HR 10-Q Quarterly Report March 31, 2011

HEALTHCARE REALTY TRUST INC

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10-Q 1 g26803e10vq.htm FORM 10-Q e10vq

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: March 31, 2011


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

For the transition period from to

Commission File Number: 001-11852

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)


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

3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of April 30, 2011, 72,742,110 shares of the Registrant’s Common Stock were outstanding.

HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS


	Page
Part I — Financial Information

Item 1. Financial Statements
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Operations		2
Condensed Consolidated Statements of Cash Flows		3
Notes to Condensed Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures about Market Risk		31

Item 4. Controls and Procedures		31

Part II — Other Information

Item 1. Legal Proceedings		32

Item 1A. Risk Factors		32

Item 5. Other Information		32

Item 6. Exhibits		34

Signature		35
EX-10.1
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I. FINANCIAL INFORMATION


Item 1.		Financial Statements.

Healthcare Realty Trust Incorporated

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)


	(Unaudited)
	March 31,			December 31,
	2011			2010
ASSETS
Real estate properties:
Land	$	163,598		$	163,020
Buildings, improvements and lease intangibles		2,317,702			2,310,404
Personal property		18,073			17,919
Construction in progress		98,590			80,262

		2,597,963			2,571,605
Less accumulated depreciation		(505,784	)		(484,641	)

Total real estate properties, net		2,092,179			2,086,964

Cash and cash equivalents		3,007			113,321

Mortgage notes receivable		88,171			36,599

Assets held for sale and discontinued operations, net		16,694			23,915

Other assets, net		96,661			96,510


Total assets	$	2,296,712		$	2,357,309


LIABILITIES AND EQUITY
Liabilities:
Notes and bonds payable	$	1,293,086		$	1,407,855

Accounts payable and accrued liabilities		55,822			62,652

Liabilities of discontinued operations		145			423

Other liabilities		45,212			43,639


Total liabilities		1,394,265			1,514,569

Commitments and contingencies

Equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued and outstanding		—			—

Common stock, $.01 par value; 150,000,000 shares authorized; 70,265,262 and 66,071,424 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		703			661

Additional paid-in capital		1,730,808			1,641,379

Accumulated other comprehensive loss		(5,269	)		(5,269	)

Cumulative net income attributable to common stockholders		790,376			796,165

Cumulative dividends		(1,614,171	)		(1,593,926	)


Total stockholders’ equity		902,447			839,010

Noncontrolling interests		—			3,730


Total equity		902,447			842,740


Total liabilities and equity	$	2,296,712		$	2,357,309

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2010, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2011 and 2010

(Dollars in thousands, except per share data)

(Unaudited)


	2011			2010
REVENUES
Master lease rent	$	15,019		$	14,059
Property operating		52,353			45,531
Straight-line rent		1,286			600
Mortgage interest		1,649			638
Other operating		2,305			2,169

		72,612			62,997

EXPENSES
General and administrative		5,781			4,728
Property operating		28,095			24,199
Bad debt, net		180			(199	)
Depreciation		18,895			16,203
Amortization		1,770			1,301

		54,721			46,232

OTHER INCOME (EXPENSE)
Loss on extinguishment of debt		(1,986	)		(480	)
Interest expense		(22,274	)		(16,311	)
Interest and other income, net		228			437

		(24,032	)		(16,354	)


INCOME (LOSS) FROM CONTINUING OPERATIONS		(6,141	)		411

DISCONTINUED OPERATIONS
Income from discontinued operations		490			1,551
Impairment		(147	)		—
Gain on sales of real estate properties		36			2,696

INCOME FROM DISCONTINUED OPERATIONS		379			4,247


NET INCOME (LOSS)		(5,762	)		4,658

Less: Net income attributable to noncontrolling interests		(27	)		(64	)


NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(5,789	)	$	4,594


BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations	$	(0.09	)	$	0.01
Discontinued operations		—			0.07

Net income (loss) attributable to common stockholders	$	(0.09	)	$	0.08


DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations	$	(0.09	)	$	0.01
Discontinued operations		—			0.07

Net income (loss) attributable to common stockholders	$	(0.09	)	$	0.08


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC		66,151,426			59,961,455


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED		66,151,426			60,969,730


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	0.30		$	0.30

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2011 and 2010

(Dollars in thousands)

(Unaudited)


	2011			2010
OPERATING ACTIVITIES
Net income (loss)	$	(5,762	)	$	4,658
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		21,855			18,848
Stock-based compensation		941			754
Straight-line rent receivable		(1,286	)		(584	)
Straight-line rent liability		97			103
Gain on sales of real estate properties		(36	)		(2,696	)
Loss on extinguishment of debt		1,986			480
Impairment		147			—
Provision for bad debt, net		195			(199	)
Changes in operating assets and liabilities:
Other assets		(3,721	)		488
Accounts payable and accrued liabilities		(6,418	)		5,052
Other liabilities		1,676			1,433

Net cash provided by operating activities		9,674			28,337

INVESTING ACTIVITIES
Acquisition and development of real estate properties		(25,537	)		(25,268	)
Funding of mortgages and notes receivable		(48,780	)		(2,090	)
Proceeds from sales of real estate		3,775			19,588
Proceeds from mortgages and notes receivable repayments		18			36

Net cash used in investing activities		(70,524	)		(7,734	)

FINANCING ACTIVITIES
Net borrowings (repayments) on unsecured credit facility		164,000			(3,000	)
Repayments on notes and bonds payable		(806	)		(524	)
Repurchase of notes payable		(280,201	)		(8,556	)
Quarterly dividends paid		(20,245	)		(18,417	)
Proceeds from issuance of common stock		90,073			15,044
Common stock redemptions		(51	)		—
Capital contributions received from noncontrolling interests		—			633
Distributions to noncontrolling interest holders		(226	)		(115	)
Purchase of noncontrolling interests		(1,591	)		—
Equity issuance costs		(61	)		—
Debt issuance costs		(356	)		(474	)

Net cash used in financing activities		(49,464	)		(15,409	)


Increase (decrease) in cash and cash equivalents		(110,314	)		5,194
Cash and cash equivalents, beginning of year		113,321			5,851

Cash and cash equivalents, end of year	$	3,007		$	11,045


Supplemental Cash Flow Information:
Interest paid	$	22,374		$	3,238
Capitalized interest	$	1,969		$	2,197
Company-financed real estate property sales	$	2,700		$	—
Invoices accrued for construction, tenant improvement and other capitalized costs	$	13,223		$	15,052

Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Business Overview

Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust (“REIT”) that owns, acquires, manages, finances, and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $2.7 billion in 213 real estate properties and mortgages as of March 31, 2011, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture. The Company’s 202 owned real estate properties, excluding assets classified as held for sale, are comprised of six facility types, located in 28 states, totaling approximately 13.3 million square feet. As of March 31, 2011, the Company provided property management services to approximately 9.2 million square feet nationwide.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, joint ventures, and partnerships where the Company controls the operating activities. During the first quarter of 2011, the Company purchased the remaining noncontrolling interest in its two consolidated joint ventures: (1) HR Ladco Holdings, LLC in which the Company held an 80% interest and (2) Lakewood MOB, LLC in which the Company held a 98.75% interest. The noncontrolling interest holder in both joint ventures was Ladco MPF I, LLC. Prior to the purchase, the noncontrolling interests were reported as equity and the related net income (loss) attributable to the noncontrolling interests as part of consolidated net income in the Company’s Condensed Consolidated Financial Statements. The Company’s investment in its one unconsolidated joint venture, which is carried at cost, is included in other assets with its related income recognized in other income (expense) in the Company’s Condensed Consolidated Financial Statements.

The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. All material intercompany transactions and balances have been eliminated in consolidation.

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 included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2011 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends and uncertainties.

Use of Estimates in the Condensed Consolidated Financial Statements

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

Segment Reporting

The Company owns, acquires, manages, finances, and develops outpatient, healthcare-related properties. The Company is managed as one operating segment, rather than multiple operating segments, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single segment.

Notes to Condensed Consolidated Financial Statements-Continued

Reclassifications

Certain amounts in the Company’s Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale, and related liabilities, have been reclassified in the Company’s Condensed Consolidated Balance Sheets, and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented. The Company also reclassified one property from discontinued operations to continuing operations as discussed in Note 3.

Revenue Recognition

General

The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must be met before a company may recognize revenue, including: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered (i.e., the tenant has taken possession of and controls the physical use of the leased asset); the price has been fixed or is determinable; and collectability is reasonably assured. Income received but not yet earned is deferred until such time it is earned. Deferred revenue is included in other liabilities in the Company’s Condensed Consolidated Balance Sheets.

