Summary of HEALTHCARE REALTY TRUST INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Disclosure Regarding Forward-Looking Statements This report and other materials Healthcare Realty Trust Incorporated (the "Company") has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "target," "intend," "plan," "estimate," "project," "continue," "should," "could" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risk, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and in this report that could significantly affect the Company's current plans and expectations and future financial condition and results.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company's filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
For a detailed discussion of the Company's risk factors, please refer to the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2008 and in Item 1A of Part II of this quarterly report on Form 10-Q. Business Overview
The Company is a self-managed and self-administered REIT that owns, 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 generally derived from rentals on its healthcare real estate properties. The Company incurs operating and administrative expenses, including compensation, office rent and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio and acquiring additional properties. The Company also incurs interest expense on its various debt instruments and depreciation and amortization expense on its real estate portfolio.
Executive Overview
The Company's real estate portfolio, diversified by facility type, geography, tenant and payor mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice patterns. Overall portfolio occupancy for the second quarter remained stable, while rental rates on renewing leases showed strong increases consistent with previous quarters.
At June 30, 2009, the Company's leverage ratio [debt divided by (debt plus stockholders' equity less intangible assets plus accumulated depreciation)] was approximately 44.9%, with 64.3% of its debt portfolio maturing after 2010. The Company had borrowings outstanding under its Unsecured Credit Facility totaling $338.0 million at June 30, 2009, with a capacity remaining under its financial covenants of $62.0 million. While access to capital markets has improved since late 2008 and the first quarter of 2009, the cost to raise additional capital remains higher than levels seen in 2007 and 2008, which will likely impact future operations and investment activity.
The Company entered into loan application and commitment agreements on July 28, 2009 with Teachers Insurance and Annuity Association of America for an aggregate of approximately $207.3 million in mortgage financing. The loans will bear interest at a fixed rate of 7.25% per annum and will mature seven years from the date of closing, which is expected to occur by September 30, 2009, subject to normal and customary conditions. The Company intends to apply the net proceeds of the loans to the outstanding balance under its Unsecured Credit Facility due 2010. In August 2009, the Company also launched the renewal of its Unsecured Credit Facility due 2010. The Company anticipates

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closing on its new credit facility during the third quarter and expects the new facility to be similar in size to its current credit facility, but with a significantly higher interest rate than on its current credit facility (1.21% at June 30, 2009).
Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry in order to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 below are some of the factors and trends that management believes may impact future operations of the Company. Cost of Capital
The Company launched the renewal of its Unsecured Credit Facility and entered into loan application and commitment agreements for an aggregate of approximately $207.3 million in mortgage financing during the third quarter of 2009. The Company expects to close on both financings by the end of the third quarter, subject to normal and customary conditions, including the attainment of commitments on the new credit facility. The mortgage debt will bear interest at a fixed rate of 7.25% per annum. The Company anticipates that the interest rate on the new credit facility will be significantly higher than on its current credit facility which was 1.21% at June 30, 2009. The anticipated increases in interest expense will negatively impact the Company's future cash flows and results from operations.
2009 Acquisitions
During the first quarter of 2009, the Company acquired the remaining equity interest in a joint venture which owns a 62,246 square foot on-campus medical office building in Oregon, for approximately $4.4 million of cash consideration, and assumed an outstanding mortgage totaling approximately $12.8 million. Prior to the acquisition, the Company owned a 50% equity interest in the joint venture. The building is 97% occupied with lease expirations through 2025. During the first quarter, HR Ladco Holdings, LLC, a joint venture in which the Company has an 80% controlling interest, acquired a 33,974 square foot medical office building in Iowa for $10.7 million. The property is 100% leased to two tenants.
During July 2009, HR Ladco Holdings, LLC acquired a 22,572 square foot medical office building in Iowa for $3.6 million that is 100% occupied by one tenant whose lease expires in 2021. HR Ladco Holdings, LLC also acquired a 63,224 square foot medical office/wellness facility in Iowa for $21.0 million that is 100% occupied by one tenant whose lease expires in 2029. 2009 Dispositions
During the first quarter of 2009, the Company disposed of three medical office buildings and membership interests in an entity that owned one medical office building for approximately $66.1 million in net proceeds and repaid a $19.5 million mortgage note secured by one of the properties.
During the second quarter of 2009, the Company disposed of one specialty inpatient facility and one ambulatory surgery center for approximately $20.5 million in net proceeds, including $1.5 million in proceeds from a land exchange.
During July 2009, the Company disposed of a physician clinic for approximately $0.6 million in net proceeds. Development Activity
At June 30, 2009, the Company had four construction projects underway. The Company expects completion of the core and shell of three of the four projects with budgets totaling approximately $88.0 million during 2009 and expects the core and shell of the fourth project with a budget totaling approximately $86.0 million to be completed during the second quarter of 2010.
In addition to the projects currently under construction discussed in the preceding paragraph, the Company is financing an on-campus medical office development in Iowa comprised of six facilities, with a total budget of approximately $72.0 million, of which the Company expects to finance the remaining $19.0 million during 2009 and 2010. With respect to five of the six facilities, the Company will have an option to purchase each facility at a market cap rate upon its completion and attaining full occupancy. The sixth facility is under contract for sale to an unrelated party. As discussed in "2009 Acquisitions," three of the five properties were acquired during 2009 for approximately $35.3 million. See Note 6 to the Condensed Consolidated Financial Statements for more information on the Company's development activities.

