Healthcare Realty Trust Incorporated
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
     
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 001-11852
 
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
     
Maryland   62 - 1507028
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 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 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):
Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o            Smaller reporting company o
(Do not check if a smaller
reporting company)
     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 July 31, 2008, 50,758,481 shares of the Registrant’s Common Stock were outstanding.
 
 

 


 

HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
June 30, 2008
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 EX-31.1 Section 302 Certification of the CEO
 EX-31.2 Section 302 Certification of the CFO
 EX-32 Section 906 Certification of the CEO and CFO

 


Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
                 
    (Unaudited)        
    June 30,     December 31,  
    2008     2007  
ASSETS
               
Real estate properties:
               
Land
  $ 99,386     $ 102,321  
Buildings, improvements and lease intangibles
    1,492,638       1,483,547  
Personal property
    16,543       16,305  
Construction in progress
    101,345       94,457  
 
           
 
    1,709,912       1,696,630  
Less accumulated depreciation
    (363,566 )     (345,457 )
 
           
Total real estate properties, net
    1,346,346       1,351,173  
 
               
Cash and cash equivalents
    4,882       8,519  
 
               
Mortgage notes receivable
    37,285       30,117  
 
               
Assets held for sale and discontinued operations, net
    20,229       15,639  
 
               
Other assets, net
    81,358       90,044  
 
           
 
               
Total assets
  $ 1,490,100     $ 1,495,492  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Notes and bonds payable
  $ 795,652     $ 785,289  
 
               
Accounts payable and accrued liabilities
    34,014       37,376  
 
               
Liabilities of discontinued operations
    4,511       34  
 
               
Other liabilities
    39,947       40,798  
 
           
 
               
Total liabilities
    874,124       863,497  
 
               
Commitments and contingencies
               
 
               
Stockholders’ 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; 50,757,916 and 50,691,331 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively
    508       507  
 
               
Additional paid-in capital
    1,288,552       1,286,071  
 
               
Accumulated other comprehensive loss
    (4,346 )     (4,346 )
 
               
Cumulative net income
    715,748       695,182  
 
               
Cumulative dividends
    (1,384,486 )     (1,345,419 )
 
           
 
               
Total stockholders’ equity
    615,976       631,995  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 1,490,100     $ 1,495,492  
 
           
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, 2007, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Three Months Ended June 30, 2008 and 2007
(Dollars in thousands, except per share data)
(Unaudited)
                 
    2008     2007  
REVENUES
               
Master lease rent
  $ 14,787     $ 14,456  
Property operating
    34,886       31,803  
Straight-line rent
    (137 )     9  
Mortgage interest
    542       460  
Other operating
    4,990       4,786  
 
           
 
    55,068       51,514  
 
               
EXPENSES
               
General and administrative
    5,863       5,220  
Property operating
    20,112       18,179  
Bad debts, net of recoveries
    115       77  
Interest
    11,209       12,153  
Depreciation
    12,385       10,883  
Amortization
    575       1,204  
 
           
 
    50,259       47,716  
 
           
 
               
INCOME FROM CONTINUING OPERATIONS
    4,809       3,798  
 
               
DISCONTINUED OPERATIONS
               
Income from discontinued operations
    1,242       2,363  
Gain on sales of real estate properties
    7,715       7,482  
 
           
INCOME FROM DISCONTINUED OPERATIONS
    8,957       9,845  
 
           
 
               
NET INCOME
  $ 13,766     $ 13,643  
 
           
 
               
Basic Earnings Per Common Share
               
Income from continuing operations per common share
  $ 0.10     $ 0.08  
Discontinued operations per common share
    0.18       0.21  
 
           
Net income per common share
  $ 0.28     $ 0.29  
 
           
 
               
Diluted Earnings Per Common Share
               
Income from continuing operations per common share
  $ 0.10     $ 0.08  
Discontinued operations per common share
    0.17       0.21  
 
           
Net income per common share
  $ 0.27     $ 0.29  
 
           
 
               
Weighted Average Common Shares Outstanding — Basic
    49,431,724       46,603,643  
 
           
 
               
Weighted Average Common Shares Outstanding — Diluted
    50,474,762       47,577,334  
 
           
 
               
Dividends Declared, per Common Share, During the Period
  $ 0.385     $ 0.660  
 
           
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, 2007, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Six Months Ended June 30, 2008 and 2007

(Dollars in thousands, except per share data)
(Unaudited)
                 
    2008     2007  
REVENUES
               
Master lease rent
  $ 30,238     $ 29,354  
Property operating
    68,911       63,343  
Straight-line rent
    (204 )     43  
Mortgage interest
    1,067       812  
Other operating
    9,226       9,782  
 
           
 
    109,238       103,334  
 
               
EXPENSES
               
General and administrative
    11,908       11,395  
Property operating
    39,135       36,163  
Bad debts, net of recoveries
    333       82  
Interest
    22,407       25,558  
Depreciation
    24,430       21,567  
Amortization
    1,169       2,620  
 
           
 
    99,382       97,385  
 
           
 
               
INCOME FROM CONTINUING OPERATIONS
    9,856       5,949  
 
               
DISCONTINUED OPERATIONS
               
Income from discontinued operations
    2,387       8,959  
Impairments
    (29 )     (2,792 )
Gain on sales of real estate properties
    8,352       37,871  
 
           
INCOME FROM DISCONTINUED OPERATIONS
    10,710       44,038  
 
           
 
               
NET INCOME
  $ 20,566     $ 49,987  
 
           
 
               
Basic Earnings Per Common Share
               
Income from continuing operations per common share
  $ 0.20     $ 0.13  
Discontinued operations per common share
    0.22       0.94  
 
           
Net income per common share
  $ 0.42     $ 1.07  
 
           
 
               
Diluted Earnings Per Common Share
               
Income from continuing operations per common share
  $ 0.20     $ 0.13  
Discontinued operations per common share
    0.21       0.92  
 
           
Net income per common share
  $ 0.41     $ 1.05  
 
           
 
               
Weighted Average Common Shares Outstanding — Basic
    49,422,391       46,575,554  
 
           
 
               
Weighted Average Common Shares Outstanding — Diluted
    50,442,808       47,587,624  
 
           
 
               
Dividends Declared, per Common Share, During the Period
  $ 0.77     $ 6.07  
 
           
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, 2007, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2008 and 2007
(Dollars in thousands)
(Unaudited)
                 
    2008     2007  
Operating Activities
               
Net income
  $ 20,566     $ 49,987  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    26,480       27,396  
Stock-based compensation
    2,403       2,666  
Straight-line rent receivable
    199       (95 )
Straight-line rent liability
    86       1,095  
Gain on sales of real estate properties
    (8,352 )     (37,871 )
Gain on repurchase of notes payable
    (9 )      
Impairments
    29       2,792  
Equity in losses from unconsolidated LLCs
    148       252  
Provision for bad debts, net of recoveries
    331       82  
State income taxes paid, net of refunds
    (621 )     (41 )
Changes in operating assets and liabilities:
               
Other assets
    5,866       (2,001 )
Accounts payable and accrued liabilities
    (3,686 )     (6,777 )
Other liabilities
    (717 )     4,906  
 
           
Net cash provided by operating activities
    42,723       42,391  
 
               
Investing Activities
               
Acquisition and development of real estate properties
    (37,694 )     (37,963 )
Funding of mortgages and notes receivable
    (7,181 )     (4,071 )
Distributions received from unconsolidated LLCs
    867       524  
Proceeds from sales of real estate
    22,040       281,699  
Proceeds from mortgages and notes receivable repayments
    79       65,519  
 
           
Net cash provided by (used in) investing activities
    (21,889 )     305,708  
 
               
Financing Activities
               
Borrowings on notes and bonds payable
    90,000       304,839  
Repayments on notes and bonds payable
    (69,825 )     (365,661 )
Repurchase of notes payable
    (5,332 )      
Special dividend paid
          (227,157 )
Quarterly dividends paid
    (39,067 )     (63,165 )
Proceeds from issuance of common stock
    361       1,767  
Common stock redemption
    (282 )     (30 )
Credit facility amendment fee
    (326 )      
 
           
Net cash used in financing activities
    (24,471 )     (349,407 )
 
           
 
               
Decrease in cash and cash equivalents
    (3,637 )     (1,308 )
Cash and cash equivalents, beginning of period
    8,519       1,950  
 
           
Cash and cash equivalents, end of period
  $ 4,882     $ 642  
 
           
 
               
Supplemental Cash Flow Information:
               
Interest paid
  $ 25,201     $ 27,008  
Capitalized interest
    3,110       1,552  
Capital expenditures accrued
    7,370       2,130  
Mortgage note payable assumed
          1,840  
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, 2007, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2008
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Business Overview
     Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust (“REIT”) that integrates owning, developing, financing and managing income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $1.8 billion in 181 real estate properties and mortgages as of June 30, 2008, excluding assets classified as held for sale and including investments in three unconsolidated joint venture limited liability companies (“LLCs”). The Company’s 174 owned real estate properties, excluding assets classified as held for sale, are comprised of six facility types, located in 24 states, totaling approximately 10.8 million square feet. As of June 30, 2008, the Company provided property management services to approximately 7.2 million square feet nationwide.
Principles of Consolidation
     The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, consolidated variable interest entities (“VIEs”) 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 did not consolidate any variable interest entities during 2008 as the real estate properties related to its variable interest entities were sold during 2007 with the sale of the senior living assets.
     The Company accounts for its joint venture investments in accordance with the American Institute of Certified Public Accountants Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” which provides guidance on whether an entity should consolidate an investment or account for it under the equity or cost methods.
     The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States for complete financial statements that are included in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2007. 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 to Shareholders on Form 10-K for the year ended December 31, 2007. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2008 due to many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of trends.

