per Common Share
Income from continuing operations		$	0.13			$	0.10
Discontinued operations			0.22				0.03
Net income attributable to common stockholders		$	0.35			$	0.13
Weighted Average Common Shares Outstanding — Basic			58,130,574				49,413,058
Weighted Average Common Shares Outstanding — Diluted			58,847,384				50,407,119
Dividends Declared, per Common Share, During the Period		$	0.385			$	0.385

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2009 and 2008
(Dollars in thousands)
(Unaudited)

		2009				2008
Operating Activities
Net income		$	20,880			$	6,802
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			17,680				13,119
Stock-based compensation			1,288				1,296
Straight-line rent receivable			(353	)			64
Straight-line rent liability			113				43
Gain on sales of real estate properties			(12,609	)			(637	)
Re-measurement gain of equity interest upon acquisition			(2,701	)			—
Impairments			22				29
Equity in losses from unconsolidated joint ventures			2				264
Provision for bad debts, net of recoveries			437				217
State income taxes paid, net of refunds			53				—
Payment of partial pension settlement			(2,300	)			—
Changes in operating assets and liabilities:
Other assets			1,199				6,374
Accounts payable and accrued liabilities			1,090				3,779
Other liabilities			2,727				408
Net cash provided by operating activities			27,528				31,758
Investing Activities
Acquisition and development of real estate properties			(33,076	)			(19,560	)
Funding of mortgages and notes receivable			(3,451	)			(1,265	)
Distributions received from unconsolidated joint ventures			—				423
Proceeds from sales of real estate			63,907				3,415
Proceeds from mortgages and notes receivable repayments			38				36
Net cash provided by (used in) investing activities			27,418				(16,951	)
Financing Activities
Net borrowings (repayments) on unsecured credit facility			(4,000	)			8,000
Repayments on notes and bonds payable			(20,548	)			(907	)
Quarterly dividends paid			(22,829	)			(19,533	)
Proceeds from issuance of common stock			183				185
Proceeds received from noncontrolling interests			529				—
Distributions to noncontrolling interests			(43	)			(3	)
Net cash used in financing activities			(46,708	)			(12,258	)
Increase in cash and cash equivalents			8,238				2,549
Cash and cash equivalents, beginning of period			4,138				8,519
Cash and cash equivalents, end of period		$	12,376			$	11,068
Supplemental Cash Flow Information:
Interest paid		$	3,101			$	2,775
Capitalized interest		$	2,145			$	1,658
Capital expenditures accrued		$	15,764			$	4,842
Mortgage note payable assumed upon acquisition of joint venture interest (adjusted to fair value)		$	11,716			$	—
Mortgage note payable assumed by purchaser upon sale of joint venture interest		$	5,425			$	—

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements

March 31, 2009
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Business Overview

          Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust (“REIT”) that owns, acquires, manages, finances, and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $2.1 billion in 204 real estate properties and mortgages as of March 31, 2009, excluding assets classified as held for sale and including an investment in an unconsolidated joint venture. The Company’s 199 owned real estate properties, excluding assets classified as held for sale, are comprised of six facility types, located in 28 states, totaling approximately 12.1 million square feet. As of March 31, 2009, the Company provided property management services to approximately 8.5 million square feet nationwide.

Principles of Consolidation

          The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and certain other affiliated entities with respect to which the Company controlled or controls the operating activities and receives substantially all of the economic benefits.

          The Company accounts for its joint venture investments in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 94, “Consolidation of all Majority-Owned Subsidiaries,” Accounting Principles Board Standard No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and the American Institute of Certified Public Accountants Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” which provide guidance on whether an entity should consolidate an investment or account for it under the equity or cost methods. The Company’s investment in its unconsolidated joint ventures is included in other assets and the related equity income is recognized in other income (expense) on the Company’s Condensed Consolidated Financial Statements. On January 1, 2009, the Company adopted SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements and eliminates the diversity that existed in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions. In addition, net income attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. SFAS No. 160 requires prospective treatment, except for the presentation and disclosure requirements, which require retrospective treatment. The adoption of SFAS No. 160 did not have a significant impact on the Company’s consolidated financial position or earnings per share.

          The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. All significant inter-company accounts and transactions have been eliminated in the Condensed Consolidated Financial Statements.

          This interim financial information should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2009 due to many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of trends.

Use of Estimates in the Condensed Consolidated Financial Statements

          Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

Segment Reporting

          The Company owns, acquires, manages, finances, and develops outpatient, healthcare-related properties. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company discloses its operating results in a single segment.

Reclassifications

          Certain amounts in the Company’s Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale, and related liabilities, have been reclassified on the Company’s Condensed Consolidated Balance Sheet and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented. Also, in accordance with SFAS No. 160, all prior period noncontrolling interests on the Company’s Condensed Consolidated Balance Sheets have been reclassified from liabilities to equity and all prior period noncontrolling interests’ net income on the Company’s Condensed Consolidated Statements of Income have been reclassified to specifically identify net income attributable to the noncontrolling interests.

Revenue Recognition

          The Company recognizes revenue in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”). SAB No. 104 includes four criteria that must be met before revenue is realized or realizable and earned. The Company begins recognizing revenue when all four criteria have been met, such as persuasive evidence of an arrangement exists, the tenant has taken possession of and controls the physical use of the leased asset, and collectibility is reasonably assured.

          The Company derives most of its revenues from its real estate and mortgage notes receivable portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements generally fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in master lease rent, property operating income, or mortgage interest income on the Company’s Condensed Consolidated Statements of Income, based on the type of contractual agreement.