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Expiring Leases
Master leases on 14 of the Company's properties were set to expire during 2009. The Company sold one of the properties during the second quarter of 2009 to the tenant and has renewed or extended the lease expirations on three of the properties, representing nearly one-third of the expiring square footage. The Company has opted not to renew the master leases on the remaining 10 properties, which are located on or near hospital campuses and in locations where the Company already has existing management capabilities. These properties have existing physician subtenants, and the Company will assume these subtenant leases upon the expiration of the master leases, six of which have already occurred.
Approximately 440 of the Company's leases in its multi-tenanted buildings were set to expire during 2009, with each tenant lessee occupying an average of approximately 3,181 square feet. As of June 30, 2009, of the 280 leases that had expired, approximately 82% of the tenants had renewed or had expressed an intention to renew their leases. Management expects that the majority of the leases remaining that have not expired or renewed will renew at favorable rates. Funds from Operations
Funds from Operations ("FFO") and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT's operating performance equal to "net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures." Impairment charges may not be added back to net income in calculating FFO, which has the effect of decreasing FFO in the period recorded.
Management believes FFO and FFO per share to be supplemental measures of a REIT's performance because they provide an understanding of the operating performance of the Company's properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. Management uses FFO and FFO per share to compare and evaluate its own operating results from period to period, and to monitor the operating results of the Company's peers in the REIT industry. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.
However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. FFO for the six months ended June 30, 2009 was impacted favorably by a re-measurement gain of $2.7 million, or $0.05 per diluted common share, recognized in connection with the acquisition of the remaining interests in a joint venture during the first quarter of 2009. The table below reconciles FFO to net income for the three and six months ended June 30, 2009 and 2008:

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                                                                 Three Months Ended                       Six Months Ended
                                                                      June 30,                                June 30,
(Dollars in thousands, except per share data)                 2009                2008                2009                2008

Net income attributable to common stockholders            $     16,752        $     13,766        $     37,617        $     20,566

Gain on sales of real estate properties                         (7,443 )            (7,715 )           (20,051 )            (8,352 )
Real estate depreciation and amortization                       16,703              13,150              33,585              26,423

Total adjustments                                                9,260               5,435              13,534              18,071


Funds from Operations - Basic and Diluted                 $     26,012        $     19,201        $     51,151        $     38,637


Funds from Operations per Common Share - Basic            $       0.45        $       0.39        $       0.88        $       0.78

Funds from Operations per Common Share - Diluted          $       0.44        $       0.38        $       0.87        $       0.77


Weighted Average Common Shares Outstanding - Basic          58,128,489          49,431,724          58,153,637          49,422,391

Weighted Average Common Shares Outstanding - Diluted        58,899,618          50,474,762          58,897,895          50,442,808

Results of Operations
Second Quarter 2009 Compared to Second Quarter 2008
   Income from continuing operations for the three months ended June 30, 2009
was $9.4 million, compared to $4.8 million for the same period in 2008. Net
income for the three months ended June 30, 2009 was $16.8 million, or $0.29 per
basic common share ($0.28 per diluted common share), compared to $13.8 million,
or $0.28 per basic common share ($0.27 per diluted common share), for the same
period in 2008.