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

Rental Income

Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company’s lease agreements generally include provisions for stated annual increases or increases based on a Consumer Price Index. The Company’s multi-tenant office lease arrangements also generally allow for operating expense recoveries which the Company calculates and bills to its tenants. Rental income from properties under master lease arrangements with tenants is included in master lease rent and rental income from properties with multi-tenant office lease arrangements is included in property operating income in the Company’s Condensed Consolidated Statements of Operations.

Interest Income

Mortgage interest income and notes receivable interest income are recognized based on the interest rates and maturity date or amortization period specific to each note. Loan origination fees received are deferred and are recognized in mortgage interest income over the estimated life of the loan.

Property Operating Income

The Company has eight real estate properties subject to property operating agreements that obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the sponsor is responsible to the Company for the shortfall under the terms of these agreements. The Company recognizes any shortfall income in other operating income in the Company’s Condensed Consolidated Statements of Operations.

Accumulated Other Comprehensive Loss

A company must include certain items in comprehensive income (loss), such as foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale securities. The Company’s accumulated other comprehensive loss includes pension liability adjustments, which are generally recognized in the fourth quarter of each year.

Income Taxes

The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for federal income taxes. The Company must

Notes to Condensed Consolidated Financial Statements-Continued

distribute at least 90% per annum of its REIT taxable income to its stockholders and meet other requirements to continue to qualify as a REIT.

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

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

Incentive Plans

The Company has various outstanding employee and non-employee stock-based awards, including restricted stock issued under its incentive plans, and options granted to employees pursuant to its employee stock purchase plan (the “Employee Stock Purchase Plan”). The Company recognizes compensation expense for these awards based on the grant date fair value of the awards ratably over the requisite service period.

Accounting for Defined Benefit Pension Plans

The Company has a retirement plan (the “Executive Retirement Plan”) under which three of the Company’s founding officers may receive certain benefits upon retirement. The plan is unfunded and benefits will be paid from cash flows of the Company. The maximum annual benefits payable under the Executive Retirement Plan have been frozen at $896,000, subject to cost-of-living adjustments. The Company recognizes pension expense on an accrual basis over an estimated service period. The Company calculates pension expense and the corresponding liability annually on the measurement date (December 31) which requires certain assumptions, such as a discount rate and the recognition of actuarial gains and losses.

The Company also had a pension plan under which the Company’s non-employee directors would receive certain retirement benefits. That plan was terminated in 2009 and during 2010 lump sum payments were made to those directors who participated in the plan. See Note 8 for further discussion.

Operating Leases

As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, the Company is obligated under operating lease agreements consisting primarily of its corporate office lease and various ground leases related to the Company’s real estate investments where the Company is the lessee.

Discontinued Operations and Assets Held for Sale

The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Condensed Consolidated Statements of Operations. 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 in the Company’s Condensed Consolidated Balance Sheets are reported at the lower of their carrying amount or their estimated 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 or anticipated sale of such properties are characterized as impairment losses relating to discontinued operations in the Company’s Condensed Consolidated Statements of Operations. See Note 3 for a detail of the Company’s assets held for sale and discontinued operations.

Land Held for Development

Land held for development, which is included in construction in progress in the Company’s Condensed Consolidated Balance Sheets, includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities.

Notes to Condensed Consolidated Financial Statements-Continued

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.

A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

o Level 1 — quoted prices for identical instruments in active markets;

o Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

o Level 3 — fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Real Estate Properties

Real estate properties are recorded at cost. Cost at the time of the acquisition is allocated between land, buildings, tenant improvements, lease and other intangibles, and personal property based upon estimated fair values at the time of acquisition.

The Company also capitalizes direct construction and development costs, including interest, to all consolidated real estate properties that are under construction and substantive activities are ongoing to prepare the asset for its intended use. The Company considers a building as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred.

Mortgage Loans

Loans receivable may be classified as held-for-investment or held-for-sale based on a lender’s intent and ability to hold the loans. Loans held-for-investment are carried at amortized cost and are reduced by valuation allowances for estimated credit losses as necessary. Loans held-for-sale are carried at the lower of cost or fair value. All of the Company’s loans receivable are classified as held-for-investment.

Allowance for Doubtful Accounts and Credit Losses

Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. Whenever deterioration in the timeliness of payment from a tenant or sponsor is noted, management investigates and determines the reason(s) for the delay. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are: the type of contractual arrangement under which the receivable was recorded (e.g., a triple net lease, a gross lease, a sponsor guaranty agreement, or some other type of agreement); the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; other contractual agreements between the tenant and the Company; relationship between the tenant and the Company; the state in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable. Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance.

Notes to Condensed Consolidated Financial Statements-Continued

The Company also evaluates collectibility of its mortgage notes and notes receivable and records an allowance on the notes as necessary. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. If a mortgage loan or note receivable becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms.

Note 2. Real Estate and Mortgage Notes Receivable Investments

The Company had investments of approximately $2.7 billion in 213 real estate properties and mortgage notes receivable as of March 31, 2011, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture. The Company’s 202 owned real estate properties, excluding assets classified as held for sale, are located in 28 states and comprise approximately 13.3 million total square feet. The table below details the Company’s investments.


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

Owned properties:
Master leases
Medical office		11	$	100,242		3.5	%		548		4.1	%
Physician clinics		13		106,063		3.9	%		602		4.6	%
Surgical facilities		6		162,631		6.1	%		382		2.9	%
Specialty outpatient		2		4,852		0.2	%		23		0.1	%
Inpatient rehab		11		178,755		6.7	%		735		5.5	%
Other		4		31,726		1.2	%		284		2.1	%

		47		584,269		21.6	%		2,574		19.3	%

Property operating agreements
Medical office		8		84,062		3.1	%		624		4.7	%

		8		84,062		3.1	%		624		4.7	%

Multi-tenanted with occupancy leases
Medical office		115		1,487,288		55.4	%		8,196		61.8	%
Medical office — stabilization in progress		8		233,366		8.7	%		808		6.1	%
Medical office — construction in progress		3		77,818		2.9	%		405		3.1	%
Physician clinics		14		46,295		1.7	%		296		2.2	%
Surgical facilities		4		35,303		1.3	%		212		1.6	%
Specialty outpatient		1		2,562		0.1	%		10		0.1	%
Other		2		11,210		0.4	%		144		1.1	%

		147		1,893,842		70.5	%		10,071		76.0	%

Land held for development		—		20,772		0.8	%		—		—
Corporate property		—		15,018		0.6	%		—		—

		—		35,790		1.4	%		—		—

Total owned properties		202		2,597,963		96.6	%		13,269		100.0	%


Mortgage loans:
Medical office		6		14,702		0.5	%		—		—
Physician clinics		2		17,620		0.7	%		—		—
Surgical facilities		1		15,849		0.6	%		—		—
Other		1		40,000		1.5	%		—		—

		10		88,171		3.3	%		—		—
Unconsolidated joint venture:
Other		1		1,266		0.1	%		—		—

		1		1,266		0.1	%		—		—


Total real estate investments		213	$	2,687,400		100.0	%		13,269		100.0	%

Notes to Condensed Consolidated Financial Statements-Continued

Mortgage loans

A summary of the Company’s mortgage loans is shown in the table below:


	March 31, 2011						December 31, 2010
	Principal		Unamortized				Principal		Unamortized
(Dollars in thousands)	Balance		Fees		Total		Balance		Fees		Total

Construction mortgage loans	$	27,189	$	338	$	26,851	$	18,409	$	430	$	17,979

Other mortgage loans		61,320		—		61,320		18,620		—		18,620

	$	88,509	$	338	$	88,171	$	37,029	$	430	$	36,599

All of the Company’s mortgage notes receivable are classified as held-for-investment based on management’s intent and ability to hold the loans until maturity. As such, the loans are carried at amortized cost. At March 31, 2011, the Company has not recorded any allowances for loan losses on its mortgage loan portfolio and has not placed any of its loans on non-accrual status.

Note 3. Acquisitions and Dispositions

Asset Acquisitions

In March 2011, the Company purchased from the noncontrolling interest holder the remaining 20% equity interest in its HR Ladco Holdings, LLC joint venture and the remaining 1.25% equity interest in its Lakewood MOB, LLC joint venture, for a total aggregate purchase price of $5.1 million. The book value of the noncontrolling interests prior to the equity purchase was $3.6 million. Concurrent with these purchases, the noncontrolling interest holder repaid a loan receivable to the Company totaling $3.5 million. The loan receivable had been secured by the noncontrolling joint venture interests. The Company had previously consolidated these joint ventures in its financial statements. HR Ladco Holdings, LLC owns nine 100% leased outpatient facilities located in Iowa with an aggregate investment of approximately $87.6 million that aggregate approximately 369,000 square feet. Lakewood MOB, LLC is constructing two medical office buildings and a parking garage located in Colorado with an aggregate budget of approximately $54.9 million.