     Rental Income

          Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company’s lease agreements generally include provisions for stated annual increases or increases based on increases in a Consumer Price Index (“CPI”). Rental income from properties under master lease arrangements with tenants is included in master lease rent, and rental income from properties with multiple tenant lease arrangements is included in property operating income on the Company’s Condensed Consolidated Statements of Income.

     Interest Income

          Mortgage interest income and notes receivable interest income are recognized based on the interest rates and maturity date or amortization period specific to each note.

     Property operating income

          As of March 31, 2009, the Company had property operating agreements, between the Company and a sponsoring health system, related to eight of the Company’s 199 owned real estate properties. The property operating agreements obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in return for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the sponsor is responsible to pay to the Company the shortfall under the terms of these agreements. The Company recognizes the shortfall income in other operating income on the Company’s Condensed Consolidated Statements of Income.

Accumulated Other Comprehensive Loss

          SFAS No. 130, “Reporting Comprehensive Income,” requires that foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains or losses on available-for-sale securities, as well as other items, be included in comprehensive income (loss). The Company includes in accumulated other comprehensive loss its cumulative adjustment related to the adoption and subsequent application of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132(R),” which is generally recognized in the fourth quarter of each year. Total comprehensive income for the three months ended March 31, 2009 and 2008 was the same as net income.

Income Taxes

          No provision has been made for federal income taxes. The Company intends at all times to qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company must distribute at least 90% per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real estate investment trust.

          The Company must pay certain state income taxes which are generally included in general and administrative expense on the Company’s Condensed Consolidated Statements of Income.

          The Company classifies interest and penalties related to uncertain tax positions, if any, in its Condensed Consolidated Financial Statements as a component of general and administrative expense.

Incentive Plans

          The Company follows the provisions of SFAS No. 123(R), “Share-Based Payment,” for accounting for its stock-based awards. As of March 31, 2009, the Company had issued and outstanding various employee and non-employee stock-based awards. These awards included restricted stock issued to employees pursuant to the Company’s employee stock incentive plans, restricted stock issued to its Board of Directors under its non-employee director incentive plan, and options issued to employees pursuant to its employee stock purchase plan.

Accounting for Defined Benefit Pension Plans

          The Company accounts for its pension plans in accordance with SFAS No. 158. The Company has pension plans under which the Company’s Board of Directors and certain designated employees may receive retirement benefits upon retirement and the completion of five years of service with the Company. The plans are unfunded and benefits will be paid from earnings of the Company.

Operating Leases

          As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, the Company is obligated under operating lease agreements consisting primarily of its corporate office lease and various ground leases related to the Company’s real estate investments where the Company is the lessee.

Discontinued Operations and Assets Held for Sale

          The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Condensed Consolidated Statements of Income in accordance with the criteria established in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). Pursuant to SFAS No. 144, a company must report discontinued operations when a component of an entity has either been disposed of or is deemed to be held for sale if (i) both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Long-lived assets classified as held for sale on the Company’s Condensed Consolidated Balance Sheet are reported at the lower of their carrying amount or their fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale of such properties are characterized as impairment losses relating to discontinued operations in the Condensed Consolidated Statements of Income. As of March 31, 2009, the Company had three real estate properties classified as held for sale.

Land Held for Development

          Land held for development, which is included in construction in progress on the Company’s Condensed Consolidated Balance Sheet, includes parcels of land owned by the Company, upon which the Company intends to develop and own medical office and outpatient healthcare properties. See Note 6 for a detail of the Company’s land held for development.

Fair Value Measurements

          The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for its financial assets and liabilities on January 1, 2008 and for its non-financial assets and liabilities on January 1, 2009. The adoption of SFAS No. 157 has not had a significant impact on the Company’s financial position or results of operations. SFAS No. 157 defines fair value, expands disclosure requirements about fair value measurements, and establishes specific requirements as well as guidelines for a consistent framework to measure fair value. SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. SFAS No. 157 requires a company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.

          SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

	•		Level 1 — quoted prices for identical instruments in active markets;
	•		Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
	•		Level 3 — fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Real Estate Properties

          Real estate properties are recorded at cost. The cost of real estate properties acquired is allocated between land, buildings, tenant improvements, lease and other intangibles, and personal property based upon estimated fair values at the time of acquisition in accordance with SFAS No. 141(R), “Business Combinations,” as revised (“SFAS No. 141(R)”) which the Company adopted on January 1, 2009. SFAS No. 141(R) requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. Prior to the adoption of SFAS No. 141(R), the Company applied SFAS No. 141, “Business Combinations.”

Note 2. Real Estate and Mortgage Notes Receivable Investments

          The Company had investments of approximately $2.1 billion in 204 real estate properties and mortgage notes receivable as of March 31, 2009, excluding assets classified as held for sale and including an investment in an unconsolidated joint venture. The Company’s 199 owned real estate properties, excluding assets classified as held for sale, are located in 28 states with approximately 12.1 million total square feet. The table below details the Company’s investments.

