UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-11852

 

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)

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

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

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

Yes þ No o

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

Yes þ No o

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

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

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

Yes o No þ

As of October 31, 2010, 64,426,375 shares of the Registrant’s Common Stock were outstanding.

 

 

HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-Q

September 30, 2010

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			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			34
Part II — Other Information
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 6. Exhibits			36
Signature			37
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

(Dollars in thousands, except per share data)

		(Unaudited)
		September 30,				December 31,
		2010				2009
ASSETS
Real estate properties:
Land		$	148,356			$	135,495
Buildings, improvements and lease intangibles			2,172,818				1,977,264
Personal property			17,974				17,509
Construction in progress			58,070				95,059
			2,397,218				2,225,327
Less accumulated depreciation			(474,120	)			(433,634	)
Total real estate properties, net			1,923,098				1,791,693
Cash and cash equivalents			11,177				5,851
Mortgage notes receivable			27,134				31,008
Assets held for sale and discontinued operations, net			17,592				17,745
Other assets, net			90,862				89,467
Total assets		$	2,069,863			$	1,935,764
LIABILITIES AND EQUITY
Liabilities:
Notes and bonds payable		$	1,138,200			$	1,046,422
Accounts payable and accrued liabilities			61,400				55,043
Liabilities of discontinued operations			1,229				251
Other liabilities			46,025				43,900
Total liabilities			1,246,854				1,145,616
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; 64,149,158 and 60,614,931 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			641				606
Additional paid-in capital			1,602,078				1,520,893
Accumulated other comprehensive loss			(4,628	)			(4,593	)
Cumulative net income attributable to common stockholders			795,785				787,965
Cumulative dividends			(1,574,586	)			(1,518,105	)
Total stockholders’ equity			819,290				786,766
Noncontrolling interests			3,719				3,382
Total equity			823,009				790,148
Total liabilities and equity		$	2,069,863			$	1,935,764

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, 2009, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

(Dollars in thousands, except per share data)

(Unaudited)

		2010				2009
REVENUES
Master lease rent		$	14,054			$	13,833
Property operating			47,714				45,024
Straight-line rent			626				704
Mortgage interest			601				658
Other operating			2,128				2,110
			65,123				62,329
EXPENSES
General and administrative			4,243				5,107
Property operating			26,671				23,537
Bad debt, net			39				(133	)
Depreciation			17,115				15,499
Amortization			1,237				1,236
			49,305				45,246
OTHER INCOME (EXPENSE)
Interest expense			(15,923	)			(9,535	)
Interest and other income, net			187				292
			(15,736	)			(9,243	)
INCOME FROM CONTINUING OPERATIONS			82				7,840
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations			(121	)			1,115
Impairments			(7,361	)			—
Gain on sales of real estate properties			4,092				84
INCOME (LOSS) FROM DISCONTINUED OPERATIONS			(3,390	)			1,199
NET INCOME (LOSS)			(3,308	)			9,039
Less: Net loss attributable to noncontrolling interests			60				65
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(3,248	)		$	9,104
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations		$	0.00			$	0.13
Discontinued operations			(0.05	)			0.03
Net income (loss) attributable to common stockholders		$	(0.05	)		$	0.16
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations		$	0.00			$	0.13
Discontinued operations			(0.05	)			0.02
Net income (loss) attributable to common stockholders		$	(0.05	)		$	0.15
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC			62,369,773				58,174,482
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED			63,424,706				59,064,066
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	0.300			$	0.385

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2010 and 2009
(Dollars in thousands, except per share data)
(Unaudited)

		2010				2009
REVENUES
Master lease rent		$	43,309			$	41,609
Property operating			140,000				132,825
Straight-line rent			1,952				1,452
Mortgage interest			1,708				2,126
Other operating			6,399				8,623
			193,368				186,635
EXPENSES
General and administrative			12,513				17,397
Property operating			75,089				69,518
Bad debt, net			(438	)			425
Depreciation			50,000				45,556
Amortization			3,869				4,063
			141,033				136,959
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt			(480	)			—
Re-measurement gain of equity interest upon acquisition			—				2,701
Interest expense			(47,803	)			(29,531	)
Interest and other income, net			1,800				675
			(46,483	)			(26,155	)
INCOME FROM CONTINUING OPERATIONS			5,852				23,521
DISCONTINUED OPERATIONS
Income from discontinued operations			1,060				3,098
Impairments			(7,361	)			(22	)
Gain on sales of real estate properties			8,313				20,136
INCOME FROM DISCONTINUED OPERATIONS			2,012				23,212
NET INCOME			7,864				46,733
Less: Net income attributable to noncontrolling interests			(44	)			(12	)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	7,820			$	46,721
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations		$	0.10			$	0.40
Discontinued operations			0.03				0.40
Net income attributable to common stockholders		$	0.13			$	0.80
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations		$	0.10			$	0.40
Discontinued operations			0.03				0.39
Net income attributable to common stockholders		$	0.13			$	0.79
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC			61,232,810				58,150,024
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED			62,269,413				58,950,870
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	0.900			$	1.155

