Edgar Filing: HEALTHCARE REALTY TRUST INC

Healthcare Realty Trust Incorporated

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: September 30, 2007


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: 1-11852

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, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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 November 1, 2007, 50,683,352 shares of the Registrant’s Common Stock were outstanding.

HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-Q

September 30, 2007

TABLE OF CONTENTS


	Page
Part I — Financial Information

Item 1. Financial Statements
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Income		2
Condensed Consolidated Statements of Cash Flows		4
Notes to Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3. Quantitative and Qualitative Disclosures about Market Risk		37

Item 4. Controls and Procedures		38

Part II — Other Information

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		40

Item 6. Exhibits		41

Signature		42
EX-3.2 AMENDMENT TO THE AMENDED AND RESTATED BYLAWS
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 & CFO

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Healthcare Realty Trust Incorporated

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)


	(Unaudited)
	September 30,			December 31,
	2007			2006
ASSETS

Real estate properties:
Land	$	101,556		$	129,658
Buildings, improvements and lease intangibles		1,462,963			1,737,126
Personal property		15,837			22,707
Construction in progress		77,925			38,835

		1,658,281			1,928,326
Less accumulated depreciation		(330,223	)		(373,706	)

Total real estate properties, net		1,328,058			1,554,620

Cash and cash equivalents		16,120			1,950

Mortgage notes receivable		16,880			73,856

Assets held for sale and discontinued operations, net		48,015			—

Other assets, net		91,709			106,177


Total assets	$	1,500,782		$	1,736,603


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes and bonds payable	$	780,194		$	849,982

Accounts payable and accrued liabilities		31,373			32,448

Liabilities held for sale and discontinued operations		7,622			—

Other liabilities		35,447			28,501


Total liabilities		854,636			910,931

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; 50,681,976 and 47,805,448 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		507			478

Additional paid-in capital		1,284,865			1,211,234

Accumulated other comprehensive loss		(3,915	)		(4,035	)

Cumulative net income		690,594			635,120

Cumulative dividends		(1,325,905	)		(1,017,125	)


Total stockholders’ equity		646,146			825,672


Total liabilities and stockholders’ equity	$	1,500,782		$	1,736,603

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2006, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Income

For The Three Months Ended September 30, 2007 and 2006

(Dollars in thousands, except per share data)

(Unaudited)


	2007			2006
REVENUES
Master lease rent	$	15,298		$	15,137
Property operating		32,356			30,934
Straight-line rent		639			541
Mortgage interest		353			1,402
Other operating		4,853			6,274

		53,499			54,288

EXPENSES
General and administrative		4,335			4,234
Property operating		19,271			17,040
Impairments		—			2,311
Bad debt		53			184
Interest		12,611			13,886
Depreciation		11,400			10,273
Amortization		1,007			2,464

		48,677			50,392


INCOME FROM CONTINUING OPERATIONS		4,822			3,896

DISCONTINUED OPERATIONS
Income from discontinued operations		1,134			5,740
Impairments		(4,057	)		(1,573	)
Gain on sales of real estate properties, net		3,587			—

INCOME FROM DISCONTINUED OPERATIONS		664			4,167


NET INCOME	$	5,486		$	8,063


BASIC EARNINGS PER COMMON SHARE
Income from continuing operations per common share	$	0.10		$	0.08

Discontinued operations per common share	$	0.02		$	0.09

Net income per common share	$	0.12		$	0.17


DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations per common share	$	0.10		$	0.08

Discontinued operations per common share	$	0.02		$	0.09

Net income per common share	$	0.12		$	0.17


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,683,619			46,545,285


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,601,330			47,491,385


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	0.385		$	0.660

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Nine Months Ended September 30, 2007 and 2006
(Dollars in thousands, except per share data)
(Unaudited)


	2007			2006
REVENUES
Master lease rent	$	46,293		$	42,796
Property operating		95,488			92,750
Straight-line rent		734			2,319
Mortgage interest		1,057			4,738
Other operating		14,743			16,837

		158,315			159,440

EXPENSES
General and administrative		15,730			12,994
Property operating		55,106			51,633
Other operating		—			171
Impairments		—			2,311
Bad debt		136			856
Interest		38,383			39,203
Depreciation		33,243			30,351
Amortization		3,626			8,024

		146,224			145,543


INCOME FROM CONTINUING OPERATIONS		12,091			13,897

DISCONTINUED OPERATIONS
Income from discontinued operations		8,773			16,465
Impairments		(6,849	)		(1,573	)
Gain on sales of real estate properties, net		41,459			3,275

INCOME FROM DISCONTINUED OPERATIONS		43,383			18,167


NET INCOME	$	55,474		$	32,064


BASIC EARNINGS PER COMMON SHARE
Income from continuing operations per common share	$	0.26		$	0.30

Discontinued operations per common share	$	0.93		$	0.39

Net income per common share	$	1.19		$	0.69


DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations per common share	$	0.25		$	0.29

Discontinued operations per common share	$	0.92		$	0.39

Net income per common share	$	1.17		$	0.68


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,680,455			46,522,939


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,596,154			47,473,738


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	6.455		$	1.980

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Cash Flows

For The Nine Months Ended September 30, 2007 and 2006

(Dollars in thousands)

(Unaudited)


	2007			2006
Operating Activities
Net income	$	55,474		$	32,064
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		40,292			47,842
Stock-based compensation		3,681			3,059
Increase in straight-line rent receivable		(735	)		(1,643	)
Increase in straight-line rent liability		1,269			—
Gain on sales of real estate, net		(41,459	)		(3,275	)
Impairments		6,849			3,884
Equity in losses from unconsolidated LLCs		59			160
Provision for bad debt, net of recoveries		115			1,251
Changes in operating assets and liabilities:
(Increase) decrease in other assets		(1,399	)		1,398
Increase (decrease) in accounts payable and accrued liabilities		(3,287	)		6,846
Increase in other liabilities		3,094			135

Net cash provided by operating activities		63,953			91,721

Investing Activities
Acquisition and development of real estate properties		(106,808	)		(107,542	)
Funding of mortgages and notes receivable		(4,020	)		(21,479	)
Investments in unconsolidated LLCs		—			(10,314	)
Distributions from unconsolidated LLCs		1,127			726
Proceeds from sales of real estate		297,341			33,020
Proceeds from mortgages and notes receivable repayments		65,545			68,980

Net cash provided by (used in) investing activities		253,185			(36,609	)

Financing Activities
Borrowings on notes and bonds payable		403,840			310,000
Repayments on notes and bonds payable		(468,556	)		(262,196	)
Dividends paid		(308,780	)		(94,656	)
Proceeds from issuance of common stock		70,558			391
Interest rate swap termination		—			(10,127	)
Common stock redemption		(30	)		(481	)
Debt issuance costs		—			(1,333	)

Net cash used in financing activities		(302,968	)		(58,402	)


Increase (decrease) in cash and cash equivalents		14,170			(3,290	)
Cash and cash equivalents, beginning of period		1,950			7,037

Cash and cash equivalents, end of period	$	16,120		$	3,747


Supplemental Cash Flow Information:
Interest paid (including interest on interest rate swaps)	$	38,002		$	31,390
Capitalized interest		2,667			914
Capital expenditures accrued		3,134			3,600
Mortgage note payable assumed		1,840			—
Company-financed real estate property sales		—			14,920

Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements

September 30, 2007
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Business Overview

Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust that integrates owning, developing, financing and managing income-producing real estate properties associated with the delivery of healthcare services throughout the United States. The Company had investments of approximately $1.7 billion in 177 real estate properties and mortgages as of September 30, 2007, excluding assets classified as held for sale and including investments in three unconsolidated joint venture limited liability companies (“LLCs”). The Company’s 172 owned real estate properties, excluding assets classified as held for sale, are comprised of six facility types, located in 24 states, totaling approximately 10.6 million square feet. In addition, the Company provided property management services to approximately 7.1 million square feet nationwide. See Note 2 for more details on the assets classified as held for sale at September 30, 2007.

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 controls the operating activities and receives substantially all of the economic benefits. Investments in entities that the Company does not consolidate but for which the Company has the ability to exercise significant influence over operating and financial policies are reported under the equity method. Under the equity method of accounting, the Company’s share of the investee’s earnings or loss is included in the Company’s operating results.

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, 2006. 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, 2006. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2007 due to many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effect of trends as discussed in MD&A.

Unconsolidated Limited Liability Companies

At September 30, 2007, the Company had investments in three joint venture LLCs which 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 recognized approximately $268,000 and $794,000, respectively, in income for the three and nine months

ended September 30, 2007 and $259,000 and $638,000, respectively, in income for the three and nine months ended September 30, 2006 related to the LLC accounted for under the cost method. The Company’s net investments in the 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.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2007			2006			2007			2006

Net LLC investments, beginning of period	$	19,303		$	20,095		$	20,079		$	10,720
New investments during the period		—			—			—			9,045
Additional investments during the period		—			441			—			1,269
Equity income (loss) recognized during the period		193			(86	)		(59	)		(160	)
Distributions received during the period		(603	)		(302	)		(1,127	)		(726	)

Net LLC investments, end of period	$	18,893		$	20,148		$	18,893		$	20,148

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 Financial Accounting Standards Board (“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.

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 has included in accumulated other comprehensive loss its cumulative adjustment related to the adoption 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), (“SFAS No. 158”).”