                                                  Three Months Ended
                                                       June 30,                         Change
(Dollars in thousands)                          2009             2008              $               %

REVENUES
Master lease rent                             $  14,953        $  15,014        $    (61 )         -0.4 %
Property operating                               45,866           32,899          12,967           39.4 %
Straight-line rent                                  328             (126 )           454          360.3 %
Mortgage interest                                   978              542             436           80.4 %
Other operating                                   3,007            4,312          (1,305 )        -30.3 %

                                                 65,132           52,641          12,491           23.7 %

EXPENSES
General and administrative                        5,329            5,863            (534 )         -9.1 %
Property operating                               23,587           19,279           4,308           22.3 %
Bad debts, net of recoveries                        127              115              12           10.4 %
Depreciation                                     15,575           11,665           3,910           33.5 %
Amortization                                      1,346              566             780          137.8 %

                                                 45,964           37,488           8,476           22.6 %

OTHER INCOME (EXPENSE)
Gain on extinguishment of debt                        -                9              (9 )            -
Interest expense                                (10,043 )        (10,886 )           843           -7.7 %
Interest and other income, net                      228              486            (258 )        -53.1 %

                                                 (9,815 )        (10,391 )           576           -5.5 %


INCOME FROM CONTINUING OPERATIONS                 9,353            4,762           4,591           96.4 %

DISCONTINUED OPERATIONS
Income from discontinued operations                  18            1,289          (1,271 )        -98.6 %
Gain on sales of real estate properties           7,443            7,715            (272 )         -3.5 %

INCOME FROM DISCONTINUED OPERATIONS               7,461            9,004          (1,543 )        -17.1 %


NET INCOME                                       16,814           13,766           3,048           22.1 %

Less: Net income attributable to
non-controlling interests                           (62 )              -             (62 )            -

NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 16,752 $ 13,766 $ 2,986 21.7 %

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Total revenues from continuing operations for the three months ended June 30, 2009 increased $12.5 million, or 23.7%, compared to the same period in 2008, mainly for the reasons discussed below:
� Master lease rental income decreased $0.1 million, or 0.4%. Master lease rental income declined approximately $1.0 million due to properties whose master leases had expired and the Company began recognizing the underlying tenant rents in property operating income. This amount was partially offset by additional revenues associated with the Company's 2008 real estate acquisitions of approximately $0.4 million, with the remaining increase resulting mainly from annual rent increases and increases in additional rent.
� Property operating income increased $13.0 million, or 39.4%, due mainly to the recognition of approximately $10.3 million in revenues in the second quarter of 2009 compared to 2008 from the Company's 2008 and 2009 real estate acquisitions. Also, the Company began recognizing the underlying tenant rental income on properties whose master leases had expired, resulting in approximately $1.0 million in additional property operating income in the second quarter of 2009 compared to the same period in 2008, with the remaining increase resulting mainly from new leasing activity and annual rent increases.
� Straight-line rent increased $0.5 million due mainly to an increase of approximately $0.8 million related to leases on properties acquired during 2008 and 2009 that require straight-line rent accounting, partially offset by a decrease of approximately $0.5 million related to lease terminations associated with one operator.
� Mortgage interest income increased $0.4 million, or 80.4%, due mainly to an amendment to one note agreement, increasing the contractual interest rate.
� Other operating income decreased $1.3 million, or 30.3%, due mainly to lower guaranty income resulting from the expiration of property operating agreements relating to five properties. Other operating income for both periods included approximately $0.6 million in replacement rent received by the Company pursuant to an agreement with one operator that expired on June 30, 2009. Total expenses for the three months ended June 30, 2009 increased $8.5 million, or 22.6%, compared to the same period in 2008, mainly for the reasons discussed below:
� General and administrative expenses decreased $0.5 million, or 9.1%, due mainly to a decrease in pension and deferred compensation expenses of approximately $0.5 million and professional fees of approximately $0.3 million, offset partially by the recognition of approximately $0.3 million in compensation-related expenses from the termination of five employees during the second quarter of 2009.
� Property operating expense increased $4.3 million, or 22.3%, due mainly to the recognition of approximately $3.6 million in expenses in the second quarter of 2009 compared to 2008 from the Company's 2008 and 2009 real estate acquisitions. Also, properties previously under construction that commenced operations during 2008 resulted in approximately $0.5 million in additional property operating expenses in 2009 compared to 2008. The remaining increase was mostly due to properties whose master leases expired, and the Company began recognizing the underlying operating expenses of the buildings totaling approximately $0.5 million for the second quarter of 2009.
� Depreciation expense increased $3.9 million, or 33.5%, due mainly to approximately $2.7 million in additional depreciation recognized in the second quarter of 2009 compared to 2008 related to the Company's 2008 and 2009 real estate acquisitions and $0.4 million related to properties previously under construction that commenced operations during 2008. The remainder of the increase was related to various building and tenant improvement expenditures.
� Amortization expense increased $0.8 million, or 137.8%, due mainly to additional amortization of approximately $1.1 million recognized on lease intangibles acquired related to the Company's 2008 real estate acquisitions, offset partially by a decrease in amortization of approximately $0.3 million on lease intangibles acquired related mainly to the Company's 2003 and 2004 real estate acquisitions which are becoming fully amortized. Other income (expense) for the three months ended June 30, 2009 improved $0.6 million, or 5.5%, compared to the same period in 2008, mainly because interest expense decreased $0.8 million, or 7.7%. This decrease was mainly