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Variable Interest Entities
     In accordance with Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51” (“FIN No. 46R”), a company must evaluate whether certain relationships it has with other entities constitute a variable interest in a variable interest entity (“VIE”). Prior to the sale of the Company’s senior living assets in 2007, the Company had concluded it had a variable interest in 21 VIEs and had also concluded that it was the primary beneficiary in six of the 21 VIEs. Therefore, in accordance with FIN No. 46R, the Company had consolidated the six entities into its Consolidated Financial Statements. As such, the Company’s Condensed Consolidated Income Statement for the three and six months ended June 30, 2007 includes, as part of discontinued operations, the operations of the six VIEs through their respective disposition dates. As of June 30, 2008, the Company concluded that it does not have any relationships with other entities constituting a variable interest in any VIEs.
Use of Estimates in the Condensed Consolidated Financial Statements
     Preparation of the Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America 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 is in the business of owning, developing, managing, and financing 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 FASB Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company discloses its operating results in a single segment.
Reclassifications
     Certain reclassifications have been made in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2007 to conform to the June 30, 2008 presentation.
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 collectibility is reasonably assured and the tenant has taken possession of or controls the physical use of the leased asset.
     The Company derives most of its revenues from its real estate property 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 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. Additional rent, generally defined in most lease agreements as the cumulative increase in a Consumer Price Index (“CPI”) from the lease start date to the CPI as of the end of the previous year, is calculated as of the beginning of each year, and is then billed and recognized as income during the year as provided for in the lease. Rental income from properties under master lease

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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 amortized period specific to each note.
   Property operating income
     As of June 30, 2008, the Company had property operating agreements, between the Company and a sponsoring health system, relating to 14 of the Company’s 174 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 and six months ended June 30, 2008 and 2007 is detailed in the following table.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands)   2008     2007     2008     2007  
Net income
  $ 13,766     $ 13,643     $ 20,566     $ 49,987  
Other comprehensive income
                      120  
 
                       
Total comprehensive income
  $ 13,766     $ 13,643     $ 20,566     $ 50,107  
 
                       
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 the 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 June 30, 2008, 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

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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, 2007, the Company is obligated under operating lease agreements consisting primarily of the 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 periodically sells properties based on market conditions and 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 June 30, 2008, the Company had classified eight real estate properties 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.
New Pronouncements
   Fair Value Measurements
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement applies to other current pronouncements that require or permit fair value measurements but does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 on January 1, 2008 for its financial assets and liabilities. The Company does not anticipate that the full adoption of SFAS No. 157 will have a significant impact on the Company’s financial position or its results of operations.

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   The Fair Value Option for Financial Assets and Financial Liabilities
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”). SFAS No. 159, which became effective for the Company on January 1, 2008, provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different fair value measurement attributes for similar types of assets and liabilities. The Company has elected not to report any of its financial assets or liabilities at fair value. As such, SFAS No. 159 has not had an impact on the Company’s Condensed Consolidated Financial Statements.
   Business Combinations and Noncontrolling Interests in Consolidated Financial Statements
     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS No. 160”). These standards were designed to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. 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. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 also eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 141(R) and SFAS No. 160 will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of these new standards to impact its Consolidated Financial Statements.
Note 2. Real Estate and Mortgage Notes Receivable Investments
     The Company had investments of approximately $1.8 billion in 181 real estate properties and mortgage notes receivable as of June 30, 2008, excluding assets classified as held for sale and including investments in three unconsolidated limited liability companies. The Company’s 174 owned real estate properties, excluding assets classified as held for sale, are located in 24 states with approximately 10.8 million total square feet. The table below details the Company’s investments.

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            Investment        
    Number of                     Square  
(Dollars and Square Feet in thousands)   Investments     Amount     %     Feet  
Owned properties
                               
Master leases
                               
Medical office
    9     $ 67,729       3.7 %     494  
Physician clinics
    20       137,673       7.8 %     803  
Ambulatory care/surgery
    7       39,963       2.3 %     160  
Specialty outpatient
    6       27,700       1.6 %     118  
Specialty inpatient
    13       232,469       13.2 %     977  
Other
    10       43,751       2.5 %     498  
 
                       
 
    65       549,285       31.1 %     3,050  
Financial support agreements
                               
Medical office
    14       150,398       8.5 %     1,048  
 
                       
 
    14       150,398       8.5 %     1,048  
Multi-tenanted with occupancy leases
                               
Medical office
    79       871,983       49.5 %     6,215  
Physician clinics
    12       38,626       2.2 %     244  
Ambulatory care/surgery
    4       58,938       3.3 %     268  
Other
          10,047       0.6 %      
 
                       
 
    95       979,594       55.6 %     6,727  
 
                               
Land held for development
          16,379       0.9 %      
Corporate property
          14,256       0.8 %      
 
                       
 
          30,635       1.7 %      
 
                       
Total owned properties
    174       1,709,912       96.9 %     10,825  
 
                       
 
                               
Mortgage notes receivable
                               
Medical office
    2       20,424       1.1 %      
Physician clinics
    2       16,861       1.0 %      
 
                       
 
    4       37,285       2.1 %      
Unconsolidated LLC investments, net
                               
Medical office
    2       10,714       0.6 %      
Other
    1       6,627       0.4 %      
 
                       
 
    3       17,341       1.0 %      
 
                       
Total real estate investments
    181     $ 1,764,538       100.0 %     10,825  
 
                       
Asset Acquisitions
     The Company did not complete any acquisitions during the first six months of 2008 but continued construction on its properties under development.
     On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each containing 146,000 square feet, and a six-level parking structure, containing 977 parking spaces, in Dallas, Texas for $59.2 million. The Company funded the transaction with proceeds from its unsecured credit facility.

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Asset Dispositions
     During the second quarter of 2008, pursuant to a purchase option exercised by a tenant, the Company disposed of an 83,718 square foot building in Texas in which it had a total gross investment of approximately $18.5 million ($10.4 million, net). The sales price was $18.5 million, and the Company recognized an $8.0 million net gain from the sale, net of closing costs of $0.1 million. The Company also recorded expense of approximately $0.3 million to the gain on sale of real estate properties related to state tax adjustments on the sale of the senior living assets in 2007.
     During the first quarter of 2008, the Company disposed of a 36,951 square foot building in Mississippi in which it had a total gross investment of approximately $2.9 million ($1.6 million, net). The sales price was $2.0 million, and the Company recognized a $0.3 million net gain from the sale, net of closing costs of $0.1 million. Also, the Company sold a 7,500 square foot physician clinic in Texas in which it had a total gross investment of approximately $0.5 million ($0.4 million, net). The sales price was $0.5 million, and the Company recognized a $0.1 million net gain from the sale. Finally, the Company disposed of a parcel of land in Pennsylvania for approximately $0.8 million, which approximated the Company’s net book value. During the first quarter of 2008, the Company also recorded a $0.2 million gain due to the collection of certain receivables by the Company relating to senior living properties sold during 2007.
Purchase Options Exercised
     In April 2008, the Company received notice from a tenant of its intent to purchase five properties from the Company pursuant to purchase options contained in its leases with the Company. The Company’s aggregate investment in the buildings was approximately $23.9 million ($16.8 million, net) at June 30, 2008. The Company expects to sell these properties to the tenant in the first quarter of 2009 for approximately $23.1 million in net proceeds, including $0.8 million in lease termination fees, which should result in a gain on sale of approximately $4.6 million. In accordance with SFAS No. 144, the five properties are classified as held for sale and are included in discontinued operations as of and for the three and six months ended June 30, 2008.
     During 2007, the Company received notice from a tenant of its intent to purchase two buildings from the Company pursuant to purchase options. The Company sold one of the buildings to the tenant during the second quarter of 2008 as discussed in Asset Dispositions above. The parties were in dispute as to the enforceability of the purchase option on the second property and, therefore, the Company was uncertain as to when the transaction would close, if at all. As a result, the second property was not reclassified to assets held for sale and its results of operations were not reclassified to discontinued operations on the Company’s Condensed Consolidated Financial Statements. During July 2008, the Company resolved the dispute with the tenant and agreed to sell the property to the tenant for $38.0 million. The Company’s gross investment in the second building was approximately $46.8 million ($32.8 million, net) and the Company carried a mortgage note payable on the building with a principal balance of $19.8 million at June 30, 2008. The transaction is expected to close during the third quarter of 2008, and the Company expects to recognize a gain on sale of approximately $2.5 million.
Note 3. Discontinued Operations
     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.

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    June 30,     December 31,  
(Dollars in thousands)   2008     2007  
Balance Sheet data (as of the period ended):
               
Land
  $ 3,585     $ 3,055  
Buildings, improvements and lease intangibles
    24,513       22,736  
Personal property
    8       70  
 
           
 
    28,106       25,861  
Accumulated depreciation
    (8,452 )     (10,462 )
 
           
Assets held for sale, net
    19,654       15,399  
 
               
Other assets, net (including receivables)
    575       240  
 
           
Assets included in discontinued operations, net
    575       240  
 
           
 
               
Assets held for sale and discontinued operations, net
  $ 20,229     $ 15,639  
 
           
 
               
Notes and bonds payable
  $ 4,405     $  
Accounts payable and accrued liabilities
    42        
Other liabilities
    64       34  
 
           
Liabilities of discontinued operations
  $ 4,511     $ 34  
 
           
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands, except per share data)   2008     2007     2008     2007  
Statements of Income data (for the period ended):
                               
Revenues (1)
                               
Master lease rent
  $ 1,387     $ 2,870     $ 2,866     $ 9,846  
Property operating
    14       (113 )     29       198  
Straight-line rent
    3       26       6       52  
Mortgage interest
          331             1,841  
Other operating
          4,492             9,277  
 
                       
 
    1,404       7,606       2,901       21,214  
Expenses (2)
                               
General and administrative
    (25 )     9       (25 )     9  
Property operating
    105       451       223       847  
Other operating
          4,151             8,364  
Bad debt expense, net
                (2 )      
Interest
    82       228       171       487  
Depreciation
          404       147       2,548  
 
                       
 
    162       5,243       514       12,255  
 
                       
 
                               
Income from Discontinued Operations
    1,242       2,363       2,387       8,959  
Impairments
                (29 )     (2,792 )
Gain on sales of real estate properties, net (3)
    7,715       7,482       8,352       37,871  
 
                       
 