Total comprehensive income for the three and nine months ended September 30, 2007 and 2006 is detailed in the following table.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2007		2006		2007		2006

Net income	$	5,486	$	8,063	$	55,474	$	32,064
Minimum pension liability adjustment		—		—		120		—

Total comprehensive income	$	5,486	$	8,063	$	55,594	$	32,064

Federal 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.

State Income Taxes

The Company recorded state income tax expense which is included in “General and administrative expenses” on the Company’s Condensed Consolidated Statements of Income and made certain payments for state income taxes during the three and nine months ended September 30, 2007 and 2006 as shown in the table below. Further, the State of Texas implemented a new gross margins tax

which became effective January 1, 2007 that taxes gross receipts from operations in Texas at 1%, less a 30% deduction for expenses. Payment of the Texas gross margins tax for 2007 is not due until May 2008.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2007		2006		2007		2006

State income tax expense:
Texas gross margins tax	$	98	$	—	$	293	$	—
Other		20		40		60		78

	$	118	$	40	$	353	$	78


State income tax payments	$	66	$	19	$	107	$	20

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.

Reclassifications

Certain reclassifications have been made in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2006 and year ended December 31, 2006 to conform to the September 30, 2007 presentation.

Incentive Plans

The Company follows the provisions of SFAS No. 123(R), “Share-Based Payment,” for accounting for its stock-based awards. During 2007 and 2006, the Company issued and had outstanding various employee and non-employee stock-based awards. These awards included restricted stock issued to employees pursuant to the Company’s employee stock incentive plans, restricted stock issued to its Board of Directors under its non-employee director incentive plan, and options issued to employees pursuant to its employee stock purchase plans.

A summary of the activity under the incentive plans is included in the table below.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006

Nonvested shares, beginning of period		1,297,658			1,280,285		1,261,613			1,271,548
Granted		—			—		65,706			46,058
Vested (1)		(9,033	)		—		(36,443	)		(36,574	)
Forfeited		(1,230	)		—		(3,481	)		(747	)

Nonvested shares, end of period		1,287,395			1,280,285		1,287,395			1,280,285


(1)		The nine months ended September 30, 2007 includes the accelerated vesting of 25,875 shares of stock related to the retirement or termination of two officers during the first quarter of 2007. The nine months ended September 30, 2006 includes the vesting of 25,000 shares of stock related to one officer.

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.

A summary of the employee stock purchase plan activity for the three and nine months ended September 30, 2007 and 2006 is included in the table below.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006

Outstanding, beginning of period		195,457			195,585			171,481			158,026
Granted		—			—			128,928			148,698
Exercised		(1,324	)		(3,684	)		(8,510	)		(14,507	)
Forfeited		(10,446	)		(7,537	)		(41,301	)		(52,703	)
Expired		—			—			(66,911	)		(55,150	)

Outstanding and exercisable, end of period		183,687			184,364			183,687			184,364

Accounting for Defined Benefit Pension Plans

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. The pension plans are accounted for in accordance with SFAS No. 158. The pension plans are described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Net periodic benefit cost recorded related to the Company’s pension plans for the three and nine months ended September 30, 2007 and 2006 is detailed in the table below.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2007		2006		2007			2006

Service costs	$	274	$	249	$	799		$	746
Interest costs		217		186		633			557
Amortization of net gain/loss		45		103		175			310

		536		538		1,607			1,613
Other comprehensive income recognized in accumulated other comprehensive loss		—		—		(120	)		—

Total recognized in net periodic benefit cost and accumulated other comprehensive loss	$	536	$	538	$	1,487		$	1,613

Revenue Recognition

The Company recognizes revenue when collectibility is reasonably assured, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”). In the event the Company determines that collectibility is not reasonably assured, it will discontinue recognizing amounts contractually owed or will establish an allowance for estimated losses.

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 a master lease arrangement with the tenant 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.

Mortgage Interest Income

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

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, management fee income, annual inspection fee income, loan exit fee income and prepayment fee income, if any, and interest income on notes receivable. A detail of “Other operating income” for the three and nine months ending September 30, 2007 and 2006 is shown below.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2007		2006		2007		2006

Property lease guaranty revenue	$	3,459	$	4,064	$	10,727	$	11,650
Interest income		130		71		457		196
Management fee income		73		86		216		336
Mortgage prepayment fee income		—		1,043		—		2,151
Other		1,191		1,010		3,343		2,504

	$	4,853	$	6,274	$	14,743	$	16,837

Operating Leases

As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, 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

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 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.

Variable Interest Entities

In accordance with FASB Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51,” the Company has included in its Condensed Consolidated Financial Statements VIEs in which the Company has concluded that it is the primary beneficiary. The properties related to these VIEs have been or will be sold as part of the Company’s disposal of its senior living assets. As such, the assets and liabilities for those entities that have not yet been sold are classified as held for sale on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2007, and the operations of the Company’s properties and related variable interest entities that have been sold or are classified as held for sale are included in discontinued operations in the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007. The Company’s VIEs are discussed in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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. As of September 30, 2007, the Company’s land held for development totaled approximately $25.0 million.

New Pronouncements

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value, which should increase the consistency and comparability of fair value measurements and disclosures. This statement applies to other current pronouncements that require or permit fair value measurements but does not itself require any new fair value measurements. SFAS No. 157 will be effective for the Company beginning January 1, 2008, but early adoption is allowed. The Company does not believe that SFAS No. 157 will have a material impact on its consolidated financial statements.

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 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. SFAS No. 159 will be effective for the Company beginning January 1, 2008, but early adoption is allowed. The Company does not believe that SFAS No. 159 will have a material impact on its consolidated financial statements.

Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” (“FIN No. 48”). FIN No. 48 prescribes how the Company should recognize, measure and present in the financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN No. 48, the Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions but, as a REIT, generally is not subject to income tax on taxable net income distributed as dividends to shareholders. The Company adopted FIN No. 48, as required, effective January 1, 2007 and has concluded that the adoption has had no material impact on the Company’s consolidated financial

statements. Accordingly, the Company did not record a cumulative effect adjustment related to the adoption of FIN No. 48.

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.” No such amounts were recognized in the three or nine months ended September 30, 2007 and 2006.

Tax returns filed for the 2003 through 2006 tax years are currently still subject to examination by taxing authorities.

Note 2. Discontinued Operations

Disposition of the Portfolio of Senior Living Assets

During the third quarter of 2007, two senior living properties in which the Company had an $8.7 million gross investment ($8.1 million, net) were disposed of for aggregate consideration of approximately $11.9 million. As of the nine months ended September 30, 2007, the Company had disposed of 53 of the senior living properties and all 16 of the mortgage notes and notes receivable for total aggregate consideration of approximately $360.0 million and had recognized a $41.2 million net gain and a deferred gain of $5.7 million. The deferred gain which is included in “Other liabilities” on the Company’s Condensed Consolidated Balance Sheet, relates to tenant performance under a lease assigned to one buyer. During the third quarter of 2007, the Company paid $0.5 million to the buyer thereby reducing the deferred gain from $5.7 million to $5.2 million as of September 30, 2007. As of September 30, 2007, there are nine properties within the senior living portfolio that have not yet been disposed. One of the nine properties was disposed of in October 2007 as discussed in Note 9 with efforts continuing to dispose of the remaining eight properties in which the Company had a $27.1 million gross investment ($18.6 million, net) at September 30, 2007.

Sale of Other Real Estate Assets

During the third quarter of 2007, the Company sold one medical office building in which it had an $11.3 million gross investment ($8.2 million, net) for cash proceeds totaling $4.1 million and recorded an impairment charge related to the sale of approximately $4.1 million. Also, during the first quarter of 2007, the Company recorded approximately $2.8 million in impairment charges related to management’s decision to sell six properties in which it had an $8.0 million gross investment ($5.5 million, net), after the impairment charges were recorded. The impairment charges were recorded to lower the properties’ carrying values to their estimated fair values less costs to sell in accordance with SFAS No. 144. See Note 3 for more details on the impairment charges. The impairment charges are reflected in “Discontinued operations” on the Company’s Condensed Consolidated Statement of Income for the nine months ended September 30, 2007. The real estate assets related to the six properties classified as held for sale during the first quarter remain in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet at September 30, 2007.

During the third quarter of 2007, the Company also decided to sell another medical office building in which the Company had an $11.6 million gross investment ($8.4 million, net). This property remains in “Assets held for sale” at September 30, 2007 on the Company’s Condensed Consolidated Balance Sheet.

Discontinued Operations

In accordance with SFAS No. 144, the major categories of the assets and related liabilities discussed above are classified as held for sale on the Company’s Condensed Consolidated Balance Sheet to the extent not sold as of September 30, 2007, and the results of operations are included in ”Discontinued operations” for all periods on the Company’s Condensed Consolidated Statements of Income as detailed in the following tables.


	September 30,
(Dollars in thousands)	2007

Balance Sheet data (as of the period ended):
Land	$	4,902
Buildings, improvements and lease intangibles		49,863
Personal property		2,422

		57,187
Accumulated depreciation		(14,732	)

Assets held for sale, net		42,455

Cash and cash equivalents		2,150
Other assets, net		3,410

Assets included in discontinued operations, net (1)		5,560


Assets held for sale and discontinued operations, net (2)	$	48,015


Notes and bonds payable	$	5,012

Liabilities held for sale		5,012

Accounts payable and accrued liabilities		2,489
Other liabilities		121

Liabilities included in discontinued operations (3)		2,610


Liabilities held for sale and discontinued operations (4)	$	7,622


(1)		Includes cash and patient receivables related to the Company’s consolidated VIEs that the Company will no longer consolidate upon disposition, and tenant receivables due to the Company that will be collected prior to or upon disposition of the properties.