		Number of				Investment								Square
(Dollars and Square Feet in thousands)		Investments				Amount				%				Feet
Owned properties
Master leases
Medical office			19			$	150,894				7.0	%			973
Physician clinics			19				134,405				6.3	%			774
Ambulatory care/surgery			7				40,505				1.9	%			160
Specialty outpatient			7				29,856				1.4	%			127
Specialty inpatient			12				218,611				10.2	%			864
Other			10				44,461				2.1	%			498
			74				618,732				28.9	%			3,396
Financial support agreements
Medical office			8				83,022				3.9	%			621
			8				83,022				3.9	%			621
Multi-tenanted with occupancy leases
Medical office			101				1,252,335				58.5	%			7,536
Physician clinics			12				39,545				1.8	%			246
Ambulatory care/surgery			4				59,570				2.8	%			268
			117				1,351,450				63.1	%			8,050
Land held for development			—				17,301				0.8	%			—
Corporate property			—				14,444				0.7	%			—
			—				31,745				1.5	%			—
Total owned properties			199				2,084,949				97.4	%			12,067
Mortgage notes receivable
Medical office			1				27,157				1.3	%			—
Physician clinics			2				16,841				0.8	%			—
Ambulatory care/surgery			1				9,297				0.4	%			—
			4				53,295				2.5	%			—
Unconsolidated joint ventures, net
Other			1				1,082				0.1	%			—
			1				1,082				0.1	%			—
Total real estate investments			204			$	2,139,326				100.00	%			12,067

Note 3. Acquisitions and Dispositions

Asset Acquisitions

          In January 2009, the Company acquired the remaining 50% equity interest in a joint venture (Unico 2006 MOB) which owns a 62,246 square foot on-campus medical office building in Oregon, for approximately $4.4 million in cash consideration. The building is approximately 97% occupied with lease maturities ranging from 2009 through 2025. In connection with the acquisition, the Company assumed an outstanding mortgage note payable held by the joint venture totaling approximately $12.8 million which bears an effective rate of 6.51% (including the $1.1 million fair value adjustment) and matures in 2021. Prior to the acquisition, the Company had a 50% equity investment in the joint venture totaling approximately $1.7 million which it accounted for under the equity method. In connection with the acquisition and in accordance with SFAS No. 141(R), the Company re-measured its previously held equity interest at the acquisition-date fair value and recognized a gain on the re-measurement of approximately $2.7 million which is recognized as income in the first quarter of 2009.

          In February 2009, a joint venture (HR Ladco Holdings, LLC), in which the Company has an 80% controlling interest, acquired a 33,974 square foot medical office building in Iowa for $10.7 million. The property is 100% leased

and occupied by two tenants with lease expirations in 2018. The building was constructed by the joint venture’s noncontrolling interest holder and the construction was funded by the Company through a construction loan. Upon acquisition by the joint venture, $8.0 million of the Company’s construction financing was converted to a mortgage note payable to the Company, with the remaining $1.1 million in construction financing added to the Company’s equity investment in the joint venture.

Asset Dispositions

          In February 2009, the Company disposed of the following:

	•		The sale of an 11,538 square foot medical office building in Florida in which the Company had an aggregate investment of approximately $1.4 million ($1.0 million, net). The Company received approximately $1.4 million in net proceeds and recognized a gain on sale of approximately $0.4 million.
	•		Completed the sale of a 139,467 square foot medical office building in Wyoming to the sponsor for $21.4 million. In December 2008, the Company received a $2.4 million deposit from the sponsor on the sale and received a $7.2 million termination fee from the sponsor for the termination of its financial support agreement with the Company. In February 2009, the Company received the remaining consideration of approximately $19.0 million (plus $0.2 million of interest). The Company had an aggregate investment of approximately $20.0 million ($15.8 million, net) in the medical office building and recognized a gain on sale of approximately $5.6 million.
	•		The sale of the Company’s membership interests in an entity which owned an 86,942 square foot medical office building in Washington. The Company acquired the entity in December 2008 and had an aggregate and net investment of approximately $10.7 million. The Company received approximately $5.3 million in net proceeds, and the purchaser assumed the mortgage note secured by the property of approximately $5.4 million. The Company recognized a $22,000 impairment charge on the disposition related to closing costs.

          In March 2009, the Company disposed of a 198,064 square foot medical office building in Nevada in which the Company had an aggregate investment of approximately $46.8 million ($32.7 million, net). The Company received approximately $38.0 million in net proceeds and concurrently paid off a $19.5 million mortgage note secured by the property. The Company recognized a gain on sale of approximately $6.6 million, net of liabilities of $1.3 million, and including the reversal of a $1.0 million unamortized premium related to the note.

Pending Disposition

          In August 2008, the Company entered into an agreement to sell a 113,555 square foot specialty inpatient facility in Michigan to the tenant. The Company’s aggregate investment in the building was approximately $13.9 million ($10.8 million, net) at March 31, 2009. The Company sold this property in the second quarter of 2009 for approximately $18.5 million and expects to recognize a gain on sale of approximately $7.6 million, net of closing costs. In accordance with SFAS No. 144, the property is classified as held for sale and is included in discontinued operations on the Company’s financial statements as of and for the three months ended March 31, 2009.

Discontinued Operations and Assets Held for Sale

          The tables below detail the assets, liabilities, and results of operations included in discontinued operations on the Company’s Condensed Consolidated Statements of Income and included in assets and liabilities held for sale and discontinued operations on the Company’s Condensed Consolidated Balance Sheets. At March 31, 2009 and December 31, 2008, the Company had three and 12 properties, respectively, classified as held for sale. Four of the properties held for sale at December 31, 2008 were sold during the first quarter of 2009, three of the properties remain in held for sale at March 31, 2009, and five of the properties were reclassified to held for use during the first quarter of 2009. The tenant of these five properties had exercised purchase options on each of these properties during 2008 but did not complete the purchase. Because the sale became improbable, the Company reclassified the properties out of held for sale and discontinued operations on the Company’s Condensed Consolidated Balance Sheet, and the operations of the properties were reclassified from discontinued operations to continuing operations on the Company’s Condensed Consolidated Statements of Income. Also, in accordance with SFAS No. 144, the Company recorded a depreciation adjustment in the first quarter of 2009 totaling approximately $0.5 million to reduce the Company’s carrying amounts of the properties to their respective adjusted net book values.