                               
Income from Discontinued Operations
  $ 8,957     $ 9,845     $ 10,710     $ 44,038  
 
                       
 
                               
Income from Discontinued Operations per basic common share
  $ 0.18     $ 0.21     $ 0.22     $ 0.94  
 
                       
 
                               
Income from Discontinued Operations per diluted common share
  $ 0.17     $ 0.21     $ 0.21     $ 0.92  
 
                       
 
                               
(1) Total revenues for the three months ended June 30, 2007 include $6.2 million from the senior living assets which were disposed of during 2007. Total revenues for the three months ended June 30, 2008 and 2007 also include $0.5 million and $0.5 million, respectively, related to properties sold other than the senior living assets, and $0.9 million and $0.9 million, respectively, related to properties classified as held for sale. Total revenues for the six months ended June 30, 2007 include $18.0 million from the senior living assets which were disposed of during 2007. Total revenues for the six months ended June 30, 2008 and 2007 include $1.8 million and $1.7 million, respectively, related to properties classified as held for sale, and $1.1 million and $1.5 million, respectively, related to properties sold other than the senior living assets.
(2) Total expenses for the three months ended June 30, 2007 include $4.5 million from the senior living assets which were disposed of during 2007 and $0.5 million related other properties sold in 2007. Total expenses for the three months ended June 30, 2008 and 2007 include $0.2 million and $0.2 million, respectively, related to properties classified as held for sale. Total expenses for the six months ended June 30, 2008 and 2007 include $0.1 million and $10.8 million, respectively, from the senior living assets which were disposed of during 2007, and $0.4 million and $0.6 million, respectively, related to properties classified as held for sale. The six months ended June 30, 2007 also includes $0.9 million related to properties sold other than the senior living assets.

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(3) The gain for the three months ended June 30, 2008 and June 30, 2007 includes the gain on the disposal of senior living assets, less certain expenses, of ($0.3) million and $7.3 million, respectively, and $8.0 million and $0.2 million, respectively, less certain expenses from other properties sold. The gain for the six months ended June 30, 2007 includes $37.7 million from the senior living assets which were disposed of during 2007. The gain for the six months ended June 30, 2008 and 2007 includes a gain of $8.4 million and $0.2 million related to other properties sold.
Note 4. Notes and Bonds Payable
     The table below details the Company’s notes and bonds payable. At June 30, 2008, the Company had classified 2 mortgage notes payable totaling $4.4 million as held for sale on the Company’s Condensed Consolidated Balance Sheet. As such, those mortgage notes are not reflected in the June 30, 2008 balances in the table below.
                                                 
    June 30,     Dec. 31,     Maturity     Contractual     Principal     Interest  
(In thousands)   2008     2007     Dates     Interest Rates     Payments     Payments  
Unsecured Credit Facility due 2009
  $ 158,000     $ 136,000       1/09     LIBOR + 0.90%   At maturity   Quarterly
Senior Notes due 2011, including premium
    297,219       300,864       5/11       8.125%   At maturity   Semi-Annual
Senior Notes due 2014, net of discount
    297,214       298,976       4/14       5.125%   At maturity   Semi-Annual
Mortgage notes payable
    43,219       49,449       5/11-10/32       5.49%-8.50%   Monthly   Monthly
 
                                           
 
  $ 795,652     $ 785,289                                  
 
                                           
     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 June 30, 2008, the Company was in compliance with its financial covenant provisions under its various debt instruments.
Unsecured Credit Facility due 2009
     The Company has a $400.0 million credit facility (the “Unsecured Credit Facility due 2009”) with a syndicate of 10 banks that it entered into in January 2006. The Unsecured Credit Facility due 2009 matures in January 2009, but the term may be extended one additional year at the option of the Company. Loans outstanding under the Unsecured Credit Facility due 2009 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. As of June 30, 2008, the weighted average rate on borrowings outstanding on the facility was approximately 3.36%. 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. On April 17, 2008, the Company entered into an amendment to its credit facility which modified certain financial covenants and had the effect of providing the Company full borrowing capacity under its credit facility. At June 30, 2008, the Company had $158.0 million outstanding under the facility and had borrowing capacity remaining of $242.0 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 8.202% 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 $125.0 million of the notes. The Company 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%.

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     The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets.
                 
    June 30,     December 31,  
(In thousands)   2008     2007  
Senior Notes due 2011 face value
  $ 296,480     $ 300,000  
Unamortized net gain (net of discount)
    739       864  
 
           
Senior Notes due 2011 carrying amount
  $ 297,219     $ 300,864  
 
           
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.
                 
    June 30,     December 31,  
(In thousands)   2008     2007  
Senior Notes due 2014 face value
  $ 298,160     $ 300,000  
Unaccreted discount
    (946 )     (1,024 )
 
           
Senior Notes due 2014 carrying amount
  $ 297,214     $ 298,976  
 
           
Mortgage Notes Payable
     The following table details the Company’s mortgage notes payable, with related collateral, at June 30, 2008. At June 30, 2008, the Company had classified two mortgage notes payable totaling $4.4 million to liabilities of discontinued operations on the Company’s Condensed Consolidated Balance Sheet. As such, those mortgage notes are not reflected in the June 30, 2008 balances in the table below:
                                                                 
                                            Investment in     Contractual Balance at  
            Effective             Number             Collateral              
    Original     Interest     Maturity     of Notes             at June 30,     June 30,     Dec. 31,  
(Dollars in millions)   Balance     Rate     Date     Payable     Collateral (6)     2008     2008     2007 (7)  
Life Insurance Co. (1)
  $ 23.3       7.765 %     7/26       1     MOB   $ 46.8     $ 19.8     $ 20.0  
Life Insurance Co. (2)
    4.7       7.765 %     1/17       1     MOB     11.2       2.9       3.0  
Commercial Bank (3)
    23.4       7.220 %     5/11       3     3 MOBs     31.3       4.4       5.1  
Commercial Bank (4)
    1.8       5.550 %     10/32       1     OTH     7.3       1.8       1.8  
Life Insurance Co. (5)
    15.1       5.490 %     1/16       1     ASC     32.5       14.3       14.5  
 
                                                       
 
                            7             $ 129.1     $ 43.2     $ 44.4  
 
                                                       
 
(1)   Payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due at maturity.
 
(2)   Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.
 
(3)   Payable in fully amortizing monthly installments of principal and interest due at maturity.
 
(4)   Payable in monthly installments of principal and interest based on a 27-year amortization with the final payment due at maturity.
 
(5)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.
 
(6)   MOB-Medical office building; ASC-Ambulatory care/Surgery; OTH-Other.
 
(7)   The contractual balance at December 31, 2007 excludes two mortgage notes payable totaling $5.1 million that were classified as liabilities of discontinued operations on the Company’s Condensed Consolidated Balance Sheet at June 30, 2008.
     The contractual interest rates for the seven outstanding mortgages ranged from 5.49% to 8.50% at June 30, 2008.

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Other Long-Term Debt Information
Long-Term Debt Maturities
     Future maturities of the Company’s notes and bonds payable as of June 30, 2008 were as follows:
                                 
            Discount/     Total        
    Principal     Premium     Notes and        
(Dollars in thousands)   Maturities     Amortization     Bonds Payable     %  
2008
  $ 1,214     $ 44     $ 1,258       0.2 %
2009(1)
    160,574       102       160,676       20.2 %
2010
    2,768       115       2,883       0.4 %
2011
    298,601       (73 )     298,528       37.5 %
2012
    1,436       (177 )     1,259       0.1 %
2013 and thereafter
    331,267       (219 )     331,048       41.6 %
 
                       
 
  $ 795,860     $ (208 )   $ 795,652       100.0 %
 
                       
(1) Includes $158.0 million outstanding on the Unsecured Credit Facility due 2009 which may be extended one additional year at the Company’s option.
Senior Note Repurchases
     In April 2008, the Company’s Board of Directors authorized the Company to repurchase in the open market up to $20.0 million of its Senior Notes due 2011 and $30.0 million of its Senior Notes due 2014. As of June 30, 2008, the Company had repurchased $3.5 million of its Senior Notes due 2011 and $1.8 million of its Senior Notes due 2014. In conjunction with the repurchases, the Company amortized a pro-rata portion of the premium or discount related to the notes and recognized a $9,000 aggregate net gain. Subsequent to June 30, 2008, the Company repurchased an additional $9.5 million of its Senior Notes due 2014. The Company may elect, from time to time, to repurchase and retire its notes either when market conditions are appropriate or as a means to reinvest available cash.
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.
                 
    June 30,     December 31,  
(In thousands)   2008     2007  
Straight-line rent receivables
  $ 22,463     $ 23,222  
Investments in unconsolidated LLCs
    17,341       18,356  
Prepaid assets
    11,572       12,868  
Accounts receivable, net
    9,669       15,417  
Above-market intangible assets, net
    6,609       6,660  
Deferred financing costs, net
    3,576       4,067  
Goodwill
    3,487       3,487  
Acquired patient accounts receivable, net
    1,803       1,912  
Customer relationship intangible assets, net
    1,292       1,311  
Notes receivable, net
    552       624  
Other
    2,994       2,120  
 
           
 
  $ 81,358     $ 90,044  
 
           
Unconsolidated Limited Liability Companies
     At June 30, 2008, the Company had investments in three joint venture LLCs that had investments in healthcare-related real estate properties. The Company accounts for two of the investments under the equity method and one of the investments under the cost method. The Company’s net investments in the three LLCs are included in other assets on the Company’s Condensed Consolidated Balance Sheet, and the related income or loss is included in other operating income on the Company’s Condensed Consolidated Income Statement. The Company recognized income of approximately $271,000 and $268,000, respectively, for the three months ended June 30, 2008 and 2007 and $539,000 and $526,000, respectively, for the six months ended June 30, 2008 and 2007, related to the LLC accounted for under the cost method. The Company’s income (loss) recognized and distributions received for each period related to its LLCs