(2)		Includes $34.0 million related to the disposal of the senior living assets and $14.0 million related to the seven other properties management has decided to sell.

(3)		Generally relates to liabilities of the consolidated VIEs that the Company will no longer consolidate upon disposition.

(4)		Relates to the senior living assets.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share data)	2007			2006			2007			2006

Statements of Income data (for the period ended):
Revenues (1)
Master lease rent	$	1,112		$	6,391		$	9,317		$	19,979
Property operating		459			670			868			2,210
Straight-line rent		—			(63	)		1			(116	)
Mortgage interest		—			1,555			1,841			4,358
Other operating		4,332			5,155			13,607			14,667

		5,903			13,708			25,634			41,098

Expenses (2)
General and administrative		(9	)		12			—			35
Property operating		453			729			1,628			1,893
Other operating		4,115			4,162			12,480			12,829
Bad debt		(20	)		—			(20	)		395
Interest		70			147			341			579
Depreciation		160			2,915			2,432			8,869
Amortization		—			3			—			33

		4,769			7,968			16,861			24,633


Income from Discontinued Operations		1,134			5,740			8,773			16,465
Impairments (3)		(4,057	)		(1,573	)		(6,849	)		(1,573	)
Gain on sales of real estate properties, net (4)		3,587			—			41,459			3,275


Income from Discontinued Operations	$	664		$	4,167		$	43,383		$	18,167


Income from Discontinued Operations per basic common share	$	0.02		$	0.09		$	0.93		$	0.39


Income from Discontinued Operations per diluted common share	$	0.02		$	0.09		$	0.92		$	0.39


(1)		Total revenues for the three months ended September 30, 2007 and 2006 include $5.4 million and $13.0 million, respectively, related to the senior living assets and $0.5 million and $0.7 million, respectively, related to other properties sold. Total revenues for the nine months ended September 30, 2007 and 2006 include $24.6 million and $37.4 million, respectively, related to the disposal of the senior living assets and $1.0 million and $3.7 million, respectively, related to other properties sold.

(2)		Total expenses for the three months ended September 30, 2007 and 2006 include $4.3 million and $7.3 million, respectively, related to the senior living assets; $0.4 million and $0.6 million, respectively, related to the sale of other properties; and $0.1 million each year related to six other properties currently held for sale. Total expenses for the nine months ended September 30, 2007 and 2006 include $15.2 million and $22.0 million, respectively, related to the disposal of the senior living assets; $1.5 million and $2.3 million, respectively, related to other properties sold; and $0.2 million and $0.3 million respectively, related to six other properties currently held for sale.

(3)		Impairment charges for the three and nine months ended September 30, 2007 include approximately $4.1 million related to the sale of one property during the third quarter of 2007, and the nine months ended September 30, 2007 also includes approximately $2.8 million related to the sale of four other properties. The impairment charge for the three and nine months ended September 30, 2006 includes $1.6 million related to two properties.

(4)		The net gain for the three and nine months ended September 30, 2007 is related to the disposal of senior living assets during 2007, less certain expenses, of $3.6 million and $41.2 million, respectively, and the nine months ended September 30, 2007 also includes a net gain of $0.3 million from the sale of one other property during the second quarter of 2007 pursuant to a purchase option exercised by the operator. The net gain for the three and nine months ended September 30, 2006 is related to the sale of assets during 2006.

Note 3. Real Estate and Mortgage Notes Receivable Investments

The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and development services, and capital for the construction of new facilities as well as for the acquisition of existing properties. The Company had investments of approximately $1.7 billion in 177 real estate properties and mortgage notes receivable as of September 30, 2007, excluding assets classified as held for sale and including investments in three unconsolidated limited liability companies. The Company’s 172 owned real estate properties, excluding assets classified as held for sale, are located in 24 states with approximately 10.6 million total square feet. The table below details the Company’s investments.


	Number of		Investment					Square
(Dollars and Square Feet in thousands)	Investments		Amount		%			Feet

Owned properties
Master leases
Medical office		16	$	112,742		6.7	%		806
Physician clinics		20		137,474		8.1	%		803
Ambulatory care/surgery		8		39,471		2.3	%		165
Specialty outpatient		6		27,700		1.6	%		118
Specialty inpatient		13		232,470		13.7	%		977
Other		4		25,942		1.5	%		347

		67		575,799		33.9	%		3,216

Financial support agreements
Medical office		14		148,255		8.8	%		1,048

		14		148,255		8.8	%		1,048

Multi-tenanted with occupancy leases
Medical office		74		783,123		46.2	%		5,782
Physician clinics		12		37,325		2.2	%		243
Ambulatory care/surgery		4		61,872		3.7	%		283
Specialty inpatient		1		3,152		0.2	%		45
Other		—		10,047		0.6	%		—

		91		895,519		52.9	%		6,353

Land held for development		—		24,961		1.5	%		—
Corporate property		—		13,747		0.8	%		—

		—		38,708		2.3	%		—

Total owned properties		172		1,658,281		97.9	%		10,617


Mortgage notes receivable
Other		2		16,880		1.0	%		—

		2		16,880		1.0	%		—

Unconsolidated LLC investments, net
Medical office		2		12,266		0.7	%		—
Other		1		6,627		0.4	%		—

		3		18,893		1.1	%		—


Total real estate investments		177	$	1,694,054		100.0	%		10,617

Asset Acquisitions

During the third quarter of 2007, the Company acquired a 76,246 square foot medical office building on the campus of a hospital system in central Texas for $26.3 million, of which $4.0 million will be funded upon completion of certain tenant improvements. The fully leased building will be completely occupied upon completion of the tenant improvements, which are expected to be completed in the first quarter of 2008. During the third quarter of 2007, the Company also acquired four parcels of land, which are located in Texas and Illinois, for an aggregate purchase price of approximately $25.0 million, on which the Company expects to construct medical office or outpatient healthcare facilities. These parcels of land are included in “Construction in progress” on the Company’s Condensed Consolidated Balance Sheet.

During the second quarter of 2007, the Company acquired for $0.9 million the real estate assets of three partnerships, which owned three adjoining medical office buildings in Virginia.

During the first quarter of 2007, the Company acquired a 75,000 square foot building in Tennessee for a total investment of $7.3 million, including $5.4 million in cash consideration and the assumption of a mortgage note payable of $1.8 million.

Asset Dispositions

Senior Living Asset Dispositions

The Company announced on February 26, 2007 its plan to dispose of its portfolio of senior living assets. The portfolio included 62 real estate properties and 16 mortgage notes and notes receivable, including properties related to all of the Company’s 21 VIEs, six of which were consolidated by the Company. As a result of its plan to dispose of this portfolio, these properties were classified as held for sale on the Company’s Condensed Consolidated Balance Sheet and the results of operations for the properties were included in discontinued operations on the Company’s Condensed Consolidated Statements of Income. As of September 30, 2007, nine properties within the senior living portfolio had not yet been disposed. One additional property was disposed of in October 2007 as discussed in Note 9 with efforts continuing to dispose of the remaining eight properties in which the Company had a $27.1 million gross investment ($18.6 million, net) at September 30, 2007.

During the third quarter of 2007, the Company disposed of two of its senior living properties, in which it had a total gross investment of $8.7 million ($8.1 million, net) for aggregate consideration of approximately $12.0 million.

During the second quarter of 2007, the Company disposed of 35 of its senior living properties, in which it had a total gross investment of $197.2 million ($159.3 million, net) and disposed of 14 mortgage notes receivable and notes receivable included in its senior living portfolio in which the Company had a total investment of approximately $52.6 million for aggregate consideration of approximately $225.0 million.

During the first quarter of 2007, the Company disposed of 16 of its senior living properties in which it had a total gross investment of $99.6 million ($73.9 million, net) and disposed of 2 mortgage notes receivable and notes receivable included in its senior living portfolio in which the Company had a total investment of approximately $11.4 million for aggregate consideration of approximately $123.0 million.

As of September 30, 2007, the Company had recognized a net gain of approximately $41.2 million relating to the disposition of the senior living assets. The proceeds received to date have been used to pay the special dividend of $4.75 per share, which was paid on May 2, 2007, and to repay outstanding amounts on the Unsecured Credit Facility due 2009. Cash proceeds from the dispositions to be completed will be used to repay outstanding amounts on the Unsecured Credit Facility due 2009.

Other Dispositions

During the third quarter of 2007, the Company sold a 72,862 square foot medical office building in Texas and received $4.1 million in net proceeds. The Company’s net book value recorded on the building was $8.2 million at the time of sale, resulting in a $4.1 million non-cash impairment charge which is reflected in “Discontinued operations” on the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007.

During the second quarter of 2007, the Company sold a property in Tennessee in which it had a total gross investment of $2.2 million ($1.9 million, net) pursuant to a purchase option exercised by an operator. The Company received $2.1 million in cash proceeds and recognized a $0.2 million net gain from the sale.