		March 31,				December 31,
(Dollars in thousands)		2009				2008
Balance Sheet data (as of the period ended):
Land		$	4,993			$	9,503
Buildings, improvements and lease intangibles			11,187				109,596
Personal property			—				30
			16,180				119,129
Accumulated depreciation			(4,004	)			(29,905	)
Assets held for sale, net			12,176				89,224
Other assets, net (including receivables)			4				1,009
Assets of discontinued operations, net			4				1,009
Assets held for sale and discontinued operations, net		$	12,180			$	90,233
Notes and bonds payable		$	—			$	5,452
Liabilities held for sale			—				5,452
Notes and bonds payable			—				23,281
Accounts payable and accrued liabilities			5				409
Other liabilities			—				3,679
Liabilities of discontinued operations			5				27,369
Liabilities held for sale and discontinued operations		$	5			$	32,821

		Three Months Ended
		March 31,
(Dollars in thousands, except per share data)		2009				2008
Statements of Income data (for the period ended):
Revenues (1)
Master lease rent		$	565			$	1,157
Property operating			821				1,924
Straight-line rent			2				(3	)
Other operating			216				251
			1,604				3,329
Expenses (2)
Property operating			632				888
Other operating			(9	)			—
Bad debt expense, net of recoveries			2				71
Depreciation			—				703
Amortization			—				10
			625				1,672
Other Income (Expense) (3)
Interest expense			(464	)			(408	)
Interest and other income, net			(1	)			—
			(465	)			(408	)
Income from Discontinued Operations			514				1,249
Impairments			(22	)			(29	)
Gain on sales of real estate properties			12,609				637
Income from Discontinued Operations		$	13,101			$	1,857
Income from Discontinued Operations per basic common share		$	0.23			$	0.04
Income from Discontinued Operations per diluted common share		$	0.22			$	0.03

Note 4. Notes and Bonds Payable

          The Company’s Condensed Consolidated Balance Sheet as of December 31, 2008 included four mortgage notes totaling $28.7 million in liabilities held for sale and discontinued operations. During the first quarter of 2009, as discussed in more detail in Note 3 and as reflected on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2009, the Company reclassified five properties and the related mortgage notes totaling $3.7 million previously included in held for sale to held for use. In the table below, the Company has also included those mortgage notes in the December 31, 2008 column to conform to the March 31, 2009 presentation.

		Mar. 31,				Dec. 31,				Maturity				Contractual				Principal				Interest
(In thousands)		2009				2008				Dates				Interest Rates				Payments				Payments
Unsecured Credit Facility		$	325,000			$	329,000				1/10			LIBOR + 0.90%				At maturity				Quarterly
Senior Notes due 2011, including premium			286,840				286,898				5/11				8.125%			At maturity				Semi-Annual
Senior Notes due 2014, net of discount			263,992				263,961				4/14				5.125%			At maturity				Semi-Annual
Mortgage notes payable, net of discounts			74,975				64,060				5/11-10/32				5.00%-7.625%			Monthly				Monthly
		$	950,807			$	943,919

          The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At March 31, 2009, the Company was in compliance with its financial covenant provisions under its various debt instruments.

Unsecured Credit Facility

          In January 2006, the Company entered into a $400.0 million credit facility (the “Unsecured Credit Facility”) with a syndicate of 10 banks, which is due in January 2010. Loans outstanding under the Unsecured Credit Facility bear interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate or the Federal Funds rate plus 0.50%) plus (y) a margin ranging from 0.60% to 1.20% (currently 0.90%), based upon the Company’s unsecured debt ratings. Additionally, the Company pays a facility fee per annum on the aggregate amount of commitments. The facility fee may range from 0.15% to 0.30% per annum (currently 0.20%), based on the Company’s unsecured debt ratings. At March 31, 2009, the Company had $325.0 million outstanding under the facility with a weighted average interest rate of approximately 1.42% and had borrowing capacity remaining, under its financial covenants, of approximately $75.0 million.

Senior Notes due 2011

          In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125%, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. The notes were originally issued at a discount of approximately $1.5 million, which yielded an 8.20% interest rate per annum upon issuance. The Company entered into interest rate swap agreements between 2001 and 2006 for notional amounts totaling $125.0 million to offset changes in the fair value of the notes but terminated the interest rate swaps in 2006. The net premium resulting from the interest rate swaps, net of the original discount, is combined with the principal balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets and is being amortized against interest expense over the remaining term of the notes yielding an effective interest rate on the notes of 7.896%. The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets.

		March 31,				December 31,
(In thousands)		2009				2008
Senior Notes due 2011 face value		$	286,300			$	286,300
Unamortized net gain (net of discount)			540				598
Senior Notes due 2011 carrying amount		$	286,840			$	286,898

Senior Notes due 2014

          In 2004, the Company publicly issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125%, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.5 million, yielding an effective interest rate of 5.19% per annum. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets.