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, 2009, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

(Dollars in thousands)

(Unaudited)

		2010				2009
OPERATING ACTIVITIES
Net income		$	7,864			$	46,733
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			57,484				52,889
Stock-based compensation			1,845				3,286
Straight-line rent receivable			(1,923	)			(1,348	)
Straight-line rent liability			309				336
Gain on sales of real estate properties			(8,313	)			(20,136	)
Loss on extinguishment of debt			480				—
Re-measurement gain of equity interest upon acquisition			—				(2,701	)
Impairments			7,361				22
Provision for bad debt, net			(418	)			429
State income taxes paid, net of refunds			(503	)			(662	)
Payment of partial pension settlement			(342	)			(2,300	)
Changes in operating assets and liabilities:
Other assets			(6,923	)			(1,003	)
Accounts payable and accrued liabilities			9,861				11,984
Other liabilities			2,193				(5,148	)
Net cash provided by operating activities			68,975				82,381
INVESTING ACTIVITIES
Acquisition and development of real estate properties			(183,653	)			(99,253	)
Funding of mortgages and notes receivable			(13,921	)			(13,183	)
Investments in unconsolidated joint venture			—				(184	)
Proceeds from sales of real estate			33,321				83,441
Proceeds from mortgages and notes receivable repayments			7,385				205
Net cash used in investing activities			(156,868	)			(28,974	)
FINANCING ACTIVITIES
Net borrowings on unsecured credit facilities			81,000				44,000
Repayments on notes and bonds payable			(1,759	)			(22,640	)
Repurchase of notes payable			(8,556	)			—
Quarterly dividends paid			(56,481	)			(68,530	)
Proceeds from issuance of common stock			79,467				534
Common stock redemptions			—				(8	)
Capital contributions received from noncontrolling interests			686				1,771
Distributions to noncontrolling interest holders			(399	)			(191	)
Equity issuance costs			(23	)			—
Debt issuance and assumption costs			(716	)			(7,393	)
Net cash provided by (used in) financing activities			93,219				(52,457	)
Increase in cash and cash equivalents			5,326				950
Cash and cash equivalents, beginning of period			5,851				4,138
Cash and cash equivalents, end of period		$	11,177			$	5,088
Supplemental Cash Flow Information:
Interest paid		$	40,048			$	26,953
Capitalized interest		$	7,729			$	7,260
Invoices accrued for construction, tenant improvement and other capitalized costs		$	11,914			$	15,891
Mortgage notes payable assumed upon acquisition (adjusted to fair value)		$	19,880			$	11,716
Mortgage note payable disposed of upon sale of joint venture interest		$	—			$	5,425

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements

September 30, 2010
(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 $2.4 billion in 209 real estate properties and mortgages as of September 30, 2010, 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 13.0 million square feet. As of September 30, 2010, the Company provided property management services to approximately 9.0 million square feet nationwide.

Principles of Consolidation

     The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, partnerships, and joint ventures where the Company controls the operating activities. The Company consolidates two joint ventures, with the same joint venture partner, in which it has a controlling interest. Included in the Company’s Condensed Consolidated Balance Sheets at September 30, 2010 was approximately $106.2 million in real estate investments, including construction notes receivable from the noncontrolling interest holder related to these two consolidated joint ventures. The Company reports noncontrolling interests as equity and reports the related net income (loss) attributable to the noncontrolling interests as part of consolidated net income in its Condensed Consolidated Financial Statements. The Company also has an investment in an unconsolidated joint venture that is included in other assets with its related income recognized in other income (expense) on 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, 2009. 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 (“MD&A”) included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2010 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.

Reclassifications

     Certain amounts in the Company’s Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale, and related liabilities, have been

reclassified on the Company’s Condensed Consolidated Balance Sheets, and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented.