Impairments

In accordance with SFAS No. 144, long-lived assets (e.g., properties) must be evaluated for possible impairment whenever facts or circumstances indicate that the carrying value might not be fully recoverable. During the first quarter of 2007, management identified six real estate properties, other than its senior living assets, that it intends to sell. In accordance with the provisions of SFAS No. 144, management analyzed these properties for potential impairment. Based on the Company’s decision to sell these assets, management concluded that the estimated future cash flows of certain of these properties were not expected to recover the carrying values of such properties. The Company’s aggregate net investment in the properties, before impairment, was approximately $8.3 million. During the first quarter of 2007, the Company recorded impairment losses totaling approximately $2.8 million, included in discontinued operations, which lowered the aggregate carrying values of the properties to their estimated fair value less costs to sell of approximately $5.5 million. During the third quarter, in connection with the sale of a property in Texas, the Company recorded a $4.1 million non-cash impairment charge as discussed in “Asset Dispositions” above. These impairment charges are included in “Discontinued operations” on the Company’s Condensed Consolidated Statements of Income for the three or nine months ended September 30, 2007, as applicable.

Future Minimum Lease Payments

Excluding leases related to those properties sold during 2007 or classified as held for sale at September 30, 2007, the Company’s future minimum lease payments to be collected under its non-cancelable operating leases and financial support arrangements as of September 30, 2007 for the years 2007 and after are as follows (in thousands):


2007	$	176,043
2008		164,971
2009		133,993
2010		107,857
2011		91,121
2012 and thereafter		283,580

	$	957,565

Purchase Options Exercised

In April 2007, the Company sold a property in Tennessee for $2.1 million pursuant to a purchase option exercised by a tenant. See Asset Dispositions above for further details on the sale.

In March 2007, an operator gave notice to the Company of its intent to purchase a building from the Company pursuant to a purchase option. The Company’s gross investment in the building was approximately $46.6 million ($33.8 million, net) at September 30, 2007. The Company also is the borrower under a mortgage note payable on the building with a principal balance of $20.1 million at September 30, 2007. The parties are in dispute over the enforceability of the option and the calculation of the purchase price. Accordingly, the Company is uncertain as to when the

transaction might close, if at all. As such, no reclassification to discontinued operations has been made as of September 30, 2007.

Note 4. Notes and Bonds Payable

The table below details the Company’s notes and bonds payable as of September 30, 2007 and December 31, 2006. At September 30, 2007, the Company had classified one mortgage note payable totaling $5.0 million as held for sale on the Company’s Condensed Consolidated Balance Sheet. As such, the note is not reflected in the September 30, 2007 balance in the table below.

Principal Balance at

Sept. 30,

Dec. 31,

Maturity

Contractual

Principal

Interest

(In thousands)

2007

2006

Dates

Interest Rates

Payments

Unsecured Credit Facility due 2009

$130,000

$190,000

1/09

LIBOR + 0.90%

At maturity

Quarterly

Senior Notes due 2011, including premium

300,920

301,083

5/11

8.125%

At maturity

Semi-Annual

Senior Notes due 2014, net of discount

298,941

298,838

4/14

5.125%

At maturity

Semi-Annual

Mortgage notes payable

50,333

60,061

5/11-10/32

5.49%-8.50%

Monthly

$780,194

$849,982

At September 30, 2007, the Company was in compliance with its financial covenant provisions under its various debt instruments.

Unsecured Credit Facility due 2009

In January 2006, the Company entered into a $400.0 million credit facility (the “Unsecured Credit Facility due 2009”) with a syndicate of 12 banks. The facility may be increased to $650.0 million during the first two years at the Company’s option, subject to it obtaining additional capital commitments from the banks. The credit facility matures in January 2009, but the term may be extended one additional year. Loans outstanding under the Unsecured Credit Facility due 2009 (other than swing line loans and competitive bid advances) will bear interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate and 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. The weighted-average rate on the borrowings outstanding as of September 30, 2007 was 6.48%. 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. The Unsecured Credit Facility due 2009 contains certain representations, warranties, and financial and other covenants customary in such loan agreements. The Company had borrowing capacity remaining, under its financial covenants, of $172.0 million under the facility as of September 30, 2007.

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. In 2001, the Company entered into interest rate swap agreements for notional amounts totaling $125.0 million to offset changes in the fair value of $125.0 million of the notes. In 2003, the Company terminated these interest rate swap agreements, received cash equal to the fair value of the terminated swaps of $18.4 million, and then entered into new swap agreements. The swap agreements entered into in 2003 were then terminated in June 2006 and the Company paid cash equal to the fair value of the terminated swaps of $10.1 million. The net premium resulting from the terminations of 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 will be amortized against interest expense over the remaining term of the notes yielding an effective interest rate on the notes of 7.896%.

The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets.


	September 30,		December 31,
(In thousands)	2007		2006

Senior Notes due 2011 face value	$	300,000	$	300,000
Unamortized net premium		920		1,083

Senior Notes due 2011 carrying amount	$	300,920	$	301,083

Senior Notes due 2014

On March 30, 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.


	September 30,			December 31,
(In thousands)	2007			2006

Senior Notes due 2014 face value	$	300,000		$	300,000
Unaccreted discount		(1,059	)		(1,162	)

Senior Notes due 2014 carrying amount	$	298,941		$	298,838

Mortgage Notes Payable

The following table details the Company’s mortgage notes payable, with related collateral, at September 30, 2007. At September 30, 2007, the Company had classified one mortgage note payable totaling $5.0 million as held for sale on the Company’s Condensed Consolidated Balance Sheet. As such, the note is not reflected in the September 30, 2007 balances in the table below.


											Investment in
			Effective					Number			Collateral at		Contractual Balance at
	Original		Interest			Maturity		of Notes		Collateral	September 30,		Sept. 30,		Dec. 31,
(Dollars in millions)	Balance		Rate (6)			Date		Payable		(8)	2007		2007		2006 (7)

Life Insurance Co. (1)	$	23.3		7.765	%		7/26		1	MOB	$	46.6	$	20.1	$	20.5
Life Insurance Co. (2)		4.7		7.765	%		1/17		1	MOB		11.1		3.1		3.2
Commercial Bank (3)		23.4		7.220	%		5/11		5	7 MOBs		54.2		10.7		12.6
Commercial Bank (4)		1.8		5.550	%		10/32		1	OTH		7.3		1.8		—
Life Insurance Co. (5)		15.1		5.490	%		1/16		1	MOB		32.5		14.6		14.8

									9		$	151.7	$	50.3	$	51.1


(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)		The contractual interest rates at September 30, 2007 ranged from 5.49% to 8.50%.

(7)		The contractual balance at December 31, 2006 excludes two mortgage notes payable totaling $9.0 million that were classified as held for sale and discontinued operations on the Company’s Condensed Consolidated Balance Sheet subsequent to December 31, 2006.

(8)		MOB-Medical office building; OTH-Other.

Other Long-Term Debt Information

Future maturities of the Company’s notes and bonds payable as of September 30, 2007, excluding mortgage notes payable classified as held for sale, were as follows (dollars in thousands):


2007	$	905	0.1	%
2008		3,802	0.5	%
2009 (1)		134,096	17.2	%
2010		4,411	0.6	%
2011		302,030	38.7	%
2012 and thereafter		334,950	42.9	%

	$	780,194	100.0	%


(1)		Includes $130.0 million outstanding on the Unsecured Credit Facility due 2009.

In its 1998 acquisition of Capstone Capital Corporation (“Capstone”), the Company acquired four interest rate swaps previously entered into by Capstone. In order to set the liabilities assumed by the Company, the Company, concurrently with the acquisition, acquired offsetting swaps. The remaining liability as of September 30, 2007 was approximately $80,000.

Note 5. Commitments and Contingencies

Construction in Progress

As of September 30, 2007, the Company had eight medical office/outpatient buildings under development with estimated completion dates ranging from the fourth quarter of 2007 through the fourth quarter of 2009. During the three and nine months ended September 30, 2007, the Company funded $16.1 million and $32.4 million on projects classified as construction in progress on the Company’s Condensed Consolidated Balance Sheet during the period. The Company has also acquired four parcels of land for an aggregate investment of approximately $25.0 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 September 30, 2007 (dollars in thousands). The information included in the table below represents management’s estimates and expectations based on the current facts. Those facts may change which could impact those estimates and expectations.


	Estimated
	Completion	Property				Estimated	Estimated
	Date -	Type		Approximate	Investment	Remaining	Total
State	Core and Shell	(1)	Properties	Square Feet	To Date	Fundings	Investment

Under construction:
Texas	4Q 2007	MOB	1	150,000	$15,145	$ 9,769	$ 24,914
Colorado	3Q 2008	MOB	2	170,000	7,002	20,401	27,403
Arizona	4Q 2008	MOB	2	191,200	6,669	24,374	31,043
Texas	2Q 2009	MOB	1	125,000	8,736	24,264	33,000
Texas	2Q 2009	SIP	1	45,000	3,152	9,248	12,400
Hawaii	4Q 2009	MOB	1	121,000	12,260	61,318	73,578

Land held for development:
Illinois					5,859
Illinois					8,413
Texas					4,731
Texas					5,958

			8	802,200	$77,925	$149,374	$202,338


(1)		MOB - Medical office building; SIP - Specialty inpatient facility

Other Construction

The Company also had various remaining first-generation tenant improvement obligations as of September 30, 2007 totaling approximately $12.9 million related to properties that were developed by the Company and a tenant improvement obligation totaling approximately $0.8 million related to a project developed by a joint venture in which the Company holds a 75% non-controlling equity interest.