Also, during the first quarter of 2011, the Company originated the following mortgage notes receivable:

•

a $40.0 million mortgage loan that is secured by a multi-tenanted office building located in Iowa that was 94% leased at the time the mortgage was originated. The mortgage loan requires interest only payments through maturity, has a stated fixed interest rate of 7.7% and matures in January 2014.

•

a $2.7 million mortgage note receivable with the purchaser in conjunction with the disposal of a physician clinic located in Florida as discussed below. The loan has a stated fixed interest rate of 7.0% and matures in March 2016.

•

a $3.7 million loan for the construction of a medical office building located in Missouri. The loan has a stated interest rate of 11.0% and matures in 2012. The Company had funded $0.5 million on the loan as of March 31, 2011.

Further, during the first quarter of 2011, the Company funded approximately $8.3 million on existing construction mortgage loans.

The following table details the Company’s acquisitions for the three months ended March 31, 2011.

Notes to Condensed Consolidated Financial Statements-Continued


					Note			Mortgage
	Date		Cash		Receivable			Note		Noncontrolling
(dollars in millions)	Acquired		Consideration		Repayment			Financing		interests		APIC		Other

Purchase of noncontrolling interests
Lakewood MOB, LLC		03/15/2011	$	0.5	$	—		$	—	$	0.2	$	—		0.3
HR Ladco Holdings, LLC		03/31/2011		0.8		(3.5	)				3.4		1.5		(0.6	)

				1.3		(3.5	)		—		3.6		1.5		(0.3	)
Mortgage note financing
Iowa		01/03/2011		40.0		—			40.0		—		—		—
Florida		02/03/2011		2.7		—			2.7		—		—		—
Missouri		03/24/2011		0.5		—			0.5		—		—		—

				43.2		—			43.2		—		—		—

			$	44.5	$	(3.5	)	$	43.2	$	3.6	$	1.5		(0.3	)

Asset Dispositions

During the first quarter of 2011, the Company disposed of the following properties:

•

a 35,761 square foot medical office building in Maryland in which the Company had a net investment of approximately $3.5 million. The Company received approximately $3.4 million in net proceeds and recorded a $0.1 million impairment charge on the disposal.

•

a 28,861 square foot physician clinic in Florida in which the Company had a net investment of approximately $3.1 million. The Company received approximately $0.4 million in net cash proceeds, originated a $2.7 million mortgage note receivable with the purchaser as discussed above, and recognized an immaterial gain on the disposition.

The following table details the Company’s dispositions for the three months ended March 31, 2011.


			Net Real		Mortgage
			Estate		Note			Gain/			Square
(dollars in millions)	Net Proceeds		Investment		Receivable			(Loss)			Footage

Real estate dispositions
Maryland	$	3.4	$	3.5	$	—		$	(0.1	)		35,761
Florida		0.4		3.1		(2.7	)		—			28,861

Total dispositions	$	3.8	$	6.6	$	(2.7	)	$	(0.1	)		64,622

Potential Dispositions

In the fourth quarter of 2010, the Company received notice from a tenant of its intent to purchase six skilled nursing facilities in Michigan and Indiana pursuant to purchase options contained in its leases with the Company. The Company’s aggregate net investment in the buildings, which are classified as held for sale, was approximately $8.2 million at March 31, 2011. The aggregate purchase price for the properties is expected to be approximately $17.3 million, resulting in an expected net gain of approximately $9.1 million. The Company expects the sale to close during the third quarter of 2011.

Discontinued Operations and Assets Held for Sale

During the first quarter of 2011, the Company sold one property in Florida and one property in Maryland and reclassified one property located in Tennessee that was previously classified as held for sale to held for use upon execution of a long-term lease. The Company’s gross investment in the Tennessee property was approximately $1.1 million ($0.5 million, net) at March 31, 2011.

The tables below detail the assets, liabilities, and results of operations included in discontinued operations on the Company’s Condensed Consolidated Statements of Operations and in assets and liabilities of discontinued operations on the

Notes to Condensed Consolidated Financial Statements-Continued

Company’s Condensed Consolidated Balance Sheets. At March 31, 2011 and December 31, 2010, the Company had eight and 11 properties, respectively, classified as held for sale, including the six properties discussed above in “Potential Dispositions.” Of the 11 properties classified as held for sale at December 31, 2010, two of the properties were sold and one was reclassified to held for use during the first quarter of 2011.


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Balance Sheet data (as of the period ended):
Land	$	4,766		$	7,099
Buildings, improvements and lease intangibles		27,115			35,424
Personal property		425			429

		32,306			42,952
Accumulated depreciation		(15,883	)		(19,447	)

Assets held for sale, net		16,423			23,505

Other assets, net (including receivables)		271			410

Assets of discontinued operations, net		271			410


Assets held for sale and discontinued operations, net	$	16,694		$	23,915


Accounts payable and accrued liabilities	$	61		$	229
Other liabilities		84			194

Liabilities of discontinued operations	$	145		$	423


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2011			2010

Statements of Operations data (for the period ended):
Revenues
Master lease rent	$	668		$	1,861
Property operating		240			615
Straight-line rent		—			(16	)

		908			2,460

Expenses
General and administrative		1			2
Property operating		402			561
Bad debt, net		15			—
Depreciation		—			388

		418			951

Other Income (Expense)
Interest and other income, net		—			42

		—			42


Discontinued Operations
Income from discontinued operations		490			1,551
Impairment		(147	)		—
Gain on sales of real estate properties		36			2,696


Income from Discontinued Operations	$	379		$	4,247


Income from Discontinued Operations per Common Share — Basic	$	—		$	0.07


Income from Discontinued Operations per Common Share — Diluted	$	—		$	0.07

Notes to Condensed Consolidated Financial Statements-Continued

Note 4. Notes and Bonds Payable

The table below details the Company’s notes and bonds payable as of March 31, 2011 and December 31, 2010.


	Mar. 31,		Dec. 31,		Maturity		Contractual		Principal	Interest
(Dollars in thousands)	2011		2010		Dates		Interest Rates		Payments	Payments

Unsecured Credit Facility due 2012	$	164,000	$	—		9/12	LIBOR + 2.80%		At maturity	Quarterly
Senior Notes due 2011, including premium		—		278,311		—		8.125%	At maturity	Semi-Annual
Senior Notes due 2014, net of discount		264,262		264,227		4/14		5.125%	At maturity	Semi-Annual
Senior Notes due 2017, net of discount		298,279		298,218		1/17		6.500%	At maturity	Semi-Annual
Senior Notes due 2021, net of discount		396,870		396,812		1/21		5.750%	At maturity	Semi-Annual
Mortgage notes payable, net of discount and including premiums		169,675		170,287		4/13-10/30		5.000%-7.625%	Monthly	Monthly

	$	1,293,086	$	1,407,855

The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At March 31, 2011, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Unsecured Credit Facility due 2012

On September 30, 2009, the Company entered into an amended and restated $550.0 million unsecured credit facility (the “Unsecured Credit Facility”) with a syndicate of 16 lenders that matures on September 30, 2012. Amounts outstanding under the Unsecured Credit Facility bear interest at a rate equal to (x) LIBOR or the base rate (defined as the highest of (i) the Federal Funds Rate plus 0.5%; (ii) the Bank of America prime rate and (iii) LIBOR) plus (y) a margin ranging from 2.15% to 3.20% (2.80% at March 31, 2011) for LIBOR-based loans and 0.90% to 1.95% for base rate loans (1.55% at March 31, 2011), based upon the Company’s unsecured debt ratings. In addition, the Company pays a facility fee per annum on the aggregate amount of commitments. The facility fee is 0.40% per annum, unless the Company’s credit rating falls below a BBB-/Baa3, at which point the facility fee would be 0.50%. At March 31, 2011, the Company had $164.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 3.05% and had borrowing capacity remaining, under its financial covenants, of approximately $386.0 million.

Senior Notes due 2011

On March 28, 2011, the Company redeemed its unsecured senior notes due 2011 (the “Senior Notes due 2011”) at a redemption price equal to an aggregate of $289.4 million, consisting of outstanding principal of $278.2 million, accrued interest as of the redemption date of $9.2 million, and a “make-whole” amount of approximately $2.0 million for the early extinguishment of the debt, which was approximately equal to the interest that would have been paid between the redemption date and the maturity date. The Senior Notes due 2011, issued in 2001, bore interest at 8.125% per annum, payable semi-annually on May 1 and November 1, and were due to mature on May 1, 2011. The unamortized net gain on these notes was written off upon redemption.

