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 risks, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, in the Company's Quarterly Report of Form 10-Q for the quarter ended March 31, 2009, 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, in Part II, "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, 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
On September 30, 2009, the Company entered into an amended and restated $550.0 million unsecured credit facility (the "Unsecured Credit Facility") with 16 lenders, including Bank of America, N.A., as administrative agent. The Unsecured Credit Facility currently bears interest at 2.80% over LIBOR, with a 0.40% facility fee, and matures on September 30, 2012. The outstanding balance on the Company's previous unsecured credit facility, totaling approximately $368.0 million, was repaid with proceeds from the Unsecured Credit Facility.
The Company has also entered into loan application and commitment agreements with Teachers Insurance and Annuity Association of America for mortgage financing not to exceed $140.3 million on certain of its properties. 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 in the fourth quarter of 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. See Note 12 to the Condensed Consolidated Financial Statements.
At September 30, 2009, the Company's leverage ratio [debt divided by (debt plus stockholders' equity less intangible assets plus accumulated depreciation)] was approximately 45.8%, with no significant maturities until 2011. The Company had borrowings outstanding under the Unsecured Credit Facility totaling $373.0 million at September 30, 2009, with a capacity remaining under its financial covenants of $177.0 million.
The Company's real estate portfolio, diversified by facility type, geography, tenant and payor mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice and reimbursement patterns. Overall portfolio occupancy for the third quarter remained stable, while rental rates on renewing leases showed strong increases consistent with previous quarters. 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 cost of the Company's short-term borrowings increased upon closing the new Unsecured Credit Facility on September 30, 2009. The rate on the revolving credit facility increased from 0.90% over LIBOR with a 0.20% facility fee to 2.80% over LIBOR with a 0.40% facility fee. Upon closing the Unsecured Credit Facility, the Company repaid the outstanding balance under its previous credit facility totaling $368.0 million.
The Company has also entered into loan application and commitment agreements to obtain mortgage financing not to exceed $140.3 million on certain of its properties. The mortgage debt will bear interest at a fixed rate of 7.25% per annum.
The Company expects that the additional interest expense from the Unsecured Credit Facility and the mortgage debt will have a negative impact on its future net income, funds from operations, and cash flows. As a result of its increasing short and long-term financing costs, the Company expects to pay quarterly dividends of $0.30 per share beginning with the fourth quarter of 2009, which would be payable in March 2010.
Acquisitions
During the first quarter of 2009, the Company acquired the remaining 50% 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 was 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 was 100% leased to two tenants.
During the third quarter of 2009, HR Ladco Holdings, LLC acquired a 22,572 square foot medical office building in Iowa for $3.6 million that was 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 was 100% occupied by one tenant whose lease expires in 2029.
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 the third quarter of 2009, the Company disposed of a physician clinic for approximately $0.6 million in net proceeds. Development Activity
At September 30, 2009, the Company had four construction projects underway. The Company expects completion of the core and shell of two of the four projects with budgets totaling approximately $55.0 million during the fourth quarter of 2009. The Company expects completion of the core and shell of the third project with a budget totaling approximately $86.0 million during the second quarter of 2010 and expects completion of the fourth project with a budget of approximately $92.2 million to be completed during the third quarter of 2011.
In addition to the properties 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 $72.6 million, of which the Company has already advanced $56.4 million. The Company expects to finance the remaining $16.2 million through 2011. 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 was sold by the developer in October 2009 to an unrelated party. As discussed in "Acquisitions," the Company acquired two of the five properties during 2009 for approximately $31.7 million. See Note 6 to the Condensed Consolidated Financial Statements for more information on the Company's development activities. 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 14 properties, representing nearly one-third of the expiring square footage. The Company 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. The Company has assumed the existing physician subtenant leases on the majority of the remaining 10 properties.
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 3,188 square feet. As of September 30, 2009, of the 361 leases that had expired, approximately 84% 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 nine months ended September 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. FFO for the three and nine months ended September 30, 2008 was impacted favorably by a net gain of approximately $2.0 million, or $0.04 per diluted common share, recognized on the repurchases of a portion of the Senior Notes due 2011 and 2014. Also, during the three months ended September 30, 2008, the Company recognized additional expense for a one-time $0.8 million settlement related to unreimbursed litigation expenses, which reduced FFO per diluted share by approximately $0.02 for the three months ended September 30, 2008 and $0.01 for the nine months ended September 30, 2008. The table below reconciles FFO to net income for the three and nine months ended September 30, 2009 and 2008:

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

Net income attributable to common stockholders             $      9,104          $      5,527          $     46,721          $     26,093

Gain on sales of real estate properties                             (84 )                (746 )             (20,136 )              (9,098 )
Real estate depreciation and amortization                        16,801                13,456                50,387                39,878

Total adjustments                                                16,717                12,710                30,251                30,780


Funds from Operations - Basic and Diluted                  $     25,821          $     18,237          $     76,972          $     56,873


Funds from Operations per Common Share - Basic             $       0.44          $       0.37          $       1.32          $       1.15

Funds from Operations per Common Share - Diluted           $       0.44          $       0.36          $       1.31          $       1.13


Weighted Average Common Shares Outstanding - Basic           58,174,482            49,530,813            58,150,024            49,438,796

Weighted Average Common Shares Outstanding - Diluted         59,064,066            50,614,173            58,950,870            50,481,469

Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Income from continuing operations for the three months ended September 30, 2009 was $8.7 million, compared to $3.7 million for the same period in 2008. Net income attributable to common stockholders for the three months ended September 30, 2009 was $9.1 million, or $0.16 per basic common share ($0.15 per diluted common share), compared to $5.5 million, or $0.11 per basic and diluted common share, for the same period in 2008.

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

REVENUES
Master lease rent                               $ 14,973          $  15,166          $   (193 )            -1.3 %
Property operating                                45,638             34,721            10,917              31.4 %
Straight-line rent                                   676                124               552             445.2 %
Mortgage interest                                    658                579                79              13.6 %
Other operating                                    2,111              4,084            (1,973 )           -48.3 %

                                                  64,056             54,674             9,382              17.2 %

EXPENSES
General and administrative                         5,107              6,018              (911 )           -15.1 %
Property operating                                23,979             21,625             2,354              10.9 %
Impairment                                             -              1,600            (1,600 )          -100.0 %
Bad debts, net of recoveries                        (133 )               95              (228 )          -240.0 %
Depreciation                                      15,906             12,166             3,740              30.7 %
Amortization                                       1,236                769               467              60.7 %

                                                  46,095             42,273             3,822               9.0 %

OTHER INCOME (EXPENSE)
Gain on extinguishment of debt, net                    -              2,015            (2,015 )          -100.0 %
Interest expense                                  (9,587 )          (10,863 )           1,276             -11.7 %
Interest and other income, net                       292                185               107              57.8 %

                                                  (9,295 )           (8,663 )            (632 )             7.3 %


INCOME FROM CONTINUING OPERATIONS                  8,666              3,738             4,928             131.8 %

DISCONTINUED OPERATIONS
Income from discontinued operations                  289              1,092              (803 )           -73.5 %
Gain on sales of real estate properties               84                746              (662 )           -88.7 %

INCOME FROM DISCONTINUED OPERATIONS                  373              1,838            (1,465 )           -79.7 %


NET INCOME                                         9,039              5,576             3,463              62.1 %

Less: Net (income) loss attributable to
noncontrolling interests                              65                (49 )             114            -232.7 %

NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 9,104 $ 5,527 $ 3,577 64.7 %

Total revenues from continuing operations for the three months ended September 30, 2009 increased $9.4 million, or 17.2%, compared to the same period in 2008, mainly for the reasons discussed below:
• Master lease rental income decreased $0.2 million, or 1.3%. Master lease rental income declined approximately $1.7 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 $0.8 million, with the remaining increase of approximately $0.7 million resulting mainly from annual rent increases and increases in additional rent.
• Property operating income increased $10.9 million, or 31.4%, due mainly to the recognition of approximately $7.6 million in revenues in the third quarter of 2009 compared to 2008 resulting 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 $1.1 million in additional property operating income in the third quarter of 2009 compared to the same period in 2008, with the remaining increase of approximately $2.2 million resulting mainly from new leasing activity and annual rent increases.
• Straight-line rent increased $0.6 million due mainly to an increase of approximately $0.6 million related to leases subject to straight-lining on properties acquired during 2008 and 2009.
• Other operating income decreased $2.0