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 on 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 on 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 on 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 to mortgage interest income over the estimated life of the loan.

Property Operating Income

     As of September 30, 2010, the Company had 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 on 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. Also, during the second quarter of 2010, the Company recorded a $35,000 adjustment to record the effect of the settlement with one non-employee director who retired in May 2010.

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 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 on 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 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 pension plan under which three employees may receive benefits upon retirement and the completion of five years of service with the Company. The plan is unfunded and benefits will be paid from earnings of the Company. 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 retirement benefits upon normal retirement (defined to be when the director reached age 65 and had completed at least five years of service or when the director reached age 60 and had completed at least 15 years of service). The Company terminated the pension plan for these directors in November 2009. As a result, in late November 2010, the Company will make lump sum payments, totaling approximately $2.2 million, which represent the non-employee directors’ aggregate accumulated pension benefits payable. A former non-employee director, who retired from the Board in May 2010, received payment upon retirement of approximately $0.3 million.

Operating Leases

     As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, 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 on 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 on 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. See Note 6 for a detail of the Company’s land held for development.

Fair Value Measurements

     Fair value is defined as the exit price, which is 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.

     In connection with its acquisitions of real estate assets during 2010, the Company assumed two mortgage notes payable. The valuation of the mortgage notes payable was determined using level two inputs. Levels 2 and 3 were used to fair value the assets classified as held for sale during the third quarter of 2010, which is discussed in more detail in Note 3.

Real Estate Properties

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

     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.

Note 2. Real Estate and Mortgage Notes Receivable Investments

     The Company had investments of approximately $2.4 billion in 209 real estate properties and mortgage notes receivable as of September 30, 2010, 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 13.0 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			$	100,228				4.1	%			548				4.2	%
Physician clinics			13				106,016				4.4	%			585				4.5	%
Ambulatory care/surgery			4				27,225				1.1	%			108				0.8	%
Specialty outpatient			2				4,852				0.2	%			23				0.2	%
Specialty inpatient			13				234,680				9.6	%			916				7.1	%
Other			9				35,933				1.5	%			372				2.9	%
			52				508,934				20.9	%			2,552				19.7	%
Property operating agreements
Medical office			8				83,999				3.5	%			624				4.8	%
			8				83,999				3.5	%			624				4.8	%
Multi-tenanted with occupancy leases
Medical office			110				1,388,550				57.2	%			7,791				60.1	%
Medical office — stabilization in progress			9				249,487				10.3	%			951				7.3	%
Medical office — construction in progress			3				39,798				1.7	%			405				3.1	%
Physician clinics			14				45,842				1.9	%			296				2.3	%
Ambulatory care/surgery			4				35,083				1.4	%			212				1.6	%
Specialty outpatient			1				2,297				0.1	%			10				0.1	%
Other			1				10,141				0.4	%			126				1.0	%
			142				1,771,198				73.0	%			9,791				75.5	%
Land held for development			—				18,272				0.8	%			—				—
Corporate property			—				14,815				0.6	%			—				—
			—				33,087				1.4	%			—				—
Total owned properties			202				2,397,218				98.8	%			12,967				100.0	%
Mortgage loans:
Medical office			3				4,975				0.2	%			—				—
Physician clinics			2				16,793				0.7	%			—				—
Specialty inpatient			1				5,366				0.2	%			—				—
			6				27,134				1.1	%			—				—
Unconsolidated joint venture:
Other			1				1,266				0.1	%			—				—
			1				1,266				0.1	%			—				—
Total real estate investments			209			$	2,425,618				100.0	%			12,967				100.0	%

Note 3. Acquisitions and Dispositions

Asset Acquisitions

     During the first nine months of 2010, the Company completed the following real estate acquisitions:

•

During the first quarter, the Company acquired, through a consolidated joint venture, a 68,534 square foot, on-campus medical office building in Iowa for a purchase price of $13.8 million from the joint venture’s noncontrolling interest holder. The Company had provided $9.9 million in mortgage financing on the building prior to acquisition by the joint venture. Upon acquisition, this mortgage was refinanced with a permanent mortgage note payable to the Company which is eliminated in consolidation.