Senior Notes due 2014

In 2004, the Company issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”) that bear interest at 5.125% per annum, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The Senior Notes due 2014 were issued at a discount of approximately $1.5 million, yielding an effective interest rate of 5.19% per annum. In previous years, the Company repurchased approximately $35.3 million of the Senior Notes due 2014 and amortized a pro-rata portion of the discount upon such repurchases. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets.

Notes to Condensed Consolidated Financial Statements-Continued


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Senior Notes due 2014 face value	$	264,737		$	264,737
Unaccreted discount		(475	)		(510	)

Senior Notes due 2014 carrying amount	$	264,262		$	264,227

Senior Notes due 2017

In 2009, the Company issued $300.0 million of unsecured senior notes due 2017 (the “Senior Notes due 2017”) that bear interest at 6.50% per annum, payable semi-annually on January 17 and July 17, and are due on January 17, 2017, unless redeemed earlier by the Company. The Senior Notes due 2017 were issued at a discount of approximately $2.0 million, yielding an effective interest rate of 6.618% per annum. For the quarter ended March 31, 2011, the Company amortized approximately $0.1 million of the discount which is included in interest expense on the Company’s Consolidated Statements of Operations. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Condensed Consolidated Balance Sheets.


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Senior Notes due 2017 face value	$	300,000		$	300,000
Unaccreted discount		(1,721	)		(1,782	)

Senior Notes due 2017 carrying amount	$	298,279		$	298,218

Senior Notes due 2021

In December 2010, the Company issued $400.0 million of unsecured senior notes due 2021 (the “Senior Notes due 2021”) that bear interest at 5.75%, payable semi-annually on January 15 and July 15, beginning July 15, 2011, and are due on January 15, 2021, unless redeemed earlier by the Company. The Senior Notes due 2021 were issued at a discount of approximately $3.2 million, which yielded a 5.855% interest rate per annum upon issuance. For the quarter ended March 31, 2011, the Company amortized approximately $0.1 million of the discount which is included in interest expense on the Company’s Consolidated Statements of Operations. The following table reconciles the balance of the Senior Notes due 2021 on the Company’s Consolidated Balance Sheet as of March 31, 2011.


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Senior Notes due 2021 face value	$	400,000		$	400,000
Unaccreted discount		(3,130	)		(3,188	)

Senior Notes due 2021 carrying amount	$	396,870		$	396,812

Mortgage Notes Payable

The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Condensed Consolidated Balance Sheets.


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Mortgage notes payable principal balance	$	175,832		$	176,638
Unaccreted discount, net		(6,157	)		(6,351	)

Mortgage notes payable carrying amount	$	169,675		$	170,287

Notes to Condensed Consolidated Financial Statements-Continued

The following table further details the Company’s mortgage notes payable, with related collateral, at March 31, 2011.


									Investment in
			Effective						Collateral at		Balance at
	Original		Interest			Maturity			March 31,		Mar. 31,		Dec. 31,
(Dollars in millions)	Balance		Rate (13)			Date		Collateral (14)	2011		2011		2010

Life Insurance Co. (1)	$	4.7		7.765	%		1/17	MOB	$	11.5	$	2.2	$	2.2
Commercial Bank (2)		1.8		5.550	%		10/30	OTH		7.9		1.7		1.7
Life Insurance Co. (3)		15.1		5.490	%		1/16	MOB		32.6		13.4		13.5
Commercial Bank (4)		17.4		6.480	%		5/15	MOB		19.9		14.5		14.5
Commercial Bank (5)		12.0		6.110	%		7/15	2 MOBs		19.4		9.7		9.7
Commercial Bank (6)		15.2		7.650	%		7/20	MOB		20.2		12.8		12.8
Life Insurance Co. (7)		1.5		6.810	%		7/16	SOP		2.2		1.1		1.2
Commercial Bank (8)		12.9		6.430	%		2/21	MOB		20.6		11.5		11.5
Investment Fund (9)		80.0		7.250	%		12/16	15 MOBs		154.0		79.0		79.2
Life Insurance Co. (10)		7.0		5.530	%		1/18	MOB		14.5		3.9		4.0
Investment Co. (11)		15.9		6.550	%		4/13	MOB		23.3		15.5		15.6
Investment Co. (12)		4.6		5.250	%		9/15	MOB		6.9		4.4		4.4

									$	333.0	$	169.7	$	170.3


(1)		Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.

(2)		Payable in monthly installments of principal and interest based on a 27-year amortization with the final payment due at maturity.

(3)		Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.

(4)		Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity. The Company recorded a $2.7 million discount on this note upon acquisition which is included in the balance above.

(5)		Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity. The Company recorded a $2.1 million discount on this note upon acquisition which is included in the balance above.

(6)		Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment due at maturity. The Company recorded a $2.4 million discount on this note upon acquisition which is included in the balance above.

(7)		Payable in monthly installments of principal and interest based on a 9-year amortization with the final payment due at maturity. The Company recorded a $0.2 million discount on this note upon acquisition which is included in the balance above.

(8)		Payable in monthly installments of principal and interest based on a 12-year amortization with the final payment due at maturity. The Company recorded a $1.0 million discount on this note upon acquisition which is included in the balance above.

(9)		Payable in monthly installments of principal and interest based on a 30-year amortization with a 7-year initial term (maturity 12/01/16) and the option to extend the initial term for two, one-year floating rate extension terms.

(10)		Payable in monthly installments of principal and interest based on a 15-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during the third quarter 2010.

(11)		Payable in monthly installments of principal and interest based on a 30-year amortization with the option to extend for three years at a fixed rate of 6.75%. The Company recorded a $0.5 million premium on this note upon acquisition which is included in the balance above.

(12)		Payable in monthly installments of principal and interest with a balloon payment of $4.0 million due at maturity.

(13)		The contractual interest rates ranged from 5.00% to 7.625% at March 31, 2011.

(14)		MOB-Medical office building; SOP-Specialty outpatient; OTH-Other.

Long-Term Debt Maturities

Future maturities of the Company’s notes and bonds payable as of March 31, 2011 were:


	Principal		Net Accretion/			Notes and
(Dollars in thousands)	Maturities		Amortization (1)			Bonds Payable		%

2011 (remaining)	$	2,475	$	(1,073	)	$	1,402		0.1	%
2012		167,491		(1,508	)		165,983		12.8	%
2013		18,284		(1,738	)		16,546		1.3	%
2014		268,460		(1,785	)		266,675		20.6	%
2015		32,632		(1,443	)		31,189		2.4	%
2016 and thereafter		815,227		(3,936	)		811,291		62.8	%

	$	1,304,569	$	(11,483	)	$	1,293,086		100.0	%


(1)		Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2014, Senior Notes due 2017, Senior Notes due 2021 and six mortgage notes payable.

Notes to Condensed Consolidated Financial Statements-Continued

Note 5. Other Assets

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


	March 31,			December 31,
(Dollars in millions)	2011			2010

Prepaid assets	$	29.9		$	27.9
Straight-line rent receivables		28.3			27.0
Above-market intangible assets, net		13.3			13.4
Deferred financing costs, net		11.0			12.0
Accounts receivable		7.6			6.1
Goodwill		3.5			3.5
Equity investment in joint venture — cost method		1.3			1.3
Customer relationship intangible assets, net		1.2			1.2
Notes receivable		0.3			3.8
Allowance for uncollectible accounts		(1.3	)		(1.2	)
Other		1.6			1.5

	$	96.7		$	96.5

Equity investment in joint venture

At March 31, 2011, the Company had an investment in one unconsolidated joint venture, which the Company accounts for under the cost method since the Company does not exert significant influence. The joint venture, which invests in real estate properties, is included in other assets on the Company’s Condensed Consolidated Balance Sheets, and the related distributions received are included in interest and other income, net on the Company’s Condensed Consolidated Statements of Operations.

Note 6. Commitments and Contingencies

Construction in Progress

As of March 31, 2011, the Company had three medical office buildings under construction with estimated completion dates in the third quarter of 2011 for two of the buildings and in the first quarter 2012 for the third building. The table below details the Company’s construction in progress and land held for development as of March 31, 2011. The information included in the table below represents management’s estimates and expectations at March 31, 2011 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.


	Estimated		Property					CIP at		Estimated		Estimated
	Completion		Type			Approximate		March 31,		Remaining		Total
State	Date		(1)	Properties		Square Feet		2011		Funding		Investment

(Dollars in thousands)

Under construction:
Washington		3Q 2011	MOB		1		206,000	$	54,581	$	37,619	$	92,200
Colorado		3Q 2011	MOB		1		101,907		12,184		15,925		28,109
Colorado		1Q 2012	MOB		1		97,093		11,053		15,738		26,791

Land held for development:
Texas					—		—		20,772		—		—

					3		405,000	$	98,590	$	69,282	$	147,100


(1)		MOB-Medical office building.