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accounted for under the equity method are shown in the table below. The equity in losses for the six months ended June 30, 2008 includes $0.3 million relating to a depreciation adjustment recorded by the joint venture for the prior year recognized during the first quarter of 2008 by the Company.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands)   2008     2007     2008     2007  
Net LLC investments, beginning of period
  $ 17,669     $ 19,720     $ 18,356     $ 20,079  
Equity in income (losses) recognized during the period
    116       (155 )     (148 )     (252 )
Distributions received during the period
    (444 )     (262 )     (867 )     (524 )
 
                       
Net LLC investments, end of period
  $ 17,341     $ 19,303     $ 17,341     $ 19,303  
 
                       
Note 6. Commitments and Contingencies
Construction in Progress
     As of June 30, 2008, the Company had nine medical office/outpatient buildings under development with estimated completion dates ranging from the third quarter of 2008 through the fourth quarter of 2010. The Company also had land held for development at June 30, 2008 of approximately $16.4 million on which the Company expects to develop and own medical office buildings and outpatient healthcare facilities. The table below details the Company’s construction in progress and land held for development as of June 30, 2008. The information included in the table below represents management’s estimates and expectations at June 30, 2008 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates and leasing may not reflect actual results.
                                                         
    Estimated     Property                     CIP at     Estimated     Estimated  
    Completion     Type             Approximate     June 30,     Remaining     Total  
State   Date     (1)     Properties     Square Feet     2008     Fundings     Investment  
(Dollars in thousands)                                                  
Under construction:
                                                       
Colorado
    3Q 2008     MOB     2       169,000     $ 18,883     $ 8,517     $ 27,400  
Arizona
    4Q 2008     MOB     2       188,000       19,578       11,422       31,000  
Texas
    3Q 2009     MOB     1       135,000       7,387       25,613       33,000  
Illinois
    3Q 2009     MOB     1       100,000       7,073       19,327       26,400  
Texas
    4Q 2009     MOB     1       120,000       6,646       21,954       28,600  
Hawaii
    1Q 2010     MOB     1       133,000       16,472       69,528       86,000  
Texas
    4Q 2010     MOB     1       90,000       8,927       17,373       26,300  
 
                                                       
Land held for development:
                                                       
Texas
                                  7,962                  
Illinois
                                  8,417                  
 
                                             
 
                    9       935,000     $ 101,345     $ 173,734     $ 258,700  
 
                                             
 
(1)   MOB-Medical office building
Other Construction
     The Company also had various remaining first-generation tenant improvements budgeted as of June 30, 2008 totaling approximately $13.0 million related to properties that were developed by the Company, as well as a tenant improvement obligation totaling approximately $0.8 million related to a project developed by a joint venture which the Company accounts for under the equity method.

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Legal Proceedings
     On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October 1998. None of the Capstone officers and directors remained in their positions following the Company’s acquisition of Capstone. The complaint seeks unspecified compensatory and punitive damages. Following the settlement of a number of claims unrelated to the claims against Capstone, the court lifted a lengthy stay on discovery in April 2007, and discovery is now proceeding. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.
     In connection with the shareholder derivative suit discussed above, Capstone filed a claim with its directors’ and officers’ liability insurance carrier, Twin City Fire Insurance Company (“Twin City”), an affiliate of the Hartford family of insurance companies, for indemnity against legal and other expenses incurred by Capstone related to the suit and any judgment rendered. Twin City asserted that the Company’s claim was not covered under the D&O policy and refused to reimburse Capstone’s defense expenses. In September 2005, Capstone filed suit against Twin City for coverage and performance under its insurance policy. In the fourth quarter of 2007, the federal district judge in Birmingham, Alabama entered partial summary judgment on Capstone’s claim for advancement of defense costs under the policy. Capstone and Twin City have agreed to an interim plan for Twin City’s payment of defense costs, fees and expenses, subject to Twin City’s appeal of the partial summary judgment ruling. As of June 30, 2008, the Company had received $1.6 million from Twin City and had recorded approximately $1.2 million in additional receivables due from Twin City for incurred but unreimbursed expenses related to the suit. The Company will continue to bill amounts to Twin City for its expenses incurred in defense of the underlying HealthSouth shareholder derivative litigation. The Company is recording these amounts as an offset to property operating expense on the Company’s Condensed Consolidated Statements of Income. The Company does not believe an appellate reversal of the partial summary judgment ruling is probable. However, if the ruling were to be reversed, the Company would be required to repay all monies received from Twin City.
     In May 2006, Methodist Health System Foundation, Inc. (the “Foundation”) filed suit against a wholly owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana. The Foundation is the sponsor under financial support agreements which support two of the Company’s medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an affiliate of Universal Health Services, Inc. in 2003. The Foundation’s assets and income are not primarily dependent upon the operations of Methodist Hospital, which has remained closed since Hurricane Katrina struck in August 2005. The Foundation’s suit alleges that Hurricane Katrina and its aftermath should relieve the Foundation of its obligations under the financial support agreements. The agreements do not contain any express provision allowing for termination upon a casualty event but do allow for a reduction in the Foundation’s obligation for any insurance proceeds received by the Company for business interruption related to a casualty event. During the first quarter of 2008, the Company settled with its insurance carrier and received insurance proceeds totaling approximately $3.8 million, of which approximately $2.5 million was applied to its business interruption claim, offsetting a portion of the Company’s receivable from the Foundation, and $1.3 million applied to its property casualty claim, offsetting a property casualty receivable, which partially reimbursed the Company for costs it incurred related to rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina. The Company continues to record revenue under its financial support agreements with the Foundation with approximately $0.9 million recognized as revenue in 2008. At June 30, 2008, the Company had a receivable recorded from the Foundation totaling approximately $2.5 million. If the Foundation is relieved of its obligations to pay the remaining outstanding amounts to the Company, the Company’s cash flows and

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results of operations could be negatively impacted. The Company believes the Foundation’s claims are not meritorious and will vigorously defend the enforceability of the financial support agreements.
     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
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 and six months ended June 30, 2008 and 2007.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands, except per share data)   2008     2007     2008     2007  
Weighted Average Shares
                               
Weighted Average Shares Outstanding
    50,745,354       47,870,653       50,738,733       47,846,837  
Unvested Restricted Stock Shares
    (1,313,630 )     (1,267,010 )     (1,316,342 )     (1,271,283 )
 
                       
Weighted Average Shares — Basic
    49,431,724       46,603,643       49,422,391       46,575,554  
 
                               
Weighted Average Shares — Basic
    49,431,724       46,603,643       49,422,391       46,575,554  
Dilutive effect of Restricted Stock Shares
    1,000,560       943,539       971,782       970,680  
Dilutive effect of Employee Stock Purchase Plan
    42,478       30,152       48,635       41,390  
 
                       
Weighted Average Shares — Diluted
    50,474,762       47,577,334       50,442,808       47,587,624  
 
Net Income
                               
Income from Continuing Operations
  $ 4,809     $ 3,798     $ 9,856     $ 5,949  
Discontinued Operations
    8,957       9,845       10,710       44,038  
 
                       
Net Income
  $ 13,766     $ 13,643     $ 20,566     $ 49,987  
 
                       
 
                               
Basic Earnings per Common Share
                               
Income from Continuing Operations per common share
  $ 0.10     $ 0.08     $ 0.20     $ 0.13  
Discontinued Operations per common share
    0.18       0.21       0.22       0.94  
 
                       
Net Income per common share
  $ 0.28     $ 0.29     $ 0.42     $ 1.07  
 
                       
 
                               
Diluted Earnings per Common Share
                               
Income from Continuing Operations per common share
  $ 0.10     $ 0.08     $ 0.20     $ 0.13  
Discontinued Operations per common share
    0.17       0.21       0.21       0.92  
 
                       
Net Income per common share
  $ 0.27     $ 0.29     $ 0.41     $ 1.05  
 
                       
Common Stock Dividends
     During 2008, the Company’s Board of Directors has declared common stock cash dividends as shown in the table below:
                                 
    Per Share     Date of             Date Paid  
Dividend   Amount     Declaration     Date of Record     (* Payable)  
4th Quarter 2007
  $ 0.385     January 29, 2008   February 15, 2008   March 3, 2008
1st Quarter 2008
  $ 0.385     April 29, 2008   May 15, 2008   June 3, 2008
2nd Quarter 2008
  $ 0.385     July 29, 2008   August 15, 2008   * September 3, 2008

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Equity Offering
     On September 28, 2007, the Company sold 2,760,000 shares of common stock, par value $0.01 per share, at $24.85 per share to an investment bank. The transaction generated approximately $68.4 million in net proceeds to the Company. The proceeds were used to fund acquisitions under contract and construction underway of medical office and outpatient facilities and for other general purposes; and were used to temporarily repay a portion of amounts outstanding under the Company’s Unsecured Credit Facility due 2009.
Authorization to Repurchase Common Stock
     The Company’s Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company’s common stock. Such purchases, if any, may be made either in the open market or through privately negotiated transactions. As of June 30, 2008, the Company had not repurchased any shares under this authorization.
Incentive Plans
     The Company has issued and outstanding various employee and non-employee 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 restricted stock incentive plans for the three and six months ended June 30, 2008 and 2007 is included in the table below.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Nonvested shares, beginning of period
    1,302,682       1,253,376       1,289,646       1,261,613  
Granted
    16,096       45,332       65,800       65,706  
Vested
    (8,000 )     (1,050 )     (41,388 )     (27,410 )
Forfeited
                (3,280 )     (2,251 )
 
                       
Nonvested shares, end of period
    1,310,778       1,297,658       1,310,778       1,297,658  
 
                       
     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 $216,000 to general and administrative expenses during the first quarter of 2008 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 and six months ended June 30, 2008 and 2007 is included in the table below.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Outstanding, beginning of period
    360,564       275,875       179,603       171,481  
Granted
                194,832       128,928  
Exercised
    (846 )     (2,866 )     (2,950 )     (7,186 )
Forfeited
    (9,064 )     (10,641 )     (20,831 )     (30,855 )
Expired
    (74,294 )     (66,911 )     (74,294 )     (66,911 )
 
                       
Outstanding and exercisable, end of period
    276,360       195,457       276,360       195,457  
 
                       