•

During the third quarter, the Company acquired:

o

a 73,331 square foot medical office building in Ohio, adjacent to a 287-bed acute-care hospital, for a purchase price of $14.5 million. The Company assumed a $4.2 million mortgage note payable with this acquisition, which has a fixed interest rate of 5.53% and matures in 2018. The building is 100% leased, with lease expirations through 2017;

o

a 134,032 square foot, on-campus medical office building in Indiana for a purchase price of $23.3 million, including a $0.3 million prepaid ground lease payment. The building is 100% leased, with lease expirations through 2020;

o

two adjacent medical office buildings in Colorado, aggregating 112,155 square feet, for a purchase price of $30.0 million. In the aggregate, the buildings are 89% leased, with lease expirations through 2020. The Company assumed a mortgage note payable related to one of the buildings totaling $15.7 million ($15.2 million with a $0.5 million fair value adjustment) which bears an effective interest rate of 6.55% and matures in 2013; and

o

four medical office buildings, adjacent to two separate acute-care hospitals, in Texas for a purchase price of $69.5 million. The portfolio includes 272,671 square feet of on-campus medical office buildings and is approximately 98% leased, with lease expirations through 2022. The Company plans to acquire from the same seller an additional 29,000 square foot building, adjacent to one of the other buildings, during the fourth quarter of 2010 for approximately $6.9 million.

     On November 3, 2010, the Company executed a purchase and sale agreement to acquire an 80,000 square foot, on-campus medical office building in Colorado for approximately $19 million. The building is over 90% leased and the Company expects to acquire the building during the fourth quarter of 2010, subject to the completion of normal and customary due diligence procedures.

     During the first nine months of 2010, the Company funded the following mortgage notes receivable:

	•		During the first quarter, the Company began funding a loan towards the construction of a $3.2 million medical office building in Iowa by its joint venture partner. The Company had funded $2.3 million of the loan before it was repaid in full by the borrower in the third quarter of 2010.
	•		During the third quarter, the Company:

o

began funding a $40.0 million loan for the construction of a 48-bed general acute-care hospital in South Dakota by its joint venture partner. At September 30, 2010, the Company had funded approximately $5.9 million of the loan. The Company received an origination fee of $0.6 million in conjunction with this loan that will be amortized to mortgage interest income over the term of the loan. As of September 30, 2010, the Company had recognized $0.1 million of the loan origination in mortgage interest income on the Company’s Condensed Consolidated Statements of Operations. Should the health system elect to lease rather than acquire the property upon completion, one of the Company’s consolidated joint ventures will acquire the hospital at cost;

o

began funding a $12.4 million loan for the construction of a medical office building in Texas. As of September 30, 2010, the Company had funded $0.6 million of the loan. The Company has the option to acquire the medical office building from the developer twelve months after the building is completed in mid-2011; and

o

entered into two mortgage notes receivable totaling $18.4 million with its joint venture partner to fund construction of two medical office buildings in Iowa as part of the development of a six-facility outpatient campus. As of September 30, 2010, the Company had funded $4.4 million on the notes and expects to fund the remaining $14.0 million through 2012. The Company, through one of its consolidated joint ventures, will have an option to purchase the two buildings at a fair market value price upon completion and full occupancy. Concurrently upon funding the two mortgage notes, an existing mortgage note receivable totaling $4.3 million was repaid by the joint venture partner. The other four buildings on the campus have been completed.

     The following table summarizes the Company’s year-to-date acquisitions and financings through September 30, 2010.

														Mortgage				Mortgage
						Cash								Note				Notes Payable								Square
(dollars in millions)		Date Acquired				Consideration				Real Estate				Financing				Assumed				Other				Footage
Real estate acquisitions (1)
Iowa			03/26/2010			$	2.9			$	14.7			$	(9.9	)		$	—			$	(1.9	)			68,534
Ohio			08/13/2010				10.3				14.5				—				(4.2	)			—				73,331
Indiana			08/27/2010				23.6				23.3				—				—				0.3				134,032
Colorado (2)			08/31/2010				14.8				31.0				—				(15.7	)			(0.5	)			112,155
Texas			09/23/2010				69.0				69.5				—				—				(0.5	)			272,671
							120.6				153.0				(9.9	)			(19.9	)			(2.6	)			660,723
Mortgage note financing
Iowa (3)			01/26/2010				2.3				—				2.3				—				—				—
Texas			07/01/2010				0.6				—				0.6				—				—				—
South Dakota			07/26/2010				5.3				—				5.3				—				—				—
Iowa			08/30/2010				4.4				—				4.4				—				—				—
							12.6				—				12.6				—				—				—
						$	133.2			$	153.0			$	2.7			$	(19.9	)		$	(2.6	)			660,723

Asset Dispositions and Potential Dispositions

     During the first quarter of 2010, the Company disposed of five properties in Virginia that were previously classified as held for sale and in which the Company had an aggregate net investment of approximately $16.0 million. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company recognized a gain on sale of approximately $2.7 million, net of straight-line rent receivables written-off.