						December 31,
(In thousands)		March 31, 2009				2008
Senior Notes due 2014 face value		$	264,737			$	264,737
Unaccreted discount			(745	)			(776	)
Senior Notes due 2014 carrying amount		$	263,992			$	263,961

Mortgage Notes Payable

          The following table details the Company’s mortgage notes payable, with related collateral, at March 31, 2009. The December 31, 2008 column has been adjusted to include $3.7 million in mortgage notes that were included in held for sale at December 31, 2008 but were subsequently reclassified to held for use during the first quarter of 2009, as discussed in more detail in Note 3.

																						Investment in				Contractual
						Effective								Number								Collateral				Balance at
		Original				Interest				Maturity				of Notes								at Mar. 31,				Mar. 31,				Dec. 31,
(Dollars in millions)		Balance				Rate (10)				Date				Payable				Collateral (11)				2009				2009				2008
Life Insurance Co. (1)		$	4.7				7.765	%			1/17				1			MOB				$	11.3			$	2.7			$	2.7
Commercial Bank (2)			23.4				7.220	%			5/11				5			4 MOBs/1 ASC					54.4				6.8				7.5
Commercial Bank (3)			1.8				5.550	%			10/32				1			OTH					7.7				1.8				1.8
Life Insurance Co. (4)			15.1				5.490	%			1/16				1			ASC					32.5				14.1				14.2
Commercial Bank (5)			17.4				6.480	%			6/15				1			MOB					19.7				14.3				14.3
Commercial Bank (6)			12.0				6.110	%			8/20				1			2 MOBs					19.3				9.6				9.6
Commercial Bank (7)			15.2				7.650	%			7/15				1			MOB					19.7				12.8				12.8
Life Insurance Co. (8)			1.5				6.810	%			7/16				1			SOP					2.2				1.2				1.2
Commercial Bank (9)			12.8				6.510	%			2/21				1			ASC					20.5				11.7				—
															13							$	187.3			$	75.0			$	64.1

Long-Term Debt Maturities

          Future maturities of the Company’s notes and bonds payable as of March 31, 2009 were as follows:

						Discount/				Total
		Principal				Premium				Notes and
(Dollars in thousands)		Maturities				Amortization				Bonds Payable				%
2009		$	3,255			$	(513	)		$	2,742				0.3	%
2010 (1)			329,687				(783	)			328,904				34.6	%
2011			289,603				(1,014	)			288,589				30.3	%
2012			1,838				(1,171	)			667				0.1	%
2013			1,950				(1,240	)			710				0.1	%
2014 and thereafter			332,944				(3,749	)			329,195				34.6	%
		$	959,277			$	(8,470	)		$	950,807				100.0	%

Note 5. Other Assets

          Other assets consist primarily of receivables, straight-line rent receivables, and intangible assets. Items included in other assets on the Company’s Condensed Consolidated Balance Sheets are detailed in the table below.

		March 31,				December 31,
(In millions)		2009				2008
Straight-line rent receivables		$	24.1			$	23.2
Equity investments in joint ventures			1.1				2.8
Prepaid assets			20.6				21.0
Accounts receivable, net			6.5				7.0
Above-market intangible assets, net			11.5				11.7
Deferred financing costs, net			2.7				3.1
Goodwill			3.5				3.5
Customer relationship intangible assets, net			1.2				1.2
Notes receivable, net			0.5				0.5
Other			4.6				3.0
		$	76.3			$	77.0

Equity investments in unconsolidated joint ventures

          At March 31, 2009 and December 31, 2008, the Company had investments in one and two unconsolidated joint ventures, respectively, which had investments in real estate properties. In January 2009, the Company acquired the remaining membership interest in one joint venture previously accounted for under the equity method. The Company accounts for its remaining joint venture investment under the cost method. The Company’s net investments in the joint venture are included in other assets on the Company’s Condensed Consolidated Balance Sheet, and the related income or loss is included in interest and other income, net on the Company’s Condensed Consolidated Statements of Income. The Company recognized income of approximately $74,000 and $269,000 for the three months ended March 31, 2009 and 2008, respectively, related to the joint venture accounted for under the cost method. The Company’s income (loss) recognized and distributions received for each period related to its joint ventures accounted for under the equity method are shown in the table below. The equity in losses for the three months ended March 31, 2008 included $0.3 million relating to a depreciation adjustment for the prior year recognized in the first quarter of 2008.

		Three Months Ended
		March 31,
(Dollars in thousands)		2009				2008
Net joint venture investments, beginning of period		$	2,784			$	18,356
Equity in losses recognized during the period			(2	)			(264	)
Acquisition of remaining equity interest in a joint venture			(1,700	)			—
Distributions received during the period			—				(423	)
Net joint venture investments, end of period		$	1,082			$	17,669

Note 6. Commitments and Contingencies

Construction in Progress

          As of March 31, 2009, the Company had four medical office buildings under construction with estimated completion dates ranging from the third quarter of 2009 through the second quarter of 2010. The Company also had land held for development at March 31, 2009 of approximately $17.3 million on which the Company expects to develop and own medical office and outpatient-related facilities. The table below details the Company’s construction in progress and land held for development as of March 31, 2009. The information included in the table below represents management’s estimates and expectations at March 31, 2009, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.