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 recent 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 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. As such, the Company has continued to accrue revenue under its financial support agreements with the Foundation, totaling approximately $3.8 million (net) as of September 30, 2007, which remain unpaid by the Foundation. If the Foundation is relieved of its obligations to pay such amounts to the Company, or the Company is unable to collect certain of these amounts from its insurance carriers, the Company’s cash flows and results of operations could be negatively impacted. The Company also has a $1.2 million receivable balance as of September 30, 2007, due from the Company’s insurance company, to partially reimburse the Company for costs incurred related to rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina. If this receivable is not collected from the Company’s insurance 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.

Note 6. Stockholders’ Equity

Equity Offering

proceeds to the Company. The proceeds are being 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.

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 nine months ended September 30, 2007 and 2006.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share data)	2007			2006			2007			2006

Weighted Average Shares
Weighted Average Shares Outstanding		47,976,503			47,812,395			47,890,534			47,801,686
Unvested Restricted Stock Shares		(1,292,884	)		(1,267,110	)		(1,210,079	)		(1,278,747	)

Weighted Average Shares – Basic		46,683,619			46,545,285			46,680,455			46,522,939

Weighted Average Shares – Basic		46,683,619			46,545,285			46,680,455			46,522,939
Dilutive effect of Restricted Stock Shares		888,987			912,699			882,266			910,976
Dilutive effect of Employee Stock Purchase Plan		28,724			33,401			33,433			39,823

Weighted Average Shares – Diluted		47,601,330			47,491,385			47,596,154			47,473,738

Net Income
Income from Continuing Operations	$	4,822		$	3,896		$	12,091		$	13,897
Discontinued Operations		664			4,167			43,383			18,167

Net income	$	5,486		$	8,063		$	55,474		$	32,064


Basic Earnings per Common Share
Income from Continuing Operations per common share	$	0.10		$	0.08		$	0.26		$	0.30
Discontinued Operations per common share		0.02			0.09			0.93			0.39

Net income per common share	$	0.12		$	0.17		$	1.19		$	0.69


Diluted Earnings per Common Share
Income from Continuing Operations per common share	$	0.10		$	0.08		$	0.25		$	0.29
Discontinued Operations per common share		0.02			0.09			0.92			0.39

Net income per common share	$	0.12		$	0.17		$	1.17		$	0.68

Common Stock Dividend Declarations

During the nine months ended September 30, 2007, the Company’s Board of Directors has declared common stock cash dividends as shown in the table below:


	Per Share		Date of
Dividend	Amount		Declaration	Date of Record	Date Paid

4^th Quarter 2006	$	0.660	January 23, 2007	February 15, 2007	March 2, 2007
Special Dividend	$	4.750	March 26, 2007	April 16, 2007	May 2, 2007
1^st Quarter 2007	$	0.660	April 24, 2007	May 15, 2007	June 1, 2007
2^nd Quarter 2007	$	0.385	July 24, 2007	August 15, 2007	September 4, 2007

Authorization to Repurchase Common Stock

On July 25, 2006, the Company’s Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company’s common stock. As of September 30, 2007, the Company had not repurchased any shares under this authorization.

Note 7. Retirement and Termination Benefits

During the first quarter of 2007, the Company recorded a $1.5 million charge, included in “General and administrative expenses” in the Company’s Condensed Consolidated Income Statement, and established a related severance and payroll tax liability, included in “Accounts payable and accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet, 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. The officer retirement and position eliminations were effective during the first quarter of 2007. The liability remaining at September 30, 2007 represents severance payments remaining that will be paid through the third quarter of 2008. The following table represents items included in the charge and liability as well as payments made related to the liability through September 30, 2007.


(In thousands)	Expense		Liability

Severance, payroll taxes and related charges	$	1,078	$	1,513
Accelerated vesting of deferred compensation		443		—

Total expense and liability recorded during 1st quarter 2007	$	1,521	$	1,513


Payments:
1st quarter 2007				(425	)
2nd quarter 2007				(546	)
3rd quarter 2007				(149	)

Balance at September 30, 2007			$	393

Note 8. 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 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 nine months ended September 30, 2007 and 2006:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2007			2006			2007			2006

Net income	$	5,486		$	8,063		$	55,474		$	32,064
Items to Reconcile Net Income to Taxable Income:
Depreciation and amortization		1,940			2,448			6,875			11,423
Gain or loss on disposition of depreciable assets		471			23			27,524			5,010
Straight-line rent		(826	)		(454	)		174			(1,638	)
VIE Consolidation		282			(36	)		676			824
Receivable allowances		770			4,440			(4,773	)		3,111
Stock-based compensation		1,994			2,071			9,543			5,341
Other		2,855			(2,175	)		(1,029	)		224


Taxable income (1)	$	12,972		$	14,380		$	94,464		$	56,359


⁽¹⁾		Before REIT dividend paid deduction.

Note 9. Subsequent Events

Common Stock Dividend

On October 23, 2007, the Company’s Board of Directors declared a quarterly common stock cash dividend in the amount of $0.385 per share payable on December 3, 2007 to shareholders of record on November 15, 2007.

Development Activities

On October 2, 2007, the Company entered into an agreement to develop and manage a medical office building on the campus of a hospital in the greater Seattle, Washington area. The agreement includes a number of conditions and contingencies which must be satisfied before development commences. Assuming satisfaction of such conditions, the Company expects construction will begin in the third quarter of 2008 and be completed in late 2010. The development budget will be approximately $78.4 million, and the building will contain approximately 192,000 square feet of office space including an underground garage with 924 spaces.

On October 12, 2007, the Company provided a construction loan to a developer in the amount of $15.2 million to fund initial development of an outpatient medical campus in Iowa. The Company anticipates expanding its funding commitment to approximately $55.0 million, subject to the completion of negotiations with the developer.

Asset Disposition

On October 31, 2007, the Company disposed of one of its senior living properties, in which it had a total gross investment of $10.5 million ($10.0 million, net) at September 30, 2007. The Company received $9.2 million in consideration, including the purchaser’s assumption of a $5.0 million mortgage note.

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

Disclosure Regarding Forward-Looking Statements

This report and other material 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,” “intend,” “plan,” “estimate,” “project,” “continue,” “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 risks, 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.

Business Overview

Healthcare Realty Trust Incorporated (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 with the delivery of 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

Since its inception, the Company has been selective about the properties it acquires and develops. Management believes that by investing in properties associated with or adjacent to leading healthcare providers and in markets with a strong demand for outpatient healthcare facilities, the Company will enhance its prospects for long-term stability and growth. The Company believes that its portfolio, diversified by facility type, geography, and tenant mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice patterns.

Management continues to see high valuations in the medical office sector based on market transactions. Despite the highly competitive market for these assets, the Company continues to pursue existing property investments and is focused on improving operations in its portfolio of managed, multi-tenanted properties.

The Company also continues to pursue opportunities to develop outpatient medical facilities. The Company has eight development projects underway with budgets totaling approximately $202.3 million. The Company expects completion of approximately $24.9 million during the remainder of 2007,

$58.4 million in 2008, and $119.0 million in 2009. Beyond the projects currently under construction, the Company is working on several other projects that the Company currently estimates will have total project budgets of approximately $250 million with anticipated completion dates in 2009 and 2010.

Trends and Matters Impacting Operating Results

Management monitors factors and trends important to the Company and 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, 2006 are some of the factors and trends that management believes may impact future operations of the Company.

Sale of Senior Living and Certain Other Real Estate Assets

In February 2007, the Company announced it plans to dispose of its portfolio of senior living assets, consisting of 62 properties and 16 mortgage notes and notes receivable. The Company’s investment in the real estate properties and mortgage notes receivable included in this portfolio was approximately $398.0 million ($326.0 million, net) at December 31, 2006 which produced approximately $50.0 million in revenues and $20.0 million in net income for the year ended December 31, 2006. The Company expects to receive approximately $400.0 million in total consideration for the portfolio. As of September 30, 2007, the Company had disposed of, in a series of closings, a total of 53 properties and all of the mortgage notes and notes receivable for consideration totaling approximately $360.0 million and anticipates that the remaining properties will be disposed of for an estimated aggregate consideration of $40.0 million. Cash proceeds from the dispositions to date have been used to pay a special dividend of $227.2 million, or $4.75 per share, pay transaction costs and to repay debt. Commensurate with the smaller asset base from the disposal of the portfolio of the senior living assets, the Company reset its dividend beginning with the second quarter of 2007 to $1.54 per share, per annum. The cash proceeds from the remaining dispositions will be used to repay debt. See Notes 2, 3 and 9 to the Condensed Consolidated Financial Statements for further details regarding the disposition of the portfolio.

In the first quarter of 2007, the Company also decided to sell six other properties. See Note 3 to the Condensed Consolidated Financial Statements for further details.

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.” In 2003, the Securities and Exchange Commission issued a statement that impairment charges could not be added back to net income in calculating FFO. As such, the impairments discussed below negatively impacted FFO. Impairment charges will be recognized from time to time and will negatively impact FFO. In the first and third quarters of 2007, based on management’s decision to sell certain properties, the Company recorded impairment charges totaling $2.8 million and $4.1 million, respectively, which reduced FFO per diluted share by approximately $0.08 for the three months ended September 30, 2007 and $0.14 for the nine months ended September 30, 2007. See Note 3 to the Condensed Consolidated Financial Statements for more details on these impairment charges.