     During the second quarter of 2010, the Company sold a 14,563 square foot specialty outpatient facility in Florida in which the Company had an aggregate net investment of approximately $2.4 million. The Company received approximately $4.0 million in net cash proceeds and recognized a gain on sale of approximately $1.5 million, net of straight-line rent receivables written-off.

     During the third quarter of 2010, the Company sold a 25,000 square foot ambulatory surgery center in Florida in which the Company had an aggregate net investment of approximately $5.0 million. The Company received approximately $9.7 million in net cash proceeds and recognized a gain on sale of approximately $4.1 million, net of straight-line rent receivables written-off.

     On October 27, 2010, the Company received notice from a tenant of its intent to purchase six skilled nursing facilities in Michigan and Indiana from the Company pursuant to purchase options contained in its leases with the Company. The Company’s aggregate net investment in the properties was approximately $8.2 million at September 30, 2010, and revenues recognized for the three and nine months ended September 30, 2010 was approximately $0.7 million and $2.0 million, respectively. The Company expects the transaction to close during the third quarter of 2011 with an aggregate purchase price of approximately $17.3 million, resulting in a net gain of approximately $9.1 million.

Discontinued Operations and Assets Held for Sale

     During the third quarter of 2010, the Company sold one property in Florida, as discussed in the preceding paragraph, and reclassified six properties located in five states to held for sale. In the aggregate, the Company’s gross investment in the six properties was approximately $28.1 million ($16.3 million, net) at September 30, 2010 with an aggregate square footage of approximately 214,000 feet. In conjunction with management’s decision to sell, the Company tested each of the six properties for impairment and determined that impairment charges totaling $7.4 million, or $0.12 per

basic and diluted common share, were warranted. A company must record an impairment charge on a property held for sale if its carrying value exceeds its estimated fair value less costs to sell. Fair value amounts used to calculate impairment were based on sale prices in executed purchase and sale agreements on two properties, estimated sales prices with potential buyers on two properties, and on broker estimates of fair value on two properties. In October 2010, one of the six properties classified as held for sale, an 11,963 square foot specialty outpatient facility, was sold for $1.1 million.

     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 Company’s Condensed Consolidated Balance Sheets. At September 30, 2010 and December 31, 2009, the Company had seven and six properties, respectively, classified as held for sale. Five of the properties held for sale at December 31, 2009 were sold in January 2010 and one remains classified as held for sale.

		September 30,				December 31,
(Dollars in thousands)		2010				2009
Balance Sheet data (as of the period ended):
Land		$	8,025			$	3,374
Buildings, improvements and lease intangibles			21,466				22,178
Personal property			214				—
			29,705				25,552
Accumulated depreciation			(12,475	)			(8,697	)
Assets held for sale, net			17,230				16,855
Other assets, net (including receivables)			362				890
Assets of discontinued operations, net			362				890
Assets held for sale and discontinued operations, net		$	17,592			$	17,745
Accounts payable and accrued liabilities		$	368			$	—
Other liabilities			861				251
Liabilities of discontinued operations		$	1,229			$	251

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in thousands, except per share data)		2010				2009				2010				2009
Statements of Operations data (for the period ended):
Revenues
Master lease rent		$	162			$	1,139			$	1,594			$	4,841
Property operating			584				614				1,794				2,412
Straight-line rent			(21	)			(28	)			(29	)			(104	)
Other operating			—				1				1				218
			725				1,726				3,360				7,367
Expenses
General and administrative			2				—				8				6
Property operating			590				461				1,713				2,117
Bad debt, net			—				(24	)			20				(16	)
Depreciation			252				407				782				1,810
			844				844				2,523				3,917
Other Income (Expense)
Interest expense			—				(52	)			—				(636	)
Interest and other income, net			(2	)			285				223				284
			(2	)			233				223				(352	)
Discontinued Operations
Income (loss) from discontinued operations			(121	)			1,115				1,060				3,098
Impairments			(7,361	)			—				(7,361	)			(22	)
Gain on sales of real estate properties			4,092				84				8,313				20,136
Income (Loss) from Discontinued Operations		$	(3,390	)		$	1,199			$	2,012			$	23,212
Income (Loss) from Discontinued Operations per common share — basic		$	(0.05	)		$	0.03			$	0.03			$	0.40
Income (Loss) from Discontinued Operations per common share — diluted		$	(0.05	)		$	0.02			$	0.03			$	0.39

Note 4. Notes and Bonds Payable

     The table below details the Company’s notes and bonds payable as of September 30, 2010 and December 31, 2009.