Notes to Condensed Consolidated Financial Statements-Continued

Other Construction

The Company had approximately $29.8 million in various first-generation tenant improvement budgeted amounts remaining as of March 31, 2011 related to properties that were developed by the Company.

As of March 31, 2011, the Company had remaining funding commitments totaling $49.6 million on six construction loans. The Company expects that the remaining commitments on the loans will be funded during the remainder of 2011 and 2012.

Legal Proceedings

Two affiliates of the Company, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., are defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs, in the Circuit Court of Davidson County, Tennessee. The plaintiffs allege that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and seek a refund of such overpayments. Plaintiffs are seeking up to $2.0 million, plus pre- and post-judgment interest and attorneys’ fees. The two leases were terminated by agreement in 2003. The Company denies that it is liable to the plaintiffs for any refund of rent paid and will continue to defend the case vigorously. A trial had been scheduled for April 18, 2011, but has since been continued on the plaintiffs’ motion. No new trial date has been scheduled.

The Company is, from time to time, involved in litigation arising out of the ordinary course of business or which is expected to be covered by insurance. 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 consolidated financial position, results of operations, or cash flows.

Note 7. Stockholders’ Equity

The following table provides a reconciliation of total equity:


						Accumulated
			Additional			Other			Cumulative						Total			Non
(Dollars in thousands,	Common		Paid-In			Comprehensive			Net			Cumulative			Stockholders’			controlling			Total
except per share data)	Stock		Capital			Loss			Income			Dividends			Equity			Interests			Equity

Balance at Dec. 31, 2010	$	661	$	1,641,379		$	(5,269	)	$	796,165		$	(1,593,926	)	$	839,010		$	3,730		$	842,740
Issuance of common stock		41		90,009			—			—			—			90,050			—			90,050
Common stock redemption		—		(51	)		—			—			—			(51	)		—			(51	)
Stock-based compensation		1		940			—			—			—			941			—			941
Net income (loss)		—		—			—			(5,789	)		—			(5,789	)		27			(5,762	)
Other comprehensive loss		—		—			—			—			—			—			—			—

Comprehensive income																						(5,762	)
Dividends to common stockholders ($0.30 per share)		—		—			—			—			(20,245	)		(20,245	)		—			(20,245	)
Distributions to noncontrolling interests		—		—			—			—			—			—			(247	)		(247	)
Proceeds from noncontrolling interests		—		—			—			—			—			—			76			76
Redemption of noncontrolling interest in consolidated joint ventures		—		(1,469	)		—			—			—			(1,469	)		(3,586	)		(5,055	)

Balance at March 31, 2011	$	703	$	1,730,808		$	(5,269	)	$	790,376		$	(1,614,171	)	$	902,447		$	—		$	902,447

Notes to Condensed Consolidated Financial Statements-Continued

Common Stock

The following table provides a reconciliation of the beginning and ending common stock outstanding for the three months ended March 31, 2011 and the year ended December 31, 2010:


	Three Months Ended		Year Ended
	March 31,		December 31,
	2011		2010
Balance, beginning of period		66,071,424		60,614,931
Issuance of common stock		4,128,163		5,287,098
Restricted stock-based awards, net of forfeitures		65,675		169,395

Balance, end of period		70,265,262		66,071,424

At-The-Market Equity Offering Program

Since December 2008, the Company has had in place an at-the-market equity offering program to sell shares of its common stock from time to time in at-the-market sales transactions. During the three months ended March 31, 2011, the Company sold 4,120,000 shares of common stock under this program at prices ranging from $20.34 per share to $23.63 per share, generating approximately $89.9 million in net proceeds.

Between March 31, 2011 and May 4, 2011, the Company sold 2,925,400 shares of common stock, generating approximately $66.0 million in net proceeds, resulting in 1,394,600 authorized shares remaining to be sold under the program.

Common Stock Dividends

During the first three months of 2011, the Company declared and paid a common stock dividend in the amount of $0.30 per share.

On May 3, 2011, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on June 2, 2011 to stockholders of record on May 19, 2011.

Earnings (Loss) Per Common Share

The table below sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2011 and 2010.

Notes to Condensed Consolidated Financial Statements-Continued


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2011			2010

Weighted average Common Shares outstanding
Weighted average Common Shares outstanding		67,591,152			61,266,352
Unvested restricted stock		(1,439,726	)		(1,304,897	)

Weighted average Common Shares Outstanding — Basic		66,151,426			59,961,455


Weighted average Common Shares — Basic		66,151,426			59,961,455
Dilutive effect of restricted stock		—			940,597
Dilutive effect of employee stock purchase plan		—			67,678

Weighted average Common Shares Outstanding — Diluted		66,151,426			60,969,730


Net income (loss)
Income (loss) from continuing operations	$	(6,141	)	$	411
Noncontrolling interests’ share in net income		(27	)		(64	)

Income from continuing operations attributable to common shareholders		(6,168	)		347
Discontinued operations		379			4,247

Net income (loss) attributable to common stockholders	$	(5,789	)	$	4,594


Basic Earnings (Loss) Per Common Share
Income from continuing operations	$	(0.09	)	$	0.01
Discontinued operations		—			0.07

Net income (loss) attributable to common stockholders	$	(0.09	)	$	0.08


Diluted Earnings (Loss) Per Common Share
Income from continuing operations	$	(0.09	)	$	0.01
Discontinued operations		—			0.07

Net income (loss) attributable to common stockholders	$	(0.09	)	$	0.08

Restricted stock totaling 1,023,174 shares and options under the Employee Stock Purchase Plan to purchase the Company’s stock totaling 89,917 shares were excluded from the calculation of diluted loss per common share for the three months ended March 31, 2011 because the effect was anti-dilutive due to the net loss from continuing operations incurred during the period.

Incentive Plans

The Company has various stock-based incentive plans for its employees and directors. Awards under these plans include restricted stock issued to employees and the Company’s directors and options granted to employees pursuant to its Employee Stock Purchase Plan.

A summary of the activity under the incentive plans for the three months ended March 31, 2011 and 2010 is included in the table below.


	Three Months Ended
	March 31,
	2011			2010

Stock-based awards, beginning of period		1,379,243			1,224,779
Granted		79,169			76,731
Vested		(10,675	)		(2,362	)
Forfeited		(10,926	)		—

Stock-based awards, end of period		1,436,811			1,299,148

Notes to Condensed Consolidated Financial Statements-Continued

Under the Company’s Employee Stock Purchase Plan, in January of each year each eligible employee is granted an option 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 within 27 months after each such option’s date of grant. The Company recorded approximately $0.2 million to general and administrative expenses during the first quarter of 2011 relating to the annual grant of options to its employees under the Employee Stock Purchase Plan. On April 1, 2011, options to purchase 166,207 shares of Common Stock expired that had not been exercised.

A summary of the activity under the Employee Stock Purchase Plan for the three months ended March 31, 2011 and 2010 is included in the table below.


	Three Months Ended
	March 31,
	2011			2010

Outstanding and exercisable, beginning of period		392,517			335,608
Granted		261,960			256,080
Exercised		(4,591	)		(3,368	)
Forfeited		(23,406	)		(11,660	)

Outstanding and exercisable, end of period		626,480			576,660

Note 8. Defined Benefit Pension Plans

The Company’s Executive Retirement Plan provides benefits upon retirement for three of the Company’s founding officers. The plan is unfunded and benefits will be paid from cash flows of the Company. The maximum annual benefits payable under the Executive Retirement Plan have been frozen at $896,000, subject to cost-of-living adjustments. As of March 31, 2011, only the Company’s Chief Executive Officer was eligible to retire under the Executive Retirement Plan.

The Company’s retirement plan for its non-employee directors was terminated in November 2009. During 2010, the Company made lump sum payments to the plan participants, totaling approximately $2.6 million, which represented the non-employee directors’ aggregate accumulated pension benefits payable.

Net periodic benefit cost recorded related to the Company’s pension plans for the three months ended March 31, 2011 and 2010 is detailed in the following table.


	Three Months Ended
	March 31,
(Dollars in thousands)	2011		2010

Service costs	$	17	$	13
Interest costs		214		242
Amortization of net gain/loss		232		187

Total recognized in net periodic benefit cost	$	463	$	442

Note 9. Other Operating Income

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

Notes to Condensed Consolidated Financial Statements-Continued


	Three Months Ended
	March 31,
(Dollars in thousands)	2011		2010

Property operating agreement guaranty revenue	$	1,975	$	1,892
Interest income on notes receivable		240		172
Management fee income		38		45
Other		52		60

	$	2,305	$	2,169

Note 10. Taxable Income (Loss)

Taxable Income (Loss)

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

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

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

The following table reconciles the Company’s consolidated net income (loss) attributable to common stockholders to taxable income (loss) for the three months ended March 31, 2011 and 2010.