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Note 8. Defined Benefit Pension Plans
     The Company has pension plans under which the Company’s Board of Directors and certain designated employees may receive certain 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. Net periodic benefit cost recorded related to the Company’s pension plans for the three and six months ended June 30, 2008 and 2007 is detailed in the table below.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
Service costs
  $ 287     $ 263     $ 605     $ 526  
Interest costs
    311       208       615       416  
Amortization of net gain/loss
    228       63       450       129  
 
                       
 
    826       534       1,670       1,071  
Net loss recognized in other comprehensive loss
                      (120 )
 
                       
Total recognized in net periodic benefit cost and other comprehensive loss
  $ 826     $ 534     $ 1,670     $ 951  
 
                       
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     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
Property lease guaranty revenue
  $ 3,707     $ 3,594     $ 7,015     $ 7,268  
Interest income
    67       60       139       219  
Management fee income
    44       75       89       143  
Replacement rent
    621       619       1,238       1,238  
Income from unconsolidated joint ventures
    387       113       391       274  
Other
    164       325       354       640  
 
                       
 
  $ 4,990     $ 4,786     $ 9,226     $ 9,782  
 
                       
Note 10. Retirement and Termination Benefits in 2007
     During the first quarter of 2007, the Company recorded a $1.5 million charge, included in general and administrative expenses on the Company’s Condensed Consolidated Income Statement, and established a severance and payroll tax liability relating to the retirement of the Company’s Chief Operating Officer and elimination of five other officer and employee positions in the Company’s corporate and regional offices. This charge is discussed in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Note 11. 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 currently distribute at least 90% of its 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

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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 and six months ended June 30, 2008 and 2007:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
Net income
  $ 13,766     $ 13,643     $ 20,566     $ 49,987  
Items to Reconcile Net Income to Taxable Income:
                               
Depreciation and amortization
    3,077       872       5,955       4,935  
Gain or loss on disposition of depreciable assets
    301       15,376       (3,407 )     27,053  
Straight-line rent
    177       251       284       1,000  
VIE consolidation
          188             394  
Receivable allowances
    385       (9,685 )     739       (5,543 )
Stock-based compensation
    2,079       5,614       3,681       7,506  
Other
    (396 )     (3,506 )     (840 )     (3,840 )
 
                       
 
                               
Taxable income (1)
  $ 19,389     $ 22,753     $ 26,978     $ 81,492  
 
                       
 
                               
Dividends paid (2)
  $ 19,534     $ 258,759     $ 39,067     $ 290,322  
 
                       
 
(1)   Before REIT dividend paid deduction.
 
(2)   The three and six months ended June 30, 2007 includes the payment of a special dividend of $227.2 million which was paid in May 2007.
State Income Taxes
     State income tax expense and state income tax payments for the three and six months ended June 30, 2008 and 2007 are detailed in the table below.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2008     2007     2008     2007  
State income tax expense:
                               
Texas gross margins tax
  $ 95     $ 98     $ 193     $ 195  
Other (1)
    259       20       293       40  
 
                       
Total state income tax expense
  $ 354     $ 118     $ 486     $ 235  
 
                       
 
                               
State income tax payments, net of refunds
  $ 621     $ 25     $ 621     $ 41  
 
                       
 
(1)   The three and six months ended June 30, 2008 includes $225 in state income taxes accrued and paid during the second quarter of 2008 related to the sale of certain of the senior living assets in 2007. The Company recorded the $225 to the gain on sale from the senior living assets which is included in discontinued operations on the Company’s Condensed Consolidated Statements of Income.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Disclosure Regarding Forward-Looking Statements
     This report and other material 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,” ”could,” “should” 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, 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. Shareholders 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, 2007 and in Item 1A of Part II of this quarterly report on Form 10-Q.
Business Overview
     The Company operates under the Internal Revenue Code of 1986, as amended, as an indefinite life real estate investment trust (“REIT”). The Company, a self-managed and self-administered REIT, integrates owning, managing and developing income-producing real estate properties and mortgages 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.
     Substantially all of the Company’s revenues are derived from rentals on its healthcare real estate properties. The Company typically incurs operating and administrative expenses, including compensation, office rental and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio, developing properties 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 continues to pursue opportunities to develop outpatient medical facilities. As of June 30, 2008, the Company had nine development projects underway with budgets totaling approximately $259 million. The Company expects completion of the core and shell of four of the nine projects with budgets totaling approximately $58 million during 2008 and expects the core and shell of the remaining five projects with budgets totaling approximately $201 million to be completed during 2009 and 2010. Beyond the projects currently under construction, the Company is pursuing several other projects that, if completed, would have project budgets totaling approximately $210 million.
     Management continues to pursue acquisitions of existing outpatient medical office facilities. On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each containing 146,000

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square feet, and a six-level parking structure, containing 977 parking spaces, in Dallas, Texas for $59.2 million.
     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. As discussed in “Liquidity and Capital Resources - Liquidity” below, management believes it is well-positioned from a capital structure and liquidity viewpoint to fund its investment activity. At June 30, 2008, the Company’s leverage ratio (debt divided by debt plus undepreciated equity) was approximately 44.9%. Approximately 79.3% of its existing debt portfolio had maturity dates after 2010. On April 17, 2008, the Company entered into an amendment to its credit facility which modified certain financial covenants and had the effect of providing the Company full borrowing capacity under its credit facility. As such, with $158.0 million outstanding under the unsecured credit facility, the Company had remaining borrowing capacity of $242.0 million at June 30, 2008.
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. Discussed below and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 are some of the factors and trends that management believes may impact future operations of the Company.
Development Activity
     The Company continues to focus on developing medical office and outpatient facilities. The development investments that the Company pursues are either relationship-based, with a particular operator or hospital system, or they are market-driven, where the underlying fundamentals in a particular market make the development of medical office and outpatient facilities, without an existing healthcare system relationship, compelling. The Company’s market-driven development opportunities are generally on sites that are most often near acute-care hospitals and in markets with strong population growth and are advantageous because of fewer use and leasing restrictions, shorter development timelines, and the prospect for higher investment returns. The Company’s ability to complete, lease-up and operate these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, lease-up periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, lease-up periods and rental rates will likely result in less favorable results of operations and cash flows. The Company’s disclosures regarding certain projections or estimates of completion dates and leasing may not reflect actual results. See Note 6 to the Condensed Consolidated Financial Statements for more information on the Company’s development activities.
Purchase Option Provisions
     Certain of the Company’s leases include purchase option provisions. These provisions vary from lease to lease. See “Liquidity and Capital Resources — Purchase Options” below and Note 2 to the Condensed Consolidated Financial Statements.
Expiring Leases and Financial Support Agreements
     Master leases on two of the Company’s properties and financial support arrangements related to four of the Company’s properties will expire in 2008. If the Company is unable to negotiate renewals of these agreements at favorable rates or the underlying tenant rents do not support the current rental rates or returns, then the Company’s results of operations and cash flows could be negatively impacted.
     In the multi-tenanted properties, leases are generally short-term in nature, resulting in a steady level of lease expirations each year in the normal course of business. During 2008, over 400 leases in these properties expire, but the Company has renewed or anticipates that it will renew the majority of these leases at favorable rates.

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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 generally accepted accounting principles), 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. During the first quarter of 2007, based on management’s decision to sell certain properties, the Company recorded impairment charges totaling $2.8 million, which reduced FFO per diluted share by approximately $0.06 for the six months ended June 30, 2007. FFO for the three and six months ended June 30, 2008 as compared to 2007 was impacted by the disposition of the senior living assets during 2007, because of the elimination of the operations of the divested assets. FFO and FFO per share generated by the senior living assets disposed of during 2007 totaled approximately $1.8 million and $9.0 million, respectively, or $0.04 and $0.19, respectively, per diluted share, for the three and six months ended June 30, 2007.
     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. 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 accounting principles generally accepted in the United States of America 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. The table below reconciles FFO to net income for the three and six months ended June 30, 2008 and 2007.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands, except per share data)   2008     2007     2008     2007  
Net income
  $ 13,766     $ 13,643     $ 20,566     $ 49,987  
Gain on sales of real estate properties
    (7,715 )     (7,482 )     (8,352 )     (37,871 )
Real estate depreciation and amortization
    13,150       12,699       26,423       27,070  
 
                       
Total adjustments
    5,435       5,217       18,071       (10,801 )
 
                       
 
                               
Funds from Operations — Basic and Diluted
  $ 19,201     $ 18,860     $ 38,637     $ 39,186  
 
                       
 
                               
Funds from Operations per Common Share — Basic
  $ 0.39     $ 0.40     $ 0.78     $ 0.84  
 
                       
Funds from Operations per Common Share — Diluted
  $ 0.38     $ 0.40     $ 0.77     $ 0.82  
 
                       
 
                               
Weighted Average Common Shares Outstanding — Basic
    49,431,724       46,603,643       49,422,391       46,575,554  
 
                       
Weighted Average Common Shares Outstanding — Diluted
    50,474,762       47,577,334       50,442,808       47,587,624  
 
                       

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Results of Operations
Second Quarter 2008 Compared to Second Quarter 2007
     Income from continuing operations increased $1.0 million, or 26.6%, for the three months ended June 30, 2008 compared to the same period in 2007 due mainly to the acquisition of a building in the third quarter of 2007, commencement of operations of three buildings developed by the Company, as well as leasing activities and annual rent increases on leases related to the Company’s other real estate properties. Net income for the second quarter of 2008, however, remained relatively level at $13.8 million, or $0.28 per basic common share ($0.27 per diluted common share), versus $13.6 million, or $0.29 per basic and diluted common share, for the second quarter of 2007. Net income for the three months ended June 30, 2008 is affected by the disposition of senior living assets and resulting gain in 2007.
                                 