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attributable to a reduction of approximately $0.7 million as a result of certain repurchases of the Senior Notes due 2011 and 2014 during 2008, an increase in the capitalization of interest of approximately $1.0 million relating to the Company's construction projects, as well as a reduction of approximately $0.1 million related to the Unsecured Credit Facility resulting mainly from a decrease in interest rates. These amounts were partially offset by an increase of approximately $1.0 million related to mortgage notes payable assumed by the Company in connection with its investments in two consolidated joint ventures during 2008 and 2009. (See "Cost of Capital" discussion below.) Income from discontinued operations totaled $7.5 million and $9.0 million, respectively, for the three months ended June 30, 2009 and 2008, which includes the results of operations, gains on sale, and impairment charges related to assets classified as held for sale or disposed of during the second quarter of 2009 and 2008. The Company disposed of two properties during the second quarter of 2009, with two properties remaining in held for sale at June 30, 2009. Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008 Income from continuing operations for the six months ended June 30, 2009 was $17.1 million, compared to $9.7 million for the same period in 2008. Net income for the six months ended June 30, 2009 was $37.7 million, or $0.65 per basic common share ($0.64 per diluted common share), compared to $20.6 million, or $0.42 per basic common share ($0.41 per diluted common share), for the same period in 2008.

                                                       Six Months Ended
                                                           June 30,                              Change
(Dollars in thousands)                             2009               2008                $                  %

REVENUES
Master lease rent                               $  30,604          $  30,703          $    (99 )             -0.3 %
Property operating                                 88,776             65,014            23,762               36.5 %
Straight-line rent                                    688               (182 )             870             -478.0 %
Mortgage interest                                   1,468              1,067               401               37.6 %
Other operating                                     6,514              8,164            (1,650 )            -20.2 %

                                                  128,050            104,766            23,284               22.2 %

EXPENSES
General and administrative                         12,296             11,908               388                3.3 %
Property operating                                 46,950             37,524             9,426               25.1 %
Bad debts, net of recoveries                          562                260               302              116.2 %
Depreciation                                       31,300             23,127             8,173               35.3 %
Amortization                                        2,827              1,150             1,677              145.8 %

                                                   93,935             73,969            19,966               27.0 %
OTHER INCOME (EXPENSE)
Gain on extinguishment of debt                          -                  9                (9 )                -
Re-measurement gain of equity interest
upon acquisition                                    2,701                  -             2,701                  -
Interest expense                                  (20,116 )          (21,764 )           1,648               -7.6 %
Interest and other income, net                        383                622              (239 )            -38.4 %

                                                  (17,032 )          (21,133 )           4,101              -19.4 %


INCOME FROM CONTINUING OPERATIONS                  17,083              9,664             7,419               76.8 %

DISCONTINUED OPERATIONS
Income from discontinued operations                   582              2,582            (2,000 )            -77.5 %
Impairments                                           (22 )              (29 )               7              -24.1 %
Gain on sales of real estate properties            20,051              8,352            11,699              140.1 %

INCOME FROM DISCONTINUED OPERATIONS                20,611             10,905             9,706               89.0 %


NET INCOME                                         37,694             20,569            17,125               83.3 %

Less: Net income attributable to
non-controlling interests                             (77 )               (3 )             (74 )          2,466.7 %

NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 37,617 $ 20,566 $ 17,051 82.9 %

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