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; because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs; and finally, because research analysts publish their earnings estimates and consensus estimates for healthcare REITs only in terms of fully diluted FFO per share and in terms of net income or earnings per share. 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 nine months ended September 30, 2007 and 2006.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Dollars in thousands, except per share data)	2007			2006		2007			2006

Net income	$	5,486		$	8,063	$	55,474		$	32,064
Gain on sales of real estate properties, net		(3,587	)		—		(41,459	)		(3,275	)
Real estate depreciation and amortization		12,664			15,726		39,734			47,474

Total adjustments		9,077			15,726		(1,725	)		44,199


Funds from Operations — Basic and Diluted	$	14,563		$	23,789	$	53,749		$	76,263


Funds from Operations per Common Share — Basic	$	0.31		$	0.51	$	1.15		$	1.64

Funds from Operations per Common Share — Diluted	$	0.31		$	0.50	$	1.13		$	1.61


Weighted Average Common Shares Outstanding — Basic		46,683,619			46,545,285		46,680,455			46,522,939

Weighted Average Common Shares Outstanding — Diluted		47,601,330			47,491,385		47,596,154			47,473,738

Results of Operations

Third Quarter 2007 Compared to Third Quarter 2006

Net income for the quarter ended September 30, 2007 totaled $5.5 million, or $0.12 per basic and diluted common share, on total revenues from continuing operations of $53.5 million. This compares with net income of $8.1 million, or $0.17 per basic and diluted common share, which was prior to the sale of the senior living portfolio, on total revenues from continuing operations of $54.3 million for the quarter ended September 30, 2006. Included in net income for the three months ended September 30, 2007 is a net gain related to the disposal of the senior living properties totaling $3.6 million, or $0.08 per basic and diluted common share.

Income from continuing operations for the quarter ended September 30, 2007 totaled $4.8 million, or $0.10 per basic and diluted common share, compared to $3.9 million, or $0.08 per basic and diluted share for the same period in 2006.

FFO was $14.6 million, or $0.31 per diluted common share for the three months ended September 30, 2007 compared to $23.8 million, or $0.50 per diluted common share for the same period in 2006, which was prior to the sale of the senior living portfolio. FFO and FFO per diluted common share decreased in 2007 compared to 2006 due mainly to (1) a reduction in revenues from the disposal of the senior living properties and mortgage notes of approximately $7.4 million; (2) an impairment charge of $4.1 million related to the sale of a facility during 2007, offset by impairment charges recorded of $3.9 million for the same period in 2006; (3) a prepayment fee recorded in 2006 totaling $1.0

million related to the prepayment of one mortgage note; and (4) interest income recognized during 2006 on three mortgage notes receivable that were repaid during 2006 totaling $1.1 million.


	Three Months Ended
	September 30,						Change
(Dollars in thousands)	2007			2006			$			%

REVENUES
Master lease rent	$	15,298		$	15,137		$	161			1.1	%
Property operating		32,356			30,934			1,422			4.6	%
Straight-line rent		639			541			98			18.1	%
Mortgage interest		353			1,402			(1,049	)		(74.8	%)
Other operating		4,853			6,274			(1,421	)		(22.6	%)

		53,499			54,288			(789	)		(1.5	%)

EXPENSES
General and administrative		4,335			4,234			101			2.4	%
Property operating		19,271			17,040			2,231			13.1	%
Impairments		—			2,311			(2,311	)		(100.0	%)
Bad debt		53			184			(131	)		(71.2	%)
Interest		12,611			13,886			(1,275	)		(9.2	%)
Depreciation		11,400			10,273			1,127			11.0	%
Amortization		1,007			2,464			(1,457	)		(59.1	%)

		48,677			50,392			(1,715	)		(3.4	%)


INCOME FROM CONTINUING OPERATIONS		4,822			3,896			926			23.8	%

DISCONTINUED OPERATIONS
Income from discontinued operations		1,134			5,740			(4,606	)		(80.2	%)
Impairments		(4,057	)		(1,573	)		(2,484	)		(157.9	%)
Gain on sales of real estate properties, net		3,587			—			3,587			—

INCOME FROM DISCONTINUED OPERATIONS		664			4,167			(3,503	)		(84.1	%)


NET INCOME	$	5,486		$	8,063		$	(2,577	)		(32.0	%)

Total revenues from continuing operations for the quarter ended September 30, 2007 decreased $0.8 million, or 1.5%, compared to the same period in 2006, mainly for the reasons discussed below:

• Property operating income increased $1.4 million, or 4.6%, due mainly to additional revenues from new tenant lease agreements and stated rental increases of $0.9 million, $0.4 million related to the completion of construction of two medical office buildings, and revenues of $0.1 million in the third quarter of 2007 resulting from the acquisition of a medical office building.

• Mortgage interest income decreased $1.0 million, or 74.8%, due mainly to the repayment of three mortgage notes in 2006, resulting in a reduction of interest income of approximately $1.1 million.

• Other operating income decreased $1.4 million, or 22.6%, due mainly to the receipt of mortgage prepayment fees in 2006 totaling approximately $1.1 million related to the prepayment of one mortgage note. No such mortgage prepayment fees were recognized in 2007.

Total expenses for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006 decreased $1.7 million, or 3.4%, mainly for the reasons discussed below:

• Property operating expense increased $2.2 million, or 13.1%, as compared to the same period in 2006. Property operating expense increased in the third quarter of 2007 in comparison to the third quarter 2006 mainly due to a favorable real estate tax adjustment of $1.1 million recorded during the third quarter of 2006 and additional real estate tax expense of $0.3 million recorded in the third quarter of 2007. Further, additional expenses of $0.4 million were recognized in 2007 related to legal fees,

$0.3 million in additional expenses was recognized in connection with the completion of construction of two medical office buildings, and $0.1 million in additional expenses was recognized related to the acquisition of a medical office building. These amounts were offset by a favorable ground lease expense adjustment of $0.3 million related to two medical office buildings on which construction began in 2007.

• Impairments for the three months ended September 30, 2006 were $2.3 million due to a charge recorded related to acquired receivables.

• Interest expense decreased $1.3 million, or 9.2%, due mainly to an increase in capitalized interest of $0.9 million and a decrease in interest expense of $0.4 million due to a lower average outstanding balance on the credit facility in the third quarter of 2007 as compared to the third quarter of 2006.

• Depreciation expense increased $1.1 million, or 11.0%, due mainly to the acquisition of $96.0 million of depreciable real estate properties since the first quarter of 2006, as well as various building and tenant improvements.

• Amortization expense decreased $1.5 million, or 59.1%, mainly due to a decrease in total amortization expense related to lease intangibles that have fully amortized.

Income from discontinued operations totaled $0.7 million and $4.2 million, respectively, for the three months ended September 30, 2007 and 2006, which includes the results of operations, net gains on sale, and impairment charges related to property disposals during 2007 and 2006, as well as the results of operations related to assets classified as held for sale at September 30, 2007. See Notes 2 and 9 to the Condensed Consolidated Financial Statements for more information about discontinued operations and the assets classified as held for sale at September 30, 2007.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income for the nine months ended September 30, 2007 totaled $55.5 million, or $1.19 per basic common share ($1.17 per diluted common share), on total revenues from continuing operations of $158.3 million. This compares with net income of $32.1 million, or $0.69 per basic common share ($0.68 per diluted common share), on total revenues from continuing operations of $159.4 million for the nine months ended September 30, 2006. Included in net income for the nine months ended September 30, 2007 is (1) a net gain largely related to the disposal of the senior living properties totaling $41.5 million, or $0.89 per basic common share ($0.87 per diluted common share); (2) impairment charges related to five properties sold or classified as held for sale totaling $6.8 million, or $0.15 per basic ($0.14 per diluted common share); and (3) charges related to the retirement of one officer and the termination of several other employees totaling $1.5 million, or $0.03 per basic and diluted common share.

FFO was $53.7 million, or $1.13 per diluted common share for the nine months ended September 30, 2007 compared to $76.3 million, or $1.61 per diluted common share for the same period in 2006, which was prior to the sale of the senior living portfolio. FFO and FFO per diluted common share decreased in 2007 compared to 2006 due mainly to: (1) impairment charges totaling $6.8 million recorded during the nine months ended September 30, 2007, compared to impairment charges totaling $3.9 million recorded in the same period of 2006; (2) the reduction of revenues due mainly to the disposal of the senior living properties and mortgage notes of approximately $14.1 million; and (3) the reduction of revenues from the repayment of seven mortgages during 2006 totaling approximately $6.2 million.