		Estimated				Property												CIP at				Estimated				Estimated
		Completion				Type								Approximate				March 31,				Remaining				Total
State		Date				(1)				Properties				Square Feet				2009				Funding				Investment
(Dollars in thousands)
Under construction:
Texas			3Q 2009			MOB					1				135,000			$	23,882			$	9,118			$	33,000
Illinois			4Q 2009			MOB					1				100,000				12,644				13,756				26,400
Texas			4Q 2009			MOB					1				120,000				13,567				15,033				28,600
Hawaii			2Q 2010			MOB					1				133,000				38,448				47,552				86,000
Land held for development:
Texas											—								9,184
Texas											—								8,117
											4				488,000			$	105,842			$	85,459			$	174,000

Other Construction

          The Company also had various remaining first-generation tenant improvements budgeted as of March 31, 2009 totaling approximately $23.4 million related to properties that were developed by the Company and a tenant improvement obligation totaling approximately $0.4 million related to a project developed by a joint venture acquired by the Company in 2008. The Company also had remaining commitments totaling approximately $8.6 million at March 31, 2009 related to two construction loans which the Company anticipates funding in 2009.

Legal Proceedings

          The Company has previously reported on the involvement of a wholly-owned affiliate, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), as a defendant in a shareholder derivative suit filed by a HealthSouth Corporation (“HealthSouth”) shareholder and the terms of an agreed proposed settlement of the claims against Capstone. The settlement transactions between Capstone and HealthSouth were concluded in March 2009, and the court approved the settlement and dismissal of the case against Capstone on May 8, 2009. In connection with the settlement, the Company entered into agreements with HealthSouth Corporation to purchase and lease a new inpatient rehabilitation hospital in Arizona and to modify the terms of several existing leases. HealthSouth and Capstone each also agreed to pay $0.6 million to the derivative plaintiff’s counsel. Management believes the new development and business transactions are favorable to the Company, and the Company continues to deny any liability for the claims presented by the derivative plaintiff.

          The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s financial condition or results of operations.

Note 7. Stockholders’ Equity

Common Stock Dividends

          During 2009, the Company’s Board of Directors declared common stock cash dividends as shown in the table below:

		Per Share								Date Paid
Dividend		Amount				Date of Declaration		Date of Record		(* Payable)
4th Quarter 2008		$	0.385			February 3, 2009		February 20, 2009		March 5, 2009
1st Quarter 2009		$	0.385			May 5, 2009		May 22, 2009		* June 5, 2009

Earnings per share

          The table below sets forth the computation of basic and diluted earnings per share as required by SFAS No. 128, “Earnings Per Share” for the three months ended March 31, 2009 and 2008.

		Three Months Ended
		March 31,
(Dollars in thousands, except per share data)		2009				2008
Weighted average shares
Weighted average shares outstanding			59,294,999				50,732,112
Unvested restricted stock			(1,164,425	)			(1,319,054	)
Weighted average shares — Basic			58,130,574				49,413,058
Weighted average shares — Basic			58,130,574				49,413,058
Dilutive effect of restricted stock			647,429				939,270
Dilutive effect of employee stock purchase plan			69,381				54,791
Weighted average shares — Diluted			58,847,384				50,407,119
Net income
Income from continuing operations		$	7,779			$	4,945
Noncontrolling interests’ share in earnings			(15	)			(3	)
Income from continuing operations attributable to common stockholders			7,764				4,942
Discontinued operations			13,101				1,857
Net income attributable to common stockholders		$	20,865			$	6,799
Basic earnings per common share
Income from continuing operations		$	0.13			$	0.10
Discontinued operations			0.23				0.04
Net income attributable to common stockholders		$	0.36			$	0.14
Diluted earnings per common share
Income from continuing operations		$	0.13			$	0.10
Discontinued operations			0.22				0.03
Net income attributable to common stockholders		$	0.35			$	0.13

Incentive Plans

          The Company has issued and outstanding various stock-based awards. These awards include restricted stock issued to employees pursuant to the Company’s employee stock incentive plans, restricted stock issued to its Board of Directors under its non-employee director incentive plan, and options issued to employees pursuant to its employee stock purchase plan.

          A summary of the activity under the incentive plans for the three months ended March 31, 2009 and 2008 is included in the table below.

		Three Months Ended
		March 31,
		2009				2008
Stock-based awards, beginning of period			1,111,728				1,289,646
Granted			48,402				49,704
Vested			(1,809	)			(33,388	)
Forfeited			—				(3,280	)
Stock-based awards, end of period			1,158,321				1,302,682

          Under the Company’s employee stock purchase plan, in January of each year each eligible employee is able to purchase up to $25,000 of Common Stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the employee stock purchase plan expire if not exercised 27 months after each such option’s date of grant. In accordance with SFAS No. 123(R), the Company recorded approximately $280,000 to general and administrative expenses during the first quarter of 2009 relating to the annual grant of options to its employees under the employee stock purchase plan.

          A summary of the activity under the employee stock purchase plan for the three months ended March 31, 2009 and 2008 is included in the table below.