	Three Months Ended
	March 31,
(Dollars in thousands)	2011			2010

Net income (loss) attributable to common stockholders	$	(5,789	)	$	4,594
Reconciling items to taxable income:
Depreciation and amortization		5,325			5,052
Gain or loss on disposition of depreciable assets		(2,176	)		6,275
Straight-line rent		(1,140	)		(481	)
Receivable allowances		396			(655	)
Stock-based compensation		1,386			1,175
Other		1,089			725


Taxable income (loss) (1)	$	(909	)	$	16,685


Dividends paid	$	20,245		$	18,417


(1)		Before REIT dividend paid deduction.

Notes to Condensed Consolidated Financial Statements-Continued

State Income Taxes

State income tax expense and state income tax payments for the three months ended March 31, 2011 and 2010 are detailed in the table below.


	Three Months Ended
	March 31,
(Dollars in thousands)	2011		2010

State income tax expense:
Texas gross margin tax	$	119	$	111
Other		44		48


Total state income tax expense	$	163	$	159


State income tax payments, net of refunds	$	23	$	(6	)

The Texas gross margin tax is a tax on gross receipts from operations in Texas. The Company understands that the Securities and Exchange Commission views this tax as an income tax. As such, the Company has disclosed the Texas gross margin tax in the table above. The Company does not necessarily agree with the Securities and Exchange Commission’s position concerning the Texas gross margin tax.

Note 11. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables and payables are reasonable estimates of their fair value as of March 31, 2011 and December 31, 2010 due to their short-term nature. The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements. The fair value of mortgage notes and notes receivable is estimated either based on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company recently or notes receivable entered into by the Company recently. The table below details the fair value and carrying values for notes and bonds payable, mortgage notes receivable and notes receivable at March 31, 2011 and December 31, 2010.


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(Dollars in millions)	value		value		value		value

Notes and bonds payable	$	1,293.1	$	1,335.0	$	1,407.9	$	1,460.2
Mortgage notes receivable	$	88.2	$	86.6	$	36.6	$	35.9
Notes receivable, net of allowances	$	0.3	$	0.3	$	3.8	$	3.8


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

Disclosure Regarding Forward-Looking Statements

This report 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 that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 that could significantly affect the Company’s current plans and expectations and future financial condition and results.

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

For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2010.

Business Overview

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

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

The Company’s real estate portfolio, diversified by facility type, geography and tenancy, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks and changes in clinical practice and reimbursement patterns.

Executive Overview

The Company has seen improvement in investment opportunities across the country. Hospitals appear to be implementing previously shelved plans for expansion, albeit at a measured pace. The Company is working on several on-campus development and acquisition opportunities, some of which are hospital sales of medical office buildings and others involving third-parties or developers monetizing their holdings. During the first quarter of 2011, the Company funded $18.3 million related to the construction of three medical office buildings with aggregate budgets of approximately $147.1 million. In addition, the Company funded $43.2 million in mortgage notes during the first quarter of 2011.

At March 31, 2011, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 48.1% and its borrowings outstanding under the Unsecured Credit Facility totaled $164.0 million with a capacity remaining under its financial covenants of approximately $386.0 million.

Trends and Matters Impacting Operating Results

Management monitors factors and trends important to the Company and the REIT industry in order to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, below are some of the factors and trends that management believes may impact future operations of the Company.

Interest Expense

The $400.0 million Senior Notes due 2021 bear interest at 5.75%, payable semi-annually on January 15 and July 15, beginning July 15, 2011, and are due on January 15, 2021, unless redeemed earlier by the Company. The proceeds from the offering were used to repay the outstanding balance on the Unsecured Credit Facility, to fund acquisitions, and to provide advanced funding for the redemption of the Senior Notes due 2011.

On March 28, 2011, the Company redeemed all of its outstanding 8.125% Senior Notes due May 1, 2011 using cash on hand and its unsecured credit facility to fund the redemption. The notes were redeemed at a price equal to an aggregate of $289.4 million, consisting of: a) $278.2 million in outstanding principal; b) $9.2 million in interest accrued but not yet paid as of the redemption date; and c) a “make-whole amount” of $2.0 million in accordance with the indenture, which was approximately equal to the interest that would have been paid between the redemption date and the maturity date.

The additional interest expense incurred during the first quarter of 2011 from the issuance of the Senior Notes due 2021 and the charge recorded upon the redemption of the Senior Notes due 2011 negatively impacted the Company’s net income (loss) attributable to common stockholders, funds from operations, and cash flows.

Acquisitions

During the first quarter of 2011, the Company acquired the remaining 20% noncontrolling equity interest in the HR Ladco Holdings, LLC joint venture and the remaining 1.25% noncontrolling equity interest in the Lakewood MOB, LLC joint venture, for a total purchase price of $5.1 million. Concurrent with these purchases, the noncontrolling interest holder repaid a loan receivable to the Company totaling $3.5 million. The loan receivable had been secured by the noncontrolling interests.

Also, during the first quarter of 2011, the Company funded $43.2 million in mortgage notes receivable with stated interest rates ranging from 7.0% to 11.0%. Further, in the first quarter of 2011, the Company funded $8.3 million on existing construction mortgage notes.

See Note 3 to the Condensed Consolidated Financial Statements for more information on these acquisitions.

Dispositions

During the first quarter of 2011, the Company disposed of a medical office building and a physician clinic in which the Company had an aggregate net investment of approximately $6.6 million. Net cash proceeds from these dispositions were used to repay outstanding balances on the Unsecured Credit Facility. See Note 3 to the Condensed Consolidated Financial Statements for more details on these dispositions.

Potential Dispositions

Development Activity

At March 31, 2011, the Company had funded $77.8 million related to the construction of three medical office buildings underway with budgets totaling approximately $147.1 million. The Company expects completion of the core and shell for two of these buildings during the third quarter of 2011 and for the third building during the first quarter of 2012.

The Company’s ability to complete and stabilize these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, stabilization periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, stabilization periods and rental rates will result in less favorable results of operations and cash flows.

The Company had approximately $29.8 million in various first-generation tenant improvement budgeted amounts remaining as of March 31, 2011 related to properties that were developed by the Company.

Expiring Leases and Financial Support Agreements

Master leases on three of the Company’s properties that were set to expire during 2011 have been renewed. Leases on three other master-leased properties are expected to expire during 2011, and the Company expects that it will not renew these leases, but will assume any tenant leases in the buildings and manage the operations of the buildings.

The Company also has 320 leases in its multi-tenanted buildings expiring during 2011, with an average size of approximately 2,723 square feet. Approximately 81% of these leases are located in on-campus buildings, which traditionally have a higher probability of renewal. Also, the 2011 expirations are widely distributed throughout the portfolio and are not concentrated with one tenant, health system or location. Of the 69 leases that had expired as of March 31, 2011, nearly all of the tenants had renewed, had expressed an intention to renew, or continued to occupy their leased space in a holdover lease arrangement.

Financial support arrangements on two of the Company’s properties in New Orleans will expire in September 2011. Quarterly payments under this support arrangement are approximately $0.5 million. The Company’s total investment in the two buildings was approximately $11.8 million ($6.7 million, net) at March 31, 2011. The buildings, which aggregate approximately 136,155 square feet, are adjacent to the former Methodist Hospital in East New Orleans which has remained closed since Hurricane Katrina struck in August 2005. The City of New Orleans purchased the hospital and formed a partnership with a health system to open and operate the hospital in the future, which the Company expects will provide additional occupancy in the buildings.

The Company expects that there could be a short-term negative impact to its results of operations from leases and financial support arrangements that are not renewed, but anticipates that over time it will be able to re-lease the properties or increase tenant rents to offset any short-term decline in revenue.

Funds from Operations

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

Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of

operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

FFO for the three months ended March 31, 2011 was impacted unfavorably compared to prior periods due mainly to the following items:

•

increased interest expense for the three months ended March 31, 2011 compared to the same period in 2010 of approximately $6.0 million, or $0.09 per diluted common share, due primarily to the issuance of the Senior Notes due 2021; and

•

a loss on extinguishment of debt of $2.0 million recognized during the three months ended March 31, 2011, or $0.03 per diluted common share, related to the redemption of the Senior Notes due 2011. A loss on extinguishment of debt of $0.5 million, or $0.01 per diluted common share, was also recognized during the three months ended March 31, 2010 related to the repurchase of a portion of the Senior Notes due 2011.