		Sept. 30,				Dec. 31,				Maturity		Contractual		Principal		Interest
(Dollars in thousands)		2010				2009				Dates		Interest Rates		Payments		Payments
Unsecured Credit Facility due 2012		$	131,000			$	50,000			9/12		LIBOR + 2.80%		At maturity		Quarterly
Senior Notes due 2011, including premium			278,376				286,655			5/11		8.125%		At maturity		Semi-Annual
Senior Notes due 2014, net of discount			264,192				264,090			4/14		5.125%		At maturity		Semi-Annual
Senior Notes due 2017, net of discount			298,160				297,988			1/17		6.500%		At maturity		Semi-Annual
Mortgage notes payable, net of discounts and including premium			166,472				147,689			4/13-10/30		5.000%-7.625%		Monthly		Monthly
		$	1,138,200			$	1,046,422

     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 September 30, 2010, the Company was in compliance with the financial covenant provisions under 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”) that matures on September 30, 2012 with a syndicate of 16 lenders. 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% (currently 2.80%) for LIBOR-based loans and 0.90% to 1.95% for base rate loans (currently 1.55%), 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 September 30, 2010, the Company had $131.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 3.06% and had borrowing capacity remaining, under its financial covenants, of approximately $419.0 million.

Senior Notes due 2011

     In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125% per annum, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. The notes were originally issued at a discount of approximately $1.5 million, which yielded an 8.202% interest rate per annum upon issuance. The original discount is combined with the premium resulting from the termination of interest rate swaps in 2006 that were entered into to offset changes in the fair value of $125.0 million of the notes. The net premium is combined with the principal balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets and is being amortized against interest expense over the remaining term of the notes. Also, during 2010, the Company repurchased $8.1 million and previously had repurchased $13.7 million of the Senior Notes due 2011, amortizing a pro-rata portion of the premium upon such repurchases. The Company recognized an expense of approximately $0.5 million related to its 2010 repurchases, which will be offset by interest savings over the remaining term of the Senior Notes due 2011. At September 30, 2010, the Senior Notes due 2011 yielded an effective interest rate of 7.896%. The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets.

		September 30,				December 31,
(Dollars in thousands)		2010				2009
Senior Notes due 2011 face value		$	278,221			$	286,300
Unamortized net gain (net of discount)			155				355
Senior Notes due 2011 carrying amount		$	278,376			$	286,655

Senior Notes due 2014

     In 2004, the Company publicly issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125% 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 notes 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 had repurchased approximately $35.3 million of the Senior Notes due 2014, amortizing a pro-rata portion of the discount upon such repurchases. At September 30, 2010, the Senior Notes due 2014 yielded an effective interest rate of 5.190%. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets.

		September 30,				December 31,
(Dollars in thousands)		2010				2009
Senior Notes due 2014 face value		$	264,737			$	264,737
Unaccreted discount			(545	)			(647	)
Senior Notes due 2014 carrying amount		$	264,192			$	264,090

Senior Notes due 2017

     On December 4, 2009, the Company publicly issued $300.0 million of unsecured senior notes due 2017 (the “Senior Notes due 2017”). The Senior Notes due 2017 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 notes were issued at a discount of approximately $2.0 million, yielding an effective interest rate of 6.618% per annum. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Condensed Consolidated Balance Sheets.

		September 30,				December 31,
(Dollars in thousands)		2010				2009
Senior Notes due 2017 face value		$	300,000			$	300,000
Unaccreted discount			(1,840	)			(2,012	)
Senior Notes due 2017 carrying amount		$	298,160			$	297,988

Mortgage Notes Payable

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

		September 30,				December 31,
(Dollars in thousands)		2010				2009
Mortgage Notes payable principal balance		$	173,013			$	155,355
Unaccreted discount, net			(6,541	)			(7,666	)
Mortgage Notes payable carrying amount		$	166,472			$	147,689

     The following table further details the Company’s mortgage notes payable, with related collateral, at September 30, 2010.