		Three Months Ended
		March 31,
		2009				2008
Outstanding and exercisable, beginning of period			250,868				179,603
Granted			219,184				194,832
Exercised			(3,848	)			(2,104	)
Forfeited			(5,171	)			(11,767	)
Expired			—				—
Outstanding and exercisable, end of period			461,033				360,564

          The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests:

														Accumulated
										Additional				Other				Cumulative								Total				Non-
(Dollars in thousands, except		Preferred				Common				Paid-In				Comprehensive				Net				Cumulative				Stockholders’				controlling
per share data)		Stock				Stock				Capital				Loss				Income				Dividends				Equity				Interests				Total Equity
Balance at December 31, 2008		$	—			$	592			$	1,490,535			$	(6,461	)		$	736,874			$	(1,426,720	)		$	794,820			$	1,427			$	796,247
Issuance of stock			—				—				182				—				—				—				182				—				182
Stock-based compensation			—				1				1,288				—				—				—				1,289				—				1,289
Net income			—				—				—				—				20,865				—				20,865				15				20,880
Other comprehensive income			—				—				—				—				—				—				—				—				—
Comprehensive income																																			20,880
Common dividends ($0.385 per share)			—				—				—				—				—				(22,829	)			(22,829	)			—				(22,829	)
Distributions to noncontrolling interests			—				—				—				—				—				—				—				(42	)			(42	)
Proceeds from noncontrolling interests			—				—				—				—				—				—				—				528				528
Balance at March 31, 2009		$	—			$	593			$	1,492,005			$	(6,461	)		$	757,739			$	(1,449,549	)		$	794,327			$	1,928			$	796,255

Note 8. Defined Benefit Pension Plans

          The Company has pension plans under which the Company’s Board of Directors and three designated employees may receive certain benefits upon retirement and the completion of five years of service with the Company. The plans are unfunded, and benefits will be paid from earnings of the Company. During the fourth quarter of 2008, the Company froze the maximum annual benefits payable under the employee plan at $896,000. This revision resulted in a curtailment of benefits for the Company’s chief executive officer. In consideration of the curtailment and as partial settlement of benefits, the Company made a one-time cash payment of $2.3 million to its chief executive officer in January 2009, resulting in additional benefit expense of $1.0 million recognized during the first quarter of 2009. Net periodic benefit cost recorded related to the Company’s pension plans for the three months ended March 31, 2009 and 2008 is detailed in the following table.

		Three Months Ended
		March 31,
(In thousands)		2009				2008
Service costs		$	77			$	318
Interest costs			234				304
Effect of partial pension settlement			1,017				—
Amortization of net gain/loss			171				222
			1,499				844
Net loss recognized in other comprehensive loss			—				—
Total recognized in net periodic benefit cost and other comprehensive loss		$	1,499			$	844

Note 9. Other Operating Income

          Other operating income on the Company’s Condensed Consolidated Statements of Income generally includes shortfall income recognized under its property operating agreements, interest income on notes receivable, and other items as detailed in the table below.

		Three Months Ended
		March 31,
(In thousands)		2009				2008
Property lease guaranty revenue		$	2,654			$	3,065
Interest income on notes receivable			125				70
Management fee income			45				45
Replacement rent			625				616
Other			60				54
		$	3,509			$	3,850

Note 10. Taxable Income

Taxable Income

          The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its annual taxable income to its stockholders.

          As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes has been made in the accompanying Condensed Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income.

          Earnings and profits, the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary from net income because of different depreciation recovery periods and methods, and other items.

          The following table reconciles the Company’s consolidated net income to taxable income for the three months ended March 31, 2009 and 2008:

		Three Months Ended
		March 31,
(In thousands)		2009				2008
Net income attributable to common stockholders		$	20,865			$	6,799
Reconciling Items to Taxable Income:
Depreciation and amortization			4,360				2,878
Gain or loss on disposition of depreciable assets			5,589				(3,708	)
Straight-line rent			(240	)			107
Receivable allowances			489				355
Stock-based compensation			1,541				1,602
Other			1,503				(443	)
Taxable income (1)		$	34,107			$	7,590
Dividends paid		$	22,829			$	19,533

State Income Taxes

     State income tax expense and state income tax payments for the three months ended March 31, 2009 and 2008 are detailed in the table below.

		Three Months Ended
		March 31,
(In thousands)		2009				2008
State income tax expense:
Texas gross margins tax		$	116			$	98
Other			42				34
Total state income tax expense		$	158			$	132
State income tax payments, net of refunds		$	53			$	—

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Disclosure Regarding Forward-Looking Statements

          This report and other materials Healthcare Realty Trust Incorporated (the “Company”) has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risk, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and in this report that could significantly affect the Company’s current plans and expectations and future financial condition and results.

          The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.

          For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2008 and in Item 1A of Part II of this quarterly report on Form 10-Q.

Business Overview

          The Company is a self-managed and self-administered REIT that owns, manages and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. Management believes that by providing a complete spectrum of real estate services, the Company can differentiate its competitive market position, expand its asset base and increase revenues over time.

          The Company’s revenues are generally derived from rentals on its healthcare real estate properties. The Company incurs operating and administrative expenses, including compensation, office rent and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio and acquiring additional properties. The Company also incurs interest expense on its various debt instruments and depreciation and amortization expense on its real estate portfolio.

Executive Overview

          The Company’s real estate portfolio, diversified by facility type, geography, tenant and payor mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice patterns. At March 31, 2009, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 44.5%, with 65.1% of its debt portfolio maturing after 2010. The Company had borrowings outstanding under its Unsecured Credit Facility totaling $325.0 million at March 31, 2009, with a capacity remaining under its financial covenants of $75.0 million.

          Despite the continued economic downturn and financial markets upheaval, the Company’s first quarter performance was characterized by solid operations and leasing. Overall portfolio occupancy remained stable, while rental rates on renewing leases showed strong increases consistent with previous quarters. The Company also signed several major leases at several of its recently completed developments.