    Three Months Ended        
    June 30,     Change  
(Dollars in thousands)   2008     2007     $     %  
REVENUES
                               
Master lease rent
  $ 14,787     $ 14,456     $ 331       2.3 %
Property operating
    34,886       31,803       3,083       9.7 %
Straight-line rent
    (137 )     9       (146 )     -1622.2 %
Mortgage interest
    542       460       82       17.8 %
Other operating
    4,990       4,786       204       4.3 %
 
                       
 
    55,068       51,514       3,554       6.9 %
 
                               
EXPENSES
                               
General and administrative
    5,863       5,220       643       12.3 %
Property operating
    20,112       18,179       1,933       10.6 %
Bad debts, net of recoveries
    115       77       38       49.4 %
Interest
    11,209       12,153       (944 )     -7.8 %
Depreciation
    12,385       10,883       1,502       13.8 %
Amortization
    575       1,204       (629 )     -52.2 %
 
                       
 
    50,259       47,716       2,543       5.3 %
 
                       
 
                               
INCOME FROM CONTINUING OPERATIONS
    4,809       3,798       1,011       26.6 %
 
                               
DISCONTINUED OPERATIONS
                               
Income from discontinued operations
    1,242       2,363       (1,121 )     -47.4 %
Gain on sales of real estate properties
    7,715       7,482       233       3.1 %
 
                       
INCOME FROM DISCONTINUED OPERATIONS
    8,957       9,845       (888 )     -9.0 %
 
                       
 
                               
NET INCOME
  $ 13,766     $ 13,643     $ 123       0.9 %
 
                       
     Total revenues from continuing operations for the quarter ended June 30, 2008 increased $3.6 million, or 6.9%, compared to the same period in 2007, mainly for the reasons discussed below:
     • Master lease income increased $0.3 million, or 2.3%, due mainly to additional revenues from annual rent increases.
     • Property operating income increased $3.1 million, or 9.7%, due mainly to additional revenues from the commencement of operations of three medical office buildings previously under construction totaling approximately $0.8 million, additional revenues resulting from the acquisition of a medical office building in the third quarter of 2007 of approximately $0.8 million, and additional revenues from new tenant lease agreements and stated annual rental increases totaling approximately $1.3 million.

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     Total expenses for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007 increased $2.5 million, or 5.3%, mainly for the reasons discussed below:
     • General and administrative expenses increased $0.6 million, or 12.3%, due mainly to additional expense recognized relating to the amortization of deferred compensation amounts for the Company’s executive officers and directors, which totaled approximately $0.3 million, as well as increases in other compensation-related costs totaling approximately $0.4 million.
     • Property operating expense increased $1.9 million, or 10.6%, as compared to the same period in 2007 due mainly to additional expenses recognized related to the commencement of operations of three medical office buildings previously under construction totaling approximately $0.7 million, as well as additional expenses recognized related to a newly acquired medical office building in the third quarter of 2007 totaling approximately $0.2 million. Property operating expenses were also impacted by increases in utilities of approximately $0.4 million, legal fees of approximately $0.4 million and real estate taxes of approximately $0.5 million for 2008 as compared to 2007. These increases in expenses were offset partially by the recognition of prior period straight-line rent expense in the first quarter of 2007 totaling approximately $0.2 million relating to ground leases where the Company is the lessee.
     • Interest expense decreased $0.9 million, or 7.8%, due mainly to an increase in capitalized interest of approximately $0.6 million related to the Company’s development activities, as well as a decrease in expense of approximately $0.2 million from a lower average interest rate on the unsecured credit facility in the first quarter of 2008 compared to 2007.
     • Depreciation expense increased $1.5 million, or 13.8%, due mainly to the acquisition of one real estate property during 2007 and the commencement of operations of three medical office buildings that were previously under construction, as well as various building and tenant improvements expenditures.
     • Amortization expense decreased $0.6 million, or 52.2%, due mainly to a decrease in amortization expense recognized on lease intangibles that have fully amortized.
     Income from discontinued operations totaled $9.0 million and $9.8 million, respectively, for the three months ended June 30, 2008 and 2007, which includes the results of operations, gains on sale, and impairment charges related to assets classified as held for sale or disposed of during 2008 and 2007.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
     Income from continuing operations increased $3.9 million, or 65.7%, for the six months ended June 30, 2008 compared to the same period in 2007 due mainly to the acquisition of a building in the third quarter of 2007, commencement of operations of three buildings developed by the Company, leasing activities and annual rent increases on leases related to the Company’s other real estate properties, a lease termination fee received in 2008, as well as a reduction in interest expense related mainly to a decrease in interest rates and an increase in capitalized interest on properties under construction. Net income for the six months ended June 30, 2008 compared to 2007 decreased by $29.4 million, or 58.9%. Net income for the six months ended June 30, 2008 is affected by the disposition of senior living assets and resulting gain in 2007. Net income for the six months ended June 30, 2008 totaled $20.6 million, or $0.42 per basic common share ($0.41 per diluted common share), compared with net income of $50.0 million, or $1.07 per basic common share ($1.05 per diluted common share) for the same period in 2007.

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    Six Months Ended        
    June 30,     Change  
(Dollars in thousands)   2008     2007     $     %  
REVENUES
                               
Master lease rent
  $ 30,238     $ 29,354     $ 884       3.0 %
Property operating
    68,911       63,343       5,568       8.8 %
Straight-line rent
    (204 )     43       (247 )     -574.4 %
Mortgage interest
    1,067       812       255       31.4 %
Other operating
    9,226       9,782       (556 )     -5.7 %
 
                       
 
    109,238       103,334       5,904       5.7 %
 
                               
EXPENSES
                               
General and administrative
    11,908       11,395       513       4.5 %
Property operating
    39,135       36,163       2,972       8.2 %
Bad debts, net of recoveries
    333       82       251       306.1 %
Interest
    22,407       25,558       (3,151 )     -12.3 %
Depreciation
    24,430       21,567       2,863       13.3 %
Amortization
    1,169       2,620       (1,451 )     -55.4 %
 
                       
 
    99,382       97,385       1,997       2.1 %
 
                       
 
                               
INCOME FROM CONTINUING OPERATIONS
    9,856       5,949       3,907       65.7 %
 
                               
DISCONTINUED OPERATIONS
                               
Income from discontinued operations
    2,387       8,959       (6,572 )     -73.4 %
Impairments
    (29 )     (2,792 )     2,763       -99.0 %
Gain on sales of real estate properties
    8,352       37,871       (29,519 )     -77.9 %
 
                       
INCOME FROM DISCONTINUED OPERATIONS
    10,710       44,038       (33,328 )     -75.7 %
 
                       
 
                               
NET INCOME
  $ 20,566     $ 49,987     $ (29,421 )     -58.9 %
 
                       
     Total revenues from continuing operations for the six months ended June 30, 2008 increased $5.9 million, or 5.7%, compared to the same period in 2007, mainly for the reasons discussed below:
     • Master lease income increased $0.9 million, or 3.0%, due mainly to a lease termination fee totaling $0.8 million received by the Company from one tenant in the first quarter of 2008.
     • Property operating income increased $5.6 million, or 8.8%, due mainly to additional revenues totaling approximately $1.4 million from the commencement of operations of three medical office buildings previously under construction, additional revenues of approximately $1.3 million resulting from the acquisition of a medical office building in the third quarter of 2007, with the remaining $3.5 million generally related to additional revenues from new tenant lease agreements and stated annual rental increases. These amounts were offset by a lease termination fee received in the first quarter of 2007 totaling $0.6 million received by the Company from one tenant.
     • Other operating income decreased $0.6 million, or 5.7%, due mainly to the expiration of a property operating agreement during 2007, resulting in a decrease in lease guaranty revenue of approximately $0.6 million.
     Total expenses for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 increased $2.0 million, or 2.1%, mainly for the reasons discussed below:
     • General and administrative expenses increased $0.5 million, or 4.5%, due mainly to additional expense recognized relating to the amortization of deferred compensation amounts for the Company’s

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executive officers and directors, which totaled approximately $0.4 million, as well as other compensation- related costs totaling approximately $1.2 million. Also, during 2008, the Company recognized additional costs incurred relating to the Company’s development efforts of approximately $0.5 million. Further, in the first quarter of 2007, the Company recorded a $1.5 million charge relating to the retirement of one officer and the termination of several other employees.
     • Property operating expense increased $3.0 million, or 8.2%, as compared to the same period in 2007 mainly due to additional expenses of approximately $1.2 million recognized from the commencement of operations of three medical office buildings previously under construction and approximately $0.5 million in additional expenses recognized related to the acquisition of a medical office building in the third quarter of 2007. Property operating expenses were also impacted by increases in utilities of approximately $0.6 million, legal fees of approximately $0.4 million, real estate taxes of approximately $0.5 million and compensation-related costs of approximately $0.3 million for 2008 as compared to 2007. These amounts were partially offset by the recognition of straight-line rent expense during 2007 for prior periods totaling approximately $0.7 million related to ground leases where the Company is the lessee.
     • Interest expense decreased $3.2 million, or 12.3%, due mainly to a decrease in interest of approximately $1.4 million from lower average interest rates on the unsecured credit facility in 2008 as compared to 2007 and an increase in capitalized interest of approximately $1.6 million related to the Company’s development activities.
     • Depreciation expense increased $2.9 million, or 13.3%, due mainly to the acquisition of one real estate property during the third quarter of 2007, the commencement of operations of three medical office buildings that were previously under construction, as well as various building and tenant improvements.
     • Amortization expense decreased $1.5 million, or 55.4%, mainly due to a decrease in amortization expense recognized on lease intangibles that have fully amortized.
     Income from discontinued operations totaled $10.7 million and $44.0 million, respectively, for the six months ended June 30, 2008 and 2007, which includes the results of operations, gains on sale, and impairment charges related to assets classified as held for sale or disposed of during 2008 and 2007.
Liquidity and Capital Resources
     The Company derives most of its revenues from its real estate property portfolio based on contractual arrangements with its tenants and sponsors. The Company may, from time to time, also generate funds from capital market financings, sales of real estate properties or mortgages, borrowings under its unsecured credit facility, secured debt borrowings, or from other private debt or equity offerings. For the six months ended June 30, 2008, the Company generated approximately $42.7 million in cash from operations and used approximately $46.4 million in total cash from investing and financing activities, as detailed in the Company’s Condensed Consolidated Cash Flow Statement.
Contractual Obligations
     The Company had certain contractual obligations as of June 30, 2008 and is also required to pay dividends to its shareholders at least equal to 90% of its taxable income in order to maintain its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended. The Company’s material contractual obligations for the remainder of 2008 through 2009 are included in the table below.