																						Investment in
						Effective								Number								Collateral at				Balance at
		Original				Interest				Maturity				of Notes at								September 30,				Sep. 30,				Dec. 31,
(Dollars in millions)		Balance				Rate (12)				Date				Sept. 30, 2010				Collateral (13)				2010				2010				2009
Life Insurance Co. (1)		$	4.7				7.765	%			1/17				1			MOB				$	11.4			$	2.3			$	2.5
Commercial Bank (2)			1.8				5.550	%			10/30				1			OTH					7.9				1.7				1.7
Life Insurance Co. (3)			15.1				5.490	%			1/16				1			MOB					32.5				13.6				13.9
Commercial Bank (4)			17.4				6.480	%			5/15				1			MOB					19.9				14.5				14.4
Commercial Bank (5)			12.0				6.110	%			7/15				1			2 MOBs					19.5				9.7				9.7
Commercial Bank (6)			15.2				7.650	%			7/20				1			MOB					20.1				12.8				12.8
Life Insurance Co. (7)			1.5				6.810	%			7/16				1			SOP					2.2				1.2				1.2
Commercial Bank (8)			12.9				6.430	%			2/21				1			MOB					20.6				11.5				11.6
Investment Fund (9)			80.0				7.250	%			12/16				1			15 MOBs					153.8				79.4				79.9
Life Insurance Co. (10)			7.0				5.530	%			1/18				1			MOB					14.5				4.1				—
Investment Co. (11)			15.9				6.550	%			4/13				1			MOB					23.3				15.7				—
																						-
															11							$	325.7			$	166.5			$	147.7

Long-Term Debt Maturities

     Future maturities of the Company’s notes and bonds payable as of September 30, 2010 were:

										Total
		Principal				Net Accretion/				Notes and
(Dollars in thousands)		Maturities				Amortization (2)				Bonds Payable				%
2010 (remaining)		$	757			$	(212	)		$	545				0.1	%
2011			281,434				(1,089	)			280,345				24.6	%
2012 (1)			134,415				(1,253	)			133,162				11.7	%
2013			18,203				(1,451	)			16,752				1.5	%
2014			268,374				(1,497	)			266,877				23.4	%
2015 and thereafter			443,788				(3,269	)			440,519				38.7	%
		$	1,146,971			$	(8,771	)		$	1,138,200				100.0	%

Note 5. Other Assets

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

		September 30,				December 31,
(Dollars in millions)		2010				2009
Straight-line rent receivables		$	26.5			$	25.2
Prepaid assets			27.7				24.7
Above-market intangible assets, net			12.4				12.0
Deferred financing costs, net			9.5				12.1
Accounts receivable			4.7				9.0
Notes receivable			3.9				3.3
Goodwill			3.5				3.5
Investment in joint venture — cost method			1.3				1.3
Customer relationship intangible assets, net			1.2				1.2
Allowance for uncollectible accounts			(1.2	)			(3.7	)
Other			1.4				0.9
		$	90.9			$	89.5

Equity investment in joint ventures

     At September 30, 2010, 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.

     The table below details the Company’s investment in its unconsolidated joint ventures.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in thousands)		2010				2009				2010				2009
Net joint venture investments, beginning of period		$	1,266			$	1,231			$	1,266			$	2,784
Equity in losses recognized during the period			—				—				—				(2	)
Acquisition of remaining equity interest in a joint venture			—				—				—				(1,700	)
Additional investment in a joint venture			—				35				—				184
Net joint venture investments, end of period		$	1,266			$	1,266			$	1,266			$	1,266

Note 6. Commitments and Contingencies

Construction in Progress

     As of September 30, 2010, the Company had three medical office buildings under construction with estimated completion dates in the third quarter 2011. The table below details the Company’s construction in progress and land held for development as of September 30, 2010. The information included in the table below represents management’s estimates and expectations at September 30, 2010 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				Sept. 30,				Remaining				Total
State		Date				(1)				Properties				Square Feet				2010				Funding				Investment
(Dollars in thousands)
Under construction:
Washington			3Q 2011			MOB					1				206,000			$	35,027			$	57,173			$	92,200
Colorado (2)			3Q 2011			MOB					2				199,000				4,771				50,129				54,900
Land held for development:
Texas																			10,155
Texas																			8,117
											3				405,000			$	58,070			$	107,302			$	147,100