          The capital and credit markets continue to be volatile as a result of adverse economic conditions. Limited access to debt and equity markets could impact the Company’s cost of capital and its ability to refinance maturing indebtedness, as well as its ability to engage in acquisition and development activity. The Company’s ability to access capital could be impacted by various factors including general market conditions and the slowdown in the economy, increasing interest rates, changes in the credit ratings on the Company’s senior notes, the market price of the Company’s capital stock, the performance of its portfolio, tenants and operators, the perception of the Company’s potential future earnings and cash

distributions, any unwillingness on the part of lenders to make loans to the Company and any deterioration in the financial position of lenders that might make them unable to meet their current commitments to the Company. The Company continues to monitor the ongoing credit crisis and could address any resulting capital constraints through one or more of the following, as conditions permit: (i) accessing the public debt and/or equity markets; (ii) obtaining mortgage financing or a credit facility secured by a portion of the Company’s $1.9 billion of unencumbered real estate assets; (iii) obtaining new lending commitments from the banks in the Company’s Unsecured Credit Facility, or other banks, to fund a new credit facility; (iv) decreasing distributions to stockholders; and/or (v) reducing or delaying acquisition and development activity.

Trends and Matters Impacting Operating Results

          Management monitors factors and trends important to the Company and the REIT industry in order to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 below are some of the factors and trends that management believes may impact future operations of the Company.

2009 Capital Financing Activities

          The Company anticipates refinancing its Unsecured Credit Facility and may obtain unsecured debt or secured financing on certain of its unencumbered real estate assets during 2009. The Company expects that the additional interest expense related to the refinancing will negatively impact its cash flows and results from operations.

2009 Acquisitions

          During the first quarter of 2009, the Company acquired the remaining equity interest in a joint venture which owns a 62,246 square foot on-campus medical office building in Oregon, for $4.4 million of cash consideration, and assumed an outstanding mortgage totaling approximately $12.8 million. The building is 97% occupied with lease expirations through 2025. During the first quarter, a joint venture in which the Company has an 80% controlling interest acquired a 33,974 square foot medical office building in Iowa for $10.7 million. The property is 100% leased to two tenants.

2009 Dispositions

          During the first quarter of 2009, the Company disposed of four medical office buildings for approximately $66.1 million in net proceeds and repaid a $19.5 million mortgage note secured by one of the properties. The Company also sold a property in the second quarter of 2009 for approximately $18.5 million.

Development Activity

          At March 31, 2009, the Company had four construction projects underway. The Company expects completion of the core and shell of three of the four projects with budgets totaling approximately $88.0 million during 2009 and expects the core and shell of the fourth project with a budget totaling approximately $86.0 million to be completed during the second quarter of 2010. In addition to the projects currently under construction, the Company is financing an on-campus medical office development in Iowa comprised of six facilities, with a total budget of approximately $72 million, of which the Company expects to finance the remaining $22.8 million during 2009 and 2010. With respect to five of the six facilities, the Company will have an option to purchase each facility at a market cap rate upon its completion and attaining full occupancy. The sixth facility is under contract for sale to an unrelated party. As discussed in “2009 Acquisitions,” one of the five properties was acquired during the first quarter of 2009 for $10.7 million. See Note 6 to the Condensed Consolidated Financial Statements for more information on the Company’s development activities.

Expiring Leases

          Master leases on 14 of the Company’s properties expire during 2009. The Company expects to renew three leases representing nearly one-third of the expiring square footage. The Company has opted not to renew the master leases relating to about one-half of the properties, which are located on or near hospital campuses and in locations where the Company already has existing management capabilities. These properties have existing physician subtenants, and the Company will assume these subtenant leases upon the expiration of the master leases. With respect to the remaining properties, the Company believes that it will lease the properties to another single tenant.

          Approximately 440 of the Company’s leases in its multi-tenanted buildings expire during 2009, with each tenant lessee occupying an average of approximately 3,188 square feet. Approximately 86% of the leases expiring are located in on-campus properties, which traditionally have a high probability of renewal. Nearly half of the leases expiring in these multi-tenant facilities are with hospital-related entities, a result of the Company’s numerous

acquisitions in 2004. Historically, hospital-related tenants who occupy space in on-campus buildings have a high probability of renewal. The majority of the healthcare systems who have leases expiring in 2009 have already indicated to the Company that they plan to renew substantially all of their leases. In addition, management expects that the majority of the non-hospital tenants will renew at favorable rates.

Funds from Operations

          Funds from Operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” Impairment charges may not be added back to net income in calculating FFO, which has the effect of decreasing FFO in the period recorded.

          Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. Management uses FFO and FFO per share to compare and evaluate its own operating results from period to period, and to monitor the operating results of the Company’s peers in the REIT industry. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.

          However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. FFO for the three months ended March 31, 2009 was impacted favorably by a re-measurement gain of $2.7 million, or $0.05 per diluted common share, recognized in connection with the acquisition of the remaining interests in a joint venture during the first quarter of 2009. The table below reconciles FFO to net income for the three months ended March 31, 2009 and 2008:

		Three Months Ended
		March 31,
(Dollars in thousands, except per share data)		2009				2008
Net income attributable to common stockholders		$	20,865			$	6,799
Gain on sales of real estate properties			(12,609	)			(637	)
Real estate depreciation and amortization			16,883				13,273
Total adjustments			4,274				12,636
Funds from Operations — Basic and Diluted		$	25,139			$	19,435
Funds from Operations per Common Share — Basic		$	0.43			$	0.39
Funds from Operations per Common Share — Diluted		$	0.43			$	0.39
Weighted Average Common Shares Outstanding — Basic			58,130,574				49,413,058
Weighted Average Common Shares Outstanding — Diluted			58,847,384				50,407,119