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(In thousands)   2008     2009     Total  
Long-term debt obligations, including interest (1)
  $ 22,433     $ 202,870     $ 225,303  
Operating lease commitments (2)
    1,540       3,184       4,724  
Construction in progress (3)
    19,939       66,895       86,834  
Tenant improvements (4)
    13,820             13,820  
Deferred gain (5)
    1,253       2,115       3,368  
Pension obligations (6)
                       
 
                 
 
  $ 58,985     $ 275,064     $ 334,049  
 
                 
 
(1)   Includes estimated cash interest due on total debt other than the unsecured credit facility. See Note 4 to the Condensed Consolidated Financial Statements.
 
(2)   Includes primarily two office leases and ground leases related to various properties for which the Company is currently making payments.
 
(3)   Includes cash flow projections for the remainder of 2008 and 2009 related to the construction of nine buildings. A portion of the remaining commitments is designated for tenant improvements that will generally be funded after the core and shell of the building is substantially completed.
 
(4)   Includes tenant improvement allowance obligations remaining on nine properties previously constructed by the Company and one property developed by a joint venture which the Company accounts for under the equity method. For purposes of this table, the Company has assumed that these obligations will be funded in 2008.
 
(5)   As part of the sale of the senior living portfolio, the Company recorded a $5.7 million deferred gain related to one tenant under a lease assigned to one buyer. The Company’s payments are based upon the tenant’s performance under its lease through July 31, 2011. As of June 30, 2008, the Company had paid $2.3 million to the buyer which reduced the Company’s deferred gain. The payment or timing of future payments is unknown. For purposes of the table, the Company has included for 2008 the maximum amount that they would be required to pay for the remainder of 2008, based on the lease, with the remainder of the deferred gain included in 2009.
 
(6)   At June 30, 2008, three employees and five non-employee directors were eligible to retire under the Executive Retirement Plan and the Retirement Plan for Outside Directors. If these individuals retired at normal retirement age and received full retirement benefits based upon the terms of each applicable plan, the future benefits to be paid are estimated to be approximately $34.5 million, of which approximately $84,000 is currently being paid annually to one employee who is retired. Because the Company does not know when these individuals will retire, it has not projected when these amounts would be paid in this table.
     As of June 30, 2008, approximately 79.3% of the Company’s outstanding debt balances were due after 2010, with the majority of the debt balances that were due prior to 2010 relating to the unsecured credit facility due 2009. The Company’s leverage ratio (debt divided by debt plus undepreciated equity) was approximately 44.9% at June 30, 2008 and its earnings (from continuing operations) covered fixed charges at a ratio of 1.26 to 1.0 for the six months ended June 30, 2008. On April 17, 2008, the Company entered into an amendment to its credit facility which modified certain financial covenants and had the effect of providing the Company full borrowing capacity under its credit facility. As such, at June 30, 2008, the Company had $158.0 million outstanding under the facility and had borrowing capacity remaining of $242.0 million. The Company’s unsecured credit facility expires in January 2009. The Company has the option of extending the facility for one additional year, which it would need to exercise by November 2008, or it could renew the facility. Based on current market conditions, the Company expects that it will extend the facility for one additional year, but may renew the facility if market conditions improve.
     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 June 30, 2008, the Company was in compliance with its financial covenant provisions under its various debt instruments.
     In April 2008, the Company’s Board of Directors authorized the Company to repurchase in the open market up to $20.0 million of its Senior Notes due 2011 and $30.0 million of its Senior Notes due 2014. As of June 30, 2008, the Company had repurchased $3.5 million of its Senior Notes due 2011 and $1.8 million of its Senior Notes due 2014. In conjunction with the repurchases, the Company amortized a pro-rata portion of the premium or discount related to the notes and recognized an immaterial aggregate net gain. Subsequent to June 30, 2008, the Company repurchased an additional $9.5 million of its Senior Notes due 2014. The Company may elect, from time to time, to repurchase and retire its notes either when market conditions are appropriate or as a means to reinvest available cash.
     The Company’s senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, respectively.

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Capital Markets
     The Company may from time to time raise additional capital by issuing equity and debt securities under its currently effective shelf registration statement or by private offerings. Access to capital markets impacts the Company’s ability to refinance existing indebtedness as it matures and fund future acquisitions and development through the issuance of additional securities. The Company’s ability to access capital on favorable terms is dependent on various factors, including general market conditions, interest rates, credit ratings on its securities, perception of its potential future earnings and cash distributions, and the market price of its capital stock.
Security Deposits and Letters of Credit
     As of June 30, 2008, the Company had approximately $4.7 million in letters of credit, security deposits, debt service reserves or capital replacement reserves for the benefit of the Company in the event the obligated lessee or operator fails to make payments under the terms of their respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.
Asset Acquisitions
     The Company did not complete any acquisitions during the first six months of 2008 but continued construction on its properties under development.
     On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each containing 146,000 square feet, and a six-level parking structure, containing 977 parking spaces, in Dallas, Texas for $59.2 million. The Company funded the transaction with proceeds from its unsecured credit facility.
Asset Dispositions
     During the second quarter of 2008, pursuant to a purchase option exercised by a tenant, the Company disposed of an 83,718 square foot building in Texas in which it had a total gross investment of approximately $18.5 million ($10.4 million, net). The sales price was $18.5 million, and the Company recognized an $8.0 million net gain from the sale, net of closing costs of $0.1 million. The Company also recorded expenses of approximately $0.3 million to the gain on sale of real estate properties related to state tax adjustments on the sale of the senior living assets in 2007.
     During the first quarter of 2008, the Company disposed of a 36,951 square foot building in Mississippi in which it had a total gross investment of approximately $2.9 million ($1.6 million, net). The sales price was $2.0 million, and the Company recognized a $0.3 million net gain from the sale, net of closing costs of $0.1 million. Also, the Company sold a 7,500 square foot physician clinic in Texas in which it had a total gross investment of approximately $0.5 million ($0.4 million, net). The sales price was $0.5 million, and the Company recognized a $0.1 million net gain from the sale. Finally, the Company disposed of a parcel of land in Pennsylvania for approximately $0.8 million, which approximated the Company’s net book value. During the first quarter of 2008, the Company also recorded a $0.2 million gain due to the collection of certain receivables by the Company relating to senior living properties sold during 2007.
Purchase Options
     Certain of the Company’s leases include purchase option provisions. The provisions vary from lease to lease. In April 2008, the Company received notice from a tenant of its intent to purchase five properties from the Company pursuant to purchase options contained in its leases with the Company. The Company’s aggregate investment in the buildings was approximately $23.9 million ($16.8 million, net) at June 30, 2008. The Company expects to sell these properties to the tenant in the first quarter of 2009 for approximately $23.1 million in net proceeds, including $0.8 million in lease termination fees, which should result in a gain on sale of approximately $4.6 million. In accordance with SFAS No. 144, the five properties are classified as held for sale and are included in discontinued operations as of and for the three and six months ended June 30, 2008.

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     During 2007, the Company received notice from a tenant of its intent to purchase two buildings from the Company pursuant to purchase options contained in each of the building leases. The Company sold one of the buildings to the tenant during the second quarter of 2008 as discussed in Asset Dispositions above. The parties were in dispute as to the enforceability of the purchase option on the second property and, therefore, the Company was uncertain as to when the transaction would close, if at all. As a result, the second property was not reclassified to assets held for sale and its results of operations were not reclassified to discontinued operations on the Company’s Condensed Consolidated Financial Statements. During July 2008, the Company resolved the dispute with the tenant and agreed to sell the property to the tenant for $38.0 million. The Company’s gross investment in the second building was approximately $46.8 million ($32.8 million, net) and the Company carried a mortgage note payable on the building with a principal balance of $19.8 million at June 30, 2008. The transaction is expected to close during the third quarter of 2008, and the Company expects to recognize a gain on sale of approximately $2.5 million.
Construction in Progress
     As of June 30, 2008, the Company had nine medical office/outpatient buildings under development with estimated completion dates ranging from the third quarter of 2008 through the fourth quarter of 2010. The Company also had land held for development at June 30, 2008 of approximately $16.4 million on which the Company expects to develop and own medical office buildings and outpatient healthcare facilities. The table below details the Company’s construction in progress and land held for development as of June 30, 2008. The information included in the table below represents management’s estimates and expectations at June 30, 2008 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates and leasing may not reflect actual results.
                                                         
    Estimated     Property                     CIP at     Estimated     Estimated  
    Completion     Type             Approximate     June 30,     Remaining     Total  
State   Date     (1)     Properties     Square Feet     2008     Fundings     Investment  
(Dollars in thousands)                                                  
Under construction:
                                                       
Colorado
    3Q 2008     MOB     2       169,000     $ 18,883     $ 8,517     $ 27,400  
Arizona
    4Q 2008     MOB     2       188,000       19,578       11,422       31,000  
Texas
    3Q 2009     MOB     1       135,000       7,387       25,613       33,000  
Illinois
    3Q 2009     MOB     1       100,000       7,073       19,327       26,400  
Texas
    4Q 2009     MOB     1       120,000       6,646       21,954       28,600  
Hawaii
    1Q 2010     MOB     1       133,000       16,472       69,528       86,000  
Texas
    4Q 2010     MOB     1       90,000       8,927       17,373       26,300  
 
                                                       
Land held for development:
                                                       
Texas
                                  7,962                  
Illinois
                                  8,417                  
 
                                             
 
                    9       935,000     $ 101,345     $ 173,734     $ 258,700  
 
                                             
 
(1)   MOB-Medical office building
Other Construction
     The Company also had various remaining first-generation tenant improvements budgeted as of June 30, 2008 totaling approximately $13.0 million related to properties that were developed by the Company, as well as a tenant improvement obligation totaling approximately $0.8 million related to a project developed by a joint venture which the Company accounts for under the equity method.