	Nine Months Ended
	September 30,						Change
(Dollars in thousands)	2007			2006			$			%

REVENUES
Master lease rent	$	46,293		$	42,796		$	3,497			8.2	%
Property operating		95,488			92,750			2,738			3.0	%
Straight-line rent		734			2,319			(1,585	)		(68.3	%)
Mortgage interest		1,057			4,738			(3,681	)		(77.7	%)
Other operating		14,743			16,837			(2,094	)		(12.4	%)

		158,315			159,440			(1,125	)		(0.7	%)

EXPENSES
General and administrative		15,730			12,994			2,736			21.1	%
Property operating		55,106			51,633			3,473			6.7	%
Other operating		—			171			(171	)		(100.0	%)
Impairments		—			2,311			(2,311	)		(100.0	%)
Bad debt		136			856			(720	)		(84.1	%)
Interest		38,383			39,203			(820	)		(2.1	%)
Depreciation		33,243			30,351			2,892			9.5	%
Amortization		3,626			8,024			(4,398	)		(54.8	%)

		146,224			145,543			681			0.5	%


INCOME FROM CONTINUING OPERATIONS		12,091			13,897			(1,806	)		(13.0	%)

DISCONTINUED OPERATIONS
Income from discontinued operations		8,773			16,465			(7,692	)		(46.7	%)
Impairments		(6,849	)		(1,573	)		(5,276	)		(335.4	%)
Gain on sales of real estate properties, net		41,459			3,275			38,184			1,165.9	%

INCOME FROM DISCONTINUED OPERATIONS		43,383			18,167			25,216			138.8	%


NET INCOME	$	55,474		$	32,064		$	23,410			73.0	%

Total revenues from continuing operations for the nine months ended September 30, 2007 decreased $1.1 million, or 0.7%, compared to the same period in 2006, mainly for the reasons discussed below:

• Master lease rental income increased $3.5 million, or 8.2%, due mainly to additional revenues of $2.5 million in 2007 resulting from the acquisition of a medical office building and an adjoining orthopaedic hospital during 2006, the receipt of a lease termination fee of $0.4 million and the acquisition of a building in Tennessee of $0.4 million during 2007.

• Property operating income increased $2.7 million, or 3.0%, due mainly to additional revenues from increases in occupancy and annual rent increases totaling approximately $0.8 million, additional income in connection with the completion of construction of two medical office buildings of $0.7 million, a lease termination fee recognized in 2007 of approximately $0.6 million, and additional income related to the acquisition of a medical office building of $0.1 million.

• Straight-line rent income decreased $1.6 million, or 68.3%, due mainly to adjustments to straight-line rent in 2006 related to amendments entered into in 2006 extending the lease terms on existing leases.

• Mortgage interest income decreased $3.7 million, or 77.7%, due mainly to the repayment of seven mortgage notes in 2006, resulting in a reduction of interest income of approximately $4.0 million, offset partially by additional revenues of $0.3 million from the addition of two new mortgages in 2006.

• Other operating income decreased $2.1 million, or 12.4%, due to mortgage prepayment fees received in 2006 associated with the repayment of two mortgages. No such mortgage prepayment fees were recognized in 2007.

Total expenses for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 increased $0.7 million, or 0.5%, mainly for the reasons discussed below:

• General and administrative expenses increased $2.7 million, or 21.1%, due mainly to charges related to the retirement or termination of six employees totaling $1.5 million recorded in the first quarter of 2007, compensation-related expenses of $0.4 million, travel-related expenses of $0.4 million and increases in franchise and state taxes of $0.3 million.

• Property operating expenses increased $3.5 million, or 6.7%, due mainly to the recognition of straight-line rent expenses totaling approximately $0.8 million associated with ground leases where the Company is the lessee, additional legal fees and utilities expenses during 2007 of $0.9 million, a favorable real estate tax adjustment recorded during 2006 of $0.7 million, additional expenses in connection with the completion of construction of two medical office buildings of $0.5 million, and additional expenses during 2007 related to the acquisition of a medical office building totaling $0.1 million.

• Impairments for the nine months ended September 30, 2007 were $2.3 million due to a charge recorded related to an acquired receivable.

• Bad debt expense decreased $0.7 million, or 84.1%, due to allowance for doubtful accounts recorded during 2006 on various receivables.

• Interest expense decreased $0.8 million, or 2.1%, as compared to the same period in 2006. The decrease is mainly due to an increase in capitalized interest of $1.8 million on projects under construction during 2007, a decrease in interest expense of approximately $0.7 million from the repayment of the senior notes due 2006, offset partially by a $1.9 million increase in interest expense on the unsecured credit facility due to higher interest rates and a higher average outstanding balance on the credit facility in 2007 than in 2006.

• Depreciation expense increased $2.9 million, or 9.5%, due mainly to the acquisition of $96.0 million of depreciable real estate properties since the first quarter of 2006, as well as various building and tenant improvements.

• Amortization expense decreased $4.4 million, or 54.8%, mainly due to a decrease in total amortization expense related to lease intangibles that have fully amortized.

Income from discontinued operations totaled $43.4 million and $18.2 million, respectively, for the nine months ended September 30, 2007 and 2006, which includes the results of operations, net gains on sale, and impairment charges related to property disposals during 2007 and 2006, as well as the results of operations related to assets classified as held for sale at September 30, 2007. See Notes 2 and 9 to the Condensed Consolidated Financial Statements for more information about discontinued operations and the assets classified as held for sale at September 30, 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, or from other private debt or equity offerings. For the nine months ended September 30, 2007, the Company generated $64.0 million in cash from operations and used $49.8 million in total cash from investing and financing activities as detailed in the Company’s Condensed Consolidated Cash Flow Statement.

The Company had certain contractual obligations as of September 30, 2007 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 2007 through 2008 are detailed in the table below.


(In thousands)	2007		2008		Total

Long-term debt obligations, including interest ⁽¹⁾	$	14,016	$	46,888	$	60,904
Operating lease commitments ⁽²⁾		803		3,302		4,105
Construction in progress ⁽³⁾		24,914		58,446		83,360
Tenant improvements ⁽⁴⁾		13,707		—		13,707
Deferred gain ⁽⁵⁾		—		—		—
Pension obligations ⁽⁶⁾		—		—		—

	$	53,440	$	108,636	$	162,076


⁽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 of the remaining commitments on the construction of eight buildings. A portion of the remaining commitments is designated for tenant improvements which will generally be funded after the core and shell of the building is substantially completed.

⁽⁴⁾		Includes tenant improvement allowance obligations remaining on seven properties constructed by the Company and on one property development by a joint venture in which the Company holds a 75% non-controlling equity interest. For the purpose of this table, the Company has assumed that the obligations will all be funded in 2007.

⁽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 amounts the Company will pay will be based upon the tenant’s performance under its lease through July 31, 2011. Payments made by the Company to the buyer reduce the deferred gain recorded by the Company. The Company has made one payment of approximately $0.5 million which was paid during the three months ended September 30, 2007.

⁽⁶⁾		The Company has three employees and three non-employee directors who are eligible to retire. If these individuals retired at normal retirement age and received full retirement benefits, the future benefits to be paid are estimated to be approximately $32 million.

As of September 30, 2007, approximately 81.6% of the Company’s outstanding debt balances were due after 2010, with the majority of the debt balances due prior to 2010 relating to the Unsecured Credit Facility due 2009. The Company’s stockholders’ equity at September 30, 2007 totaled approximately $646.1 million, and its debt-to-total capitalization ratio, on a book basis, was approximately 54.7%. For the nine months ended September 30, 2007, the Company’s earnings covered fixed charges at a ratio of 1.23 to 1.0. At September 30, 2007, the Company had borrowing capacity remaining, under its financial covenants, of $172.0 million under the Unsecured Credit Facility due 2009 and was in compliance with its financial covenant provisions under its various debt instruments.

The Company’s senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, respectively.

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 Stifel Nicolaus. The transaction generated approximately $68.4 million in net proceeds to the Company. The proceeds are being 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.

Shelf Registration

The Company may from time to time raise additional capital or make investments by issuing, in public or private transactions, equity and debt securities. The availability and terms of any such issuance will depend upon market and other conditions. As of September 30, 2007, the Company may issue approximately $430.9 million of securities under its currently effective shelf registration statement.

Security Deposits and Letters of Credit

As of September 30, 2007, the Company had approximately $4.6 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.

Acquisitions and Dispositions in 2007

Asset Acquisitions

During the third quarter of 2007, the Company acquired a 76,246 square foot medical office building on a new campus of a hospital system in central Texas for $26.3 million, of which $4.0 million will be funded upon completion of certain tenant improvements. The fully leased building will be completely occupied upon completion of the tenant improvements, which are expected to be completed in the first quarter of 2008. During the third quarter of 2007, the Company also acquired four parcels of land, which are located in Texas and Illinois, for an aggregate purchase price of approximately $25.0 million, on which the Company expects to construct medical office or outpatient healthcare facilities. These parcels of land are included in “Construction in progress” on the Company’s Condensed Consolidated Balance Sheet.

During the second quarter of 2007, the Company acquired for $0.9 million the real estate assets of three partnerships, which owned three adjoining medical office buildings in Virginia.

Asset Dispositions

Senior Living Asset Dispositions

As of September 30, 2007, the Company had recognized a net gain of approximately $41.2 million relating to the disposition of the senior living assets. The proceeds received to date have been used to pay the special dividend of $4.75 per share, which was paid on May 2, 2007, and to repay outstanding amounts on the Unsecured Credit Facility due 2009. Cash proceeds from the dispositions remaining to be completed will be used to repay outstanding amounts on the Unsecured Credit Facility due 2009.

Other Dispositions

During the third quarter of 2007, the Company sold a 72,862 square foot medical office building in Beaumont, Texas and received $4.1 million in net proceeds. The Company’s net book value recorded on the building was $8.2 million at the time of sale, resulting in a $4.1 million non-cash impairment charge which is reflected in “Discontinued operations” on the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007.

The Company has also made the decision to sell seven other real estate properties in which the Company had a $19.6 million gross investment ($13.9 million, net) at September 30, 2007. These seven properties have not been sold and remain in held for sale at September 30, 2007.

Purchase Options Exercised

In April 2007, pursuant to a purchase option exercised by an operator, the Company sold a property in Tennessee for $2.1 million in cash. The Company’s gross investment in the building was approximately $2.2 million ($1.9 million, net).

Construction in Progress


	Estimated
	Completion		Property							Estimated		Estimated
	Date -		Type			Approximate		Investment		Remaining		Total
State	Core and Shell		(1)	Properties		Square Feet		To Date		Fundings		Investment

Under construction:
Texas		4Q 2007	MOB		1		150,000	$	15,145	$	9,769	$	24,914
Colorado		3Q 2008	MOB		2		170,000		7,002		20,401		27,403
Arizona		4Q 2008	MOB		2		191,200		6,669		24,374		31,043
Texas		2Q 2009	MOB		1		125,000		8,736		24,264		33,000
Texas		2Q 2009	SIP		1		45,000		3,152		9,248		12,400
Hawaii		4Q 2009	MOB		1		121,000		12,260		61,318		73,578

Land held for development:
Illinois									5,859
Illinois									8,413
Texas									4,731
Texas									5,958

					8		802,200	$	77,925	$	149,374	$	202,338


(1)		MOB - Medical office building; SIP - Specialty inpatient facility

Other Construction

Dividends

During 2007, 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)

4^th Quarter 2006	$	0.660	January 23, 2007	February 15, 2007	March 2, 2007
Special Dividend	$	4.750	March 26, 2007	April 16, 2007	May 2, 2007
1^st Quarter 2007	$	0.660	April 24, 2007	May 15, 2007	June 1, 2007
2^nd Quarter 2007	$	0.385	July 24, 2007	August 15, 2007	September 4, 2007
3^rd Quarter 2007	$	0.385	October 23, 2007	November 15, 2007	* December 3, 2007

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon

its ability to generate funds from operations, cash flows, and to make accretive new investments. The special dividend of $4.75 per share declared on March 26, 2007 was paid with proceeds from the disposition of the senior living assets.

Cash dividends paid by the Company during 2007, excluding the special dividend which was paid with proceeds from the sale of assets, have exceeded its cash flows from operations. The dividends paid in excess of cash flows from operations were funded by the Company’s Unsecured Credit Facility due 2009. Commensurate with the smaller asset base from the disposal of the portfolio of the senior living assets, the Company reset its dividend for the second quarter of 2007 to $1.54 per share, per annum.

Liquidity

Net cash provided by operating activities was $64.0 million and $91.7 million for the nine months ended September 30, 2007 and 2006, respectively. Cash flow from operations for 2007 reflects a reduction in revenues from the disposition of the senior living portfolio as well as fluctuations in receivables, payables and accruals. 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 is in the process of disposing of its portfolio of senior living assets which has and will continue to impact the Company’s cash flows from operations for 2007. The Company has used the proceeds received from the disposal to fund repayments on its Unsecured Credit Facility due 2009 and the payment of a one-time special dividend. The proceeds from the remaining disposals will be used to fund repayments on the Unsecured Credit Facility due 2009. Beginning with the second quarter of 2007, the Company reset its dividend to an amount commensurate with the smaller asset base resulting from the disposition.

The Company plans to continue to meet its liquidity needs, including funding additional investments in 2007 and 2008, 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, and proceeds from sales of real estate investments 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.

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.

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.

Cautionary Language Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q and other materials 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 which 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,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “anticipate” 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 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. 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, 2006 and in Item 1A of Part II of this quarterly report on Form 10-Q.

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. Additionally, from time to time, the Company may utilize interest rate swaps to either (i) convert fixed rates to variable rates in order to hedge the exposure related to changes in the fair value of obligations, or (ii) convert variable rates to fixed rates in order to hedge risks associated with future cash flows.

At September 30, 2007, approximately $650.2 million, or 83.3%, of the Company’s total debt balance bore interest at fixed rates. Additionally, the Company’s mortgage and other notes receivable portfolio, totaling $19.9 million, bore interest at fixed rates.

The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market rates (dollars in thousands).

Impact on Earnings and Cash Flows

Outstanding

Calculated

Principal Balance

Annual

Assuming 10%

as of

Interest Expense

Increase in Market

Decrease in Market

Sept. 30, 2007

(1)

Interest Rates

Variable Rate Debt:

Unsecured Credit Facility due 2009 ($400 Million)

130,000

8,541

(737

)

737


			Fair Value
	Carrying Value				Assuming 10%		Assuming 10%
	at				Increase in Market		Decrease in Market		December 31,
	Sept. 30, 2007		Sept. 30, 2007		Interest Rates		Interest Rates		2006 (2)

*Fixed Rate Debt:*

Senior Notes due 2011, including premium	$	300,920	$	323,105	$	319,067	$	327,210	$	312,777
Senior Notes due 2014, net of discount		298,941		298,576		291,586		305,792		288,434
Mortgage Notes Payable		50,333		52,697		51,287		54,105		61,688

	$	650,194	$	674,378	$	661,940	$	687,107	$	662,899

*Fixed Rate Receivables:*

Mortgage Notes Receivable	$	16,880	$	16,742	$	15,864	$	17,686	$	70,389
Other Notes Receivable		3,022		2,836		2,686		2,997		9,233

	$	19,902	$	19,578	$	18,550	$	20,683	$	79,622


(1)		Annual interest expense is calculated using the market rate as of September 30, 2007, or 6.57%, and assumes a constant principal balance.

(2)		Fair values as of December 31, 2006 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments.

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. Management has excluded from its evaluation the effectiveness of the disclosure controls of the variable interest entities (“VIEs”) consolidated by the Company since it does not have the contractual right, authority or ability, in practice, to assess the VIEs’ disclosure controls and does not have the ability to dictate or modify those controls. 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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. As such, the Company has continued to accrue revenue under its financial support agreements with the Foundation, totaling approximately $3.8 million (net) as of September 30, 2007, which remain unpaid by the Foundation. If the Foundation is relieved of its obligations to pay such amounts to the Company or the Company is unable to collect certain of these amounts from its insurance carriers, the Company’s cash flows and results of operations could be negatively impacted. The Company also has a $1.2 million receivable balance as of September 30, 2007, due from the Company’s insurance company, to partially reimburse the Company for costs incurred related to rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina. If this receivable is not collected from the Company’s insurance 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.

Item 1A. Risk Factors

In addition to the items discussed below and 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, 2006, 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 and in this report, 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.

The Company’s real estate development activities are subject to risks particular to development.

The Company intends to continue to pursue development activities as opportunities arise. The Company is subject to certain risks associated with development activities including the following:

	o		Development activities generally require various government and other approvals which may not be received;

	o		Unsuccessful development opportunities could result in direct expenses which could impact the Company’s results of operations;

	o		Construction costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or possibly unprofitable;

	o		Time required to complete the construction of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;

	o		Occupancy rates and rents of a completed project may not be sufficient to make the project profitable; and

	o		Favorable sources to fund the Company’s development activities may not be available when needed.

The Company is exposed to risks associated with entering new markets.

The Company’s development activities may involve entering new markets. The construction and/or acquisition of properties in new markets involves risks, including the risk that the property will not perform as anticipated and the risk that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-construction or pre-acquisition due diligence process will exceed estimates. There is, and it is expected that there will continue to be, significant competition for investment opportunities that meet management’s investment criteria, as well as risks associated with obtaining financing for acquisition activities, if necessary.

The Company may be unsuccessful in operating completed real estate projects.

The Company’s real estate properties developed or acquired may not perform in accordance with management’s expectations due to many factors including the following:

	o		The Company’s purchase price for acquired facilities may be based upon a series of market judgments which may be incorrect; and

	o		The costs of any improvements required to bring an acquired facility up to standards necessary to establish the market position intended for that facility might exceed budgeted costs.

Further, the Company can give no assurance that acquisition and development project targets that will meet management’s investment criteria will be available when needed or anticipated.

Item 6. Exhibits



		Exhibit 3.1		Second Articles of Amendment and Restatement of the Registrant (1)

		Exhibit 3.2		Amended and Restated Bylaws of the Registrant, as amended (filed herewith)

		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) (2)

		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) (2)

		Exhibit 4.4		Form of 8.125% Senior Note Due 2011 (2)

		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) (3)

		Exhibit 4.6		Form of 5.125% Senior Note Due 2014 (3)

		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 (4)

		Exhibit 10.2		Underwriting Agreement dated September 25, 2007 by and between the Company and Stifel, Nicolaus & Company, Incorporated (5)

		Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 6 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 8-K filed May 17, 2001 and hereby incorporated by reference.

(3)		Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.

(4)		Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.

(5)		Filed as an exhibit to the Company’s Form 8-K filed September 27, 2007 and hereby incorporated by reference.

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
		Senior Vice President and Chief Financial Officer

Date: November 5, 2007

Exhibit Index


Exhibit		Description
Exhibit 3.1		Second Articles of Amendment and Restatement of the Registrant (1)

Exhibit 3.2		Amended and Restated Bylaws of the Registrant, as amended (file herewith)

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) (2)

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) (2)

Exhibit 4.4		Form of 8.125% Senior Note Due 2011 (2)

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) (3)

Exhibit 4.6		Form of 5.125% Senior Note Due 2014 (3)

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 (4)

Exhibit 10.2		Underwriting Agreement dated September 25, 2007 by and between the Company and Stifel, Nicolaus & Company, Incorporated (5)

Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 6 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 8-K filed May 17, 2001 and hereby incorporated by reference.

(3)		Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.

(4)		Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.

(5)		Filed as an exhibit to the Company’s Form 8-K filed September 27, 2007 and hereby incorporated by reference.