The table below reconciles FFO to net income (loss) attributable to common stockholders for the three months ended March 31, 2011 and 2010:


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2011			2010

Net Income (Loss) Attributable to Common Stockholders	$	(5,789	)	$	4,594

Gain on sales of real estate properties		(36	)		(2,696	)
Real estate depreciation and amortization		20,054			17,333

Total adjustments		20,018			14,637


Funds from Operations	$	14,229		$	19,231


Funds from Operations per Common Share — Basic	$	0.22		$	0.32

Funds from Operations per Common Share — Diluted	$	0.21		$	0.32


Weighted Average Common Shares Outstanding — Basic		66,151,426			59,961,455

Weighted Average Common Shares Outstanding — Diluted		67,264,517			60,969,730

Results of Operations

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

The Company’s results of operations for the three months ended March 31, 2011 compared to the same period in 2010 were significantly impacted by higher interest expense, a loss recognized due to the redemption of the Senior Notes due 2011, and gains on sales of real estate properties recognized during 2010.


	Three Months Ended
	March 31,						Change
(Dollars in thousands, except per share data)	2011			2010			$			%

REVENUES
Master lease rent	$	15,019		$	14,059		$	960			6.8	%
Property operating		52,353			45,531			6,822			15.0	%
Straight-line rent		1,286			600			686			114.3	%
Mortgage interest		1,649			638			1,011			158.5	%
Other operating		2,305			2,169			136			6.3	%

		72,612			62,997			9,615			15.3	%

EXPENSES
General and administrative		5,781			4,728			1,053			22.3	%
Property operating		28,095			24,199			3,896			16.1	%
Bad debt, net		180			(199	)		379			-190.5	%
Depreciation		18,895			16,203			2,692			16.6	%
Amortization		1,770			1,301			469			36.0	%

		54,721			46,232			8,489			18.4	%

OTHER INCOME (EXPENSE)
Loss on extinguishment of debt		(1,986	)		(480	)		(1,506	)		313.8	%
Interest expense		(22,274	)		(16,311	)		(5,963	)		-36.6	%
Interest and other income, net		228			437			(209	)		-47.8	%

		(24,032	)		(16,354	)		(7,678	)		46.9	%


INCOME (LOSS) FROM CONTINUING OPERATIONS		(6,141	)		411			(6,552	)		-1594.2	%

DISCONTINUED OPERATIONS
Income from discontinued operations		490			1,551			(1,061	)		-68.4	%
Impairment		(147	)		—			(147	)		—
Gain on sales of real estate properties		36			2,696			(2,660	)		-98.7	%

INCOME FROM DISCONTINUED OPERATIONS		379			4,247			(3,868	)		-91.1	%


NET INCOME (LOSS)		(5,762	)		4,658			(10,420	)		-223.7	%

Less: Net income attributable to noncontrolling interests		(27	)		(64	)		37			-57.8	%


NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(5,789	)	$	4,594		$	(10,383	)		-226.0	%


EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) attributable to common stockholders — Basic	$	(0.09	)	$	0.08		$	(0.17	)		-212.5	%

Net income (loss) attributable to common stockholders — Diluted	$	(0.09	)	$	0.08		$	(0.17	)		-212.5	%

Total revenues from continuing operations for the three months ended March 31, 2011 increased $9.6 million, or 15.3%, compared to the same period in 2010, mainly for the reasons discussed below:

• Master lease rental income increased $1.0 million, or 6.8%. Master lease rental income increased approximately $1.7 million as a result of the Company’s 2010 acquisitions and increased approximately $0.3 million mainly from annual contractual rent increases. These increases to master lease rent were partially offset by a reduction of approximately $0.7 million related to properties whose master leases had expired and the Company began recognizing the underlying tenant rents.

• Property operating income increased $6.8 million, or 15.0%, due mainly to approximately $6.5 million of increased revenues related to the Company’s 2010 real estate acquisitions. Also, the Company began recognizing the underlying tenant rental income on properties whose master leases had expired, resulting in approximately $0.3 million in additional property operating income in the first quarter of 2011 compared to the same period in 2010.

• Straight-line rent increased $0.7 million, or 114.3%, due mainly to new leases requiring straight-line rent related to the Company’s 2010 real estate acquisitions.

• Mortgage interest increased $1.0 million, or 158.5%, due mainly to fundings on three new mortgage notes resulting in approximately $0.8 million of interest income with the remaining increase generally related to additional fundings on construction loans.

Total expenses for the three months ended March 31, 2011 increased $8.5 million, or 18.4%, compared to the same period in 2010, mainly for the reasons discussed below:

• General and administrative expenses increased $1.1 million, or 22.3%, due mainly to a $0.8 million increase in salary and deferred compensation expense and a $0.2 million increase in travel expense.

• Property operating expense increased $3.9 million, or 16.1%, due mainly to the recognition of additional expenses totaling approximately $2.7 million related to the Company’s 2010 real estate acquisitions and $0.3 million from properties that were previously under construction that commenced operations during 2010. Property operating expense also increased approximately $0.2 million for properties whose master leases expired and the Company began incurring the underlying operating expenses of the buildings. Also, utilities expense increased approximately $0.2 million and general maintenance and repair expenses increased totaling $0.3 million.

• Depreciation expense increased $2.7 million, or 16.6%, due mainly to approximately $1.9 million in additional depreciation recognized related to the Company’s 2010 real estate acquisitions and $0.5 million related to properties previously under construction that commenced operations during 2010. The remaining $0.3 million increase was due mainly to additional depreciation expense recognized related to various building and tenant improvement expenditures.

• Amortization expense increased $0.5 million, or 36.0%, due mainly to additional amortization expense related to the Company’s 2010 acquisitions totaling approximately $0.8 million, partially offset by a decrease in amortization related to certain intangibles becoming fully amortized.

Other income (expense) for the three months ended March 31, 2011 changed unfavorably by $7.7 million, or 46.9%, compared to the same period in 2010 due mainly to an increase in interest expense of approximately $6.0 million relating mainly to the issuance of the Senior Notes due 2021 in late 2010 and a $2.0 million loss on extinguishment of debt relating to the redemption of the Senior Notes due 2011 in March 2011.

Income from discontinued operations totaled $0.4 million and $4.2 million, respectively, for the three months ended March 31, 2011 and 2010, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale or disposed of as of March 31, 2011.

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 the Unsecured Credit Facility, or from other private debt or equity offerings. For the three months ended March 31, 2011, the Company generated approximately $9.7

million in cash from operations and used approximately $120.0 million in total cash in investing and financing activities, including dividend payments, as detailed in the Company’s Condensed Consolidated Statements of Cash Flows. Dividends paid during the first quarter of 2011 were funded from cash flows from operations and from the Company’s Unsecured Credit Facility as cash flows from operations were not adequate to fully fund the dividend due in part to the unusually large interest expense in the first quarter. For the remainder of 2011, the Company expects quarterly interest expense and, therefore, cash flows to return to levels that will be adequate to fund dividends at the current rate. At March 31, 2011, the Company also had remaining borrowing capacity on its Unsecured Credit Facility of approximately $386.0 million.

Contractual Obligations

The Company monitors its contractual obligations to ensure funds are available to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of March 31, 2011, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders 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 2011 through 2012 are included in the table below. At March 31, 2011, the Company had no long-term capital lease or purchase obligations.


(Dollars in thousands)	2011		2012		Total

Long-term debt obligations, including interest (1)	$	47,852	$	234,758	$	282,610
Operating lease commitments (2)		4,083		4,335		8,418
Construction in progress (3)		61,874		9,832		71,706
Tenant improvements (4)		—		—		—
Construction loan obligation (5)		38,789		10,774		49,563
Pension obligations (6)		—		—		—

Total contractual obligations	$	152,598	$	259,699	$	412,297


(1)		Includes estimated interest due on total debt other than on the Unsecured Credit Facility. Note 4 to the Company’s Condensed Consolidated Financial Statements provides more detail on the Company’s notes and bonds payable.

(2)		Includes primarily the corporate office lease and ground leases related to various properties for which the Company is currently making payments.

(3)		Includes cash flow projections for the remainder of 2011 and 2012 related to the construction of three buildings. The table above does not include budgeted amounts designated for tenant improvements which the Company is not obligated to fund until tenant leases are executed.

(4)		The Company has various first-generation tenant improvements budgeted amounts remaining as of March 31, 2011 of approximately $29.8 million related to properties developed by the Company that the Company may fund for tenant improvements as leases are signed. The Company cannot predict when or if these amounts will be expended and, therefore, has not included estimated fundings in the table above.