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Dividends
     During 2008, the Company’s Board of Directors has declared common stock cash dividends as shown in the table below:
                                 
    Per Share     Date of             Date Paid  
Dividend   Amount     Declaration     Date of Record     (* Payable)  
4th Quarter 2007
  $ 0.385     January 29, 2008   February 15, 2008   March 3, 2008
1st Quarter 2008
  $ 0.385     April 29, 2008   May 15, 2008   June 3, 2008
2nd Quarter 2008
  $ 0.385     July 29, 2008   August 15, 2008   * September 3, 2008
     As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows, and to make accretive new investments.
Liquidity
     Net cash provided by operating activities was $42.7 million and $42.4 million for the six months ended June 30, 2008 and 2007, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.
     The Company plans to continue to meet its liquidity needs, including funding additional investments in 2008 and 2009, paying dividends, and funding debt service, with cash flows from operations, proceeds from the Unsecured Credit Facility due 2009, proceeds of mortgage notes receivable repayments, proceeds from sales of real estate investments, proceeds from secured debt borrowings, or additional capital market financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
     The recent turmoil in the credit markets has not significantly affected the Company, though it may influence the Company’s decision to extend or renew its unsecured credit facility due 2009, which is discussed in more detail above. The Company also has some exposure to variable interest rates and its stock price has been impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, are generally fixed in nature, have terms of approximately one to 15 years and have annual rate increases based generally on consumer price indices.
Impact of Inflation
     Inflation has not significantly affected the Company’s earnings due to the moderate inflation rate in recent years and the fact that most of the Company’s leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing the Company’s risk of the adverse effects of inflation. In addition, inflation will have the effect of increasing gross revenue the Company is to receive under the terms of certain leases and financial support arrangements. Leases and financial support arrangements vary in the remaining terms of obligations, further reducing the Company’s risk of any adverse effects of inflation. Interest payable under the Unsecured Credit Facility due 2009 is calculated at a variable rate; therefore, the amount of interest payable under the unsecured credit facility will be influenced by changes in short-term rates, which tend to be sensitive to inflation. Generally, changes in inflation and interest rates tend to move in the same direction. During periods where interest rate increases outpace inflation, the Company’s operating results should be negatively impacted. Conversely, when increases in inflation outpace increases in interest rates, the Company’s operating results should be positively impacted.
     The Company has seen significant inflation in construction costs in recent years, which may negatively affect the profitability or suitability of new medical office and outpatient developments.

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New Accounting Pronouncements
     See Note 1 to the Condensed Consolidated Financial Statements for the impact of new accounting standards.
Off-Balance Sheet Arrangements
     The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
     The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes and other notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three and six months ended June 30, 2008, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Item 4.   Controls and Procedures.
     Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.
     Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1.   Legal Proceedings.
     On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October 1998. None of the Capstone officers and directors remained in their positions following the Company’s acquisition of Capstone. The complaint seeks unspecified compensatory and punitive damages. Following the settlement of a number of claims unrelated to the claims against Capstone, the court lifted a lengthy stay on discovery in April 2007, and discovery is now proceeding. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.
     In connection with the shareholder derivative suit discussed above, Capstone filed a claim with its directors’ and officers’ liability insurance carrier, Twin City Fire Insurance Company (“Twin City”), an affiliate of the Hartford family of insurance companies, for indemnity against legal and other expenses incurred by Capstone related to the suit and any judgment rendered. Twin City asserted that the Company’s claim was not covered under the D&O policy and refused to reimburse Capstone’s defense expenses. In September 2005, Capstone filed suit against Twin City for coverage and performance under its insurance policy. In the fourth quarter of 2007, the federal district judge in Birmingham, Alabama entered partial summary judgment on Capstone’s claim for advancement of defense costs under the policy. Capstone and Twin City have agreed to an interim plan for Twin City’s payment of defense costs, fees and expenses, subject to Twin City’s appeal of the partial summary judgment ruling. As of June 30, 2008, the Company had received $1.6 million from Twin City and had recorded approximately $1.2 million in additional receivables due from Twin City for incurred but unreimbursed expenses related to the suit. The Company will continue to bill amounts to Twin City for its expenses incurred in defense of the underlying HealthSouth shareholder derivative litigation. The Company is recording these amounts as an offset to property operating expense on the Company’s Condensed Consolidated Statements of Income. The Company does not believe an appellate reversal of the partial summary judgment ruling is probable. However, if the ruling were to be reversed, the Company would be required to repay all monies received from Twin City.
     In May 2006, Methodist Health System Foundation, Inc. (the “Foundation”) filed suit against a wholly owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana. The Foundation is the sponsor under financial support agreements which support two of the Company’s medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an affiliate of Universal Health Services, Inc. in 2003. The Foundation’s assets and income are not primarily dependent upon the operations of Methodist Hospital, which has remained closed since Hurricane Katrina struck in August 2005. The Foundation’s suit alleges that Hurricane Katrina and its aftermath should relieve the Foundation of its obligations under the financial support agreements. The agreements do not contain any express provision allowing for termination upon a casualty event but do allow for a reduction in the Foundation’s obligation for any insurance proceeds received by the Company for business interruption related to a casualty event. During the first quarter of 2008, the Company settled with its insurance carrier and received insurance proceeds totaling approximately $3.8 million, of which approximately $2.5 million was applied to its business interruption claim, offsetting a portion of the Company’s receivable from the Foundation, and $1.3 million applied to its property casualty claim, offsetting a property casualty receivable, which partially reimbursed the Company for costs it incurred related to rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina. The Company continues to record revenue under its financial support agreements with the Foundation with

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approximately $0.9 million recognized as revenue in 2008. At June 30, 2008, the Company had a receivable recorded from the Foundation totaling approximately $2.5 million. If the Foundation is relieved of its obligations to pay the remaining outstanding amounts to the Company, the Company’s cash flows and results of operations could be negatively impacted. The Company believes the Foundation’s claims are not meritorious and will vigorously defend the enforceability of the financial support agreements.
     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.
Item 1A. Risk Factors.
     In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition or operating results.
Item 4.   Submission of Matters to a Vote of Security Holders
     The Company’s annual meeting of shareholders was held on May 13, 2008, and its shareholders voted on the following matters.
     (a) David R. Emery, Batey M. Gresham, Jr., and Dan S. Wilford were elected to serve as Directors. The vote was as follows:
                                         
                            Votes Cast        
    Director     Term     Votes Cast     Against or        
    Class     Expires     in Favor     Withheld     Non Votes  
David R. Emery
    3       2011       46,273,962       792,777       3,665,903  
Batey M. Gresham, Jr.
    3       2011       42,432,119       4,634,620       3,665,903  
Dan S. Wilford
    3       2011       42,602,142       4,464,597       3,665,903  
     The following Class 1 and Class 2 Directors continued in office following the meeting:
         
    Term Expires
Charles Raymond Fernandez, M.D.
    2009  
Errol L. Biggs, Ph. D.
    2009  
Bruce D. Sullivan
    2009  
Marliese E. Mooney
    2010  
Edwin B. Morris III
    2010  
John Knox Singleton
    2010  
(b) The shareholders ratified the appointment of BDO Seidman, LLP as the Company’s independent auditors for the fiscal year ended December 31, 2008, by the following vote:
                 
  Votes Cast     Abstentions/Non  
Votes Cast in Favor   Against     Votes  
46,583,932
    359,106       3,789,604  

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Item 6.   Exhibits.
     
Exhibit 3.1  
Second Articles of Amendment and Restatement of the Company (1)
   
 
Exhibit 3.2  
Amended and Restated Bylaws of the Company, as amended (2)
   
 
Exhibit 4.1  
Specimen Stock Certificate (1)
   
 
Exhibit 4.2  
Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
   
 
Exhibit 4.3  
First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
   
 
Exhibit 4.4  
Form of 8.125% Senior Note Due 2011 (3)
   
 
Exhibit 4.5  
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4)
   
 
Exhibit 4.6  
Form of 5.125% Senior Note Due 2014 (4)
   
 
Exhibit 10.1  
Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (5)
   
 
Exhibit 10.2  
Amendment No. 2, dated as of April 17, 2008, to that certain Credit Agreement, dated as of January 25, 2008, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (6)
   
 
Exhibit 11  
Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
   
 
Exhibit 31.1  
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
 
Exhibit 31.2  
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
 
Exhibit 32  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
(1)   Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
 
(2)   Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
 
(3)   Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.
 
(4)   Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
 
(5)   Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.
 
(6)   Filed as an exhibit to the Company’s Form 8-K filed April 21, 2008 and hereby incorporated by reference.

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  HEALTHCARE REALTY TRUST INCORPORATED
 
 
  By:   /s/ SCOTT W. HOLMES    
    Scott W. Holmes   
    Executive Vice President and Chief Financial Officer   
 
Date: August 4, 2008

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Exhibit Index
     
Exhibit   Description
Exhibit 3.1  
Second Articles of Amendment and Restatement of the Company (1)
   
 
Exhibit 3.2  
Amended and Restated Bylaws of the Company, as amended (2)
   
 
Exhibit 4.1  
Specimen Stock Certificate (1)
   
 
Exhibit 4.2  
Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
   
 
Exhibit 4.3  
First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
   
 
Exhibit 4.4  
Form of 8.125% Senior Note Due 2011 (3)
   
 
Exhibit 4.5  
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4)
   
 
Exhibit 4.6  
Form of 5.125% Senior Note Due 2014 (4)
   
 
Exhibit 10.1  
Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (5)
   
 
Exhibit 10.2  
Amendment No. 2, dated as of April 17, 2008, to that certain Credit Agreement, dated as of January 25, 2008, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (6)
   
 
Exhibit 11  
Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
   
 
Exhibit 31.1  
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
 
Exhibit 31.2  
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
 
Exhibit 32  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
(1)   Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
 
(2)   Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
 
(3)   Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.
 
(4)   Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
 
(5)   Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.
 
(6)   Filed as an exhibit to the Company’s Form 8-K filed April 21, 2008 and hereby incorporated by reference.

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