(5)		The Company’s remaining funding commitment as of March 31, 2011 on six construction loans. The Company expects these commitments will be funded through 2012.

(6)		At December 31, 2010, the last measurement date, one employee, the Company’s chief executive officer, was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $29.9 million as of December 31, 2010. However, because the Company’s chief executive officer has no present intention to retire, the Company has not projected when the retirement benefits would be paid to the officer in this table. At March 31, 2011, the Company had recorded a $16.0 million liability, included in other liabilities, related to its pension plan obligations.

As of March 31, 2011, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 48.1%. Also, at March 31, 2011, the Company had $164.0 million outstanding under the Unsecured Credit Facility, with a weighted average interest rate of approximately 3.05%, and had borrowing capacity remaining, under its financial covenants, of approximately $386.0 million.

The Company’s fixed charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale, as well as other income from discontinued operations. In accordance with this definition, the Company’s earnings from continuing operations for the three months ended March 31, 2011 were insufficient to cover its fixed charges by approximately $8.1 million, with a ratio of 0.67 to 1.00. However, the Company’s fixed charge ratio calculated in accordance with its covenant ratios included in its Unsecured Credit Facility was in excess of 2.0 times.

indebtedness and create liens or encumbrances. At March 31, 2011, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Interest Expense

Security Deposits and Letters of Credit

As of March 31, 2011, the Company had approximately $6.2 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.

Development Activity

The Company had approximately $29.8 million in various first-generation tenant improvement budgeted amounts remaining as of March 31, 2011 related to properties that were developed by the Company.

At-The-Market Equity Offering Program

The proceeds from these sales are generally used to fund the Company’s development activities and repay balances outstanding under the Unsecured Credit Facility.

Dividends

The Company expects to pay quarterly dividends of $0.30 per common share during 2011. On May 3, 2011, the Company’s Board of Directors declared a common stock cash dividend for the three months ended March 31, 2011 of $0.30 per share, payable on June 2, 2011. As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.

Liquidity

Net cash provided by operating activities was $9.7 million and $28.3 million for the three months ended March 31, 2011 and 2010, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors. The Company’s leases, which provide its main source of income and cash flow, are generally fixed in nature, have terms of approximately one to 20 years and have annual rate increases based generally on consumer price indices. Also, as discussed above, the Company’s results of operations and cash flows were significantly impacted in the first quarter of 2011 compared to 2010 due to additional interest expense from the issuance of $400 million of its Senior Notes due 2021 in December 2010. A portion of the proceeds from this issuance were used to redeem the Senior Notes due 2011 on March 28, 2011 which were due in May 2011. As such, during the first quarter, the Company recognized interest expense on both debt issuances. Also, as a result of the redemption of the Senior Notes due 2011, all accrued interest through the redemption date of March 28, 2011 was paid rather than on May 1, 2011 when it was contractually due.

The Company plans to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, with cash flows from operations, borrowings under the Unsecured Credit Facility, proceeds from sales of real estate investments, proceeds from debt borrowings, or additional capital market financings. 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 continue to 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 property operating agreements 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 has the effect of increasing gross revenue the Company is to receive under the terms of certain leases and property operating agreements. Leases and property operating agreements 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 is calculated at a variable rate; therefore, the amount of interest payable under the Unsecured Credit Facility is influenced by changes in short-term rates, which tend to be sensitive to inflation. 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.

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.


Item 3.		Quantitative and Qualitative Disclosures about Market Risk.

The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes and other notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three months ended March 31, 2011, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.


Item 4.		Controls and Procedures.

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

Changes in Internal Control over Financial Reporting . There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings.


Item 1A.		Risk Factors.

In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, 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 for the year ended December 31, 2010, 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, operating results or cash flows.


Item 5.		Other Information.

On May 6, 2011, the Company entered into a new employment agreement with Todd J. Meredith, who has been serving as the Company’s Executive Vice President — Investments since February 17, 2011. The terms of Mr. Meredith’s employment agreement are substantially similar to the terms of the employment agreements for the Company’s other executive officers, with the exception of David R. Emery. Mr. Meredith’s employment agreement with the Company has a one-year term that is automatically extended on January 1 of each year for an additional year. If Mr. Meredith’s employment agreement is terminated for any reason other than for cause or upon his voluntary termination, he is entitled to receive his unpaid salary, earned bonus, accelerated vesting of unvested stock awards, vested deferred compensation and other benefits through the date of termination. In addition, if a termination “not for cause” occurs, Mr. Meredith will receive as severance compensation his base salary for a period of 18 months following the date of termination and an amount equal to twice his average annual bonus during the two years immediately preceding his termination.

If a “change-in-control” (as defined in the employment agreement) occurs, Mr. Meredith may terminate his agreement and receive his accrued base salary and other benefits described above through the termination date, an amount equal to 1.5 times his base salary through the remaining term of the agreement, and an amount equal to two times his average annual bonus during the two years immediately preceding the termination.

The Company may terminate Mr. Meredith’s agreement for “cause,” which is defined to include material, substantial and willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company or the officer’s material, substantial and willful breach of the employment agreement which has resulted in material injury to the Company. In the event of Mr. Meredith’s termination for cause, he shall receive all accrued salary, earned bonus compensation, vested deferred compensation (other than plan benefits which will be payable in accordance with the applicable plan), and other benefits through the date of termination, but shall receive no other severance benefits.

Mr. Meredith’s agreement may also be terminated if he dies or becomes disabled and his disability continues for a period of 12 consecutive months. In the event of termination of the employment agreement because of his death or disability, Mr. Meredith (or his estate) shall receive his unpaid salary, earned bonus, accelerated vesting of unvested stock awards, vested deferred compensation (other than plan benefits which will be paid in accordance with the applicable plan) and other benefits through the date of termination, but no additional severance except that, if he becomes disabled, the Company will maintain his insurance benefits for the remaining term of his employment agreement.

The Company has agreed to indemnify Mr. Meredith for certain liabilities arising from actions taken within the scope of his employment. The employment agreement contains restrictive covenants pursuant to which Mr. Meredith has agreed not to compete with the Company during the period of employment and any period following termination of his employment during which he is receiving severance payments.


Item 6.		Exhibits.


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

Exhibit 3.2		Amended and Restated Bylaws of the Company, as amended (2)

Exhibit 4.1		Specimen Stock Certificate (1)

Exhibit 4.2		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 4.3		Form of 5.125% Senior Note Due 2014 (3)

Exhibit 4.4		Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (4)

Exhibit 4.5		Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.7 thereto) (4)

Exhibit 4.6		Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee (5)

Exhibit 4.7		Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.9 thereto) (5)

Exhibit 10.1		Employment Agreement by and between Todd J. Meredith and the Company (filed herewith)

Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)

Exhibit 31.1		Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 31.2		Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

Exhibit 101.INS		XBRL Instance Document (furnished herewith)

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document (furnished herewith)

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)

Exhibit 101.LAB		XBRL Taxonomy Extension Labels Linkbase Document (furnished herewith)

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)


(1)		Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.

(2)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.

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

(4)		Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.

(5)		Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 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
		Executive Vice President and Chief Financial Officer

Date: May 9, 2011

Exhibit Index


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

Exhibit 3.2		Amended and Restated Bylaws of the Company, as amended (2)

Exhibit 4.1		Specimen Stock Certificate (1)

Exhibit 4.2		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 4.3		Form of 5.125% Senior Note Due 2014 (3)

Exhibit 4.4		Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (4)

Exhibit 4.5		Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.7 thereto) (4)

Exhibit 4.6		Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee (5)

Exhibit 4.7		Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.9 thereto) (5)

Exhibit 10.1		Employment Agreement by and between Todd J. Meredith and the Company (filed herewith)

Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)

Exhibit 31.1		Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 31.2		Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

Exhibit 101.INS		XBRL Instance Document (furnished herewith)

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document (furnished herewith)

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)

Exhibit 101.LAB		XBRL Taxonomy Extension Labels Linkbase Document (furnished herewith)

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)


(1)		Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.

(2)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.

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

(4)		Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.

(5)		Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference.

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Note 1. Summary Of Significant Accounting Policies Note 2. Real Estate and Mortgage Notes Receivable Investments Note 3. Acquisitions and Dispositions Note 4. Notes and Bonds Payable Note 5. Other Assets Note 6. Commitments and Contingencies Note 7. Stockholders Equity Note 8. Defined Benefit Pension Plans Note 9. Other Operating Income Note 10. Taxable Income (loss)Note 11. Fair Value Of Financial Instruments Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 5. Other Information Item 6. Exhibits

Exhibits

EX-10.1 EX-31.1 EX-31.2 EX-32

HR 10-Q Quarter ended March 31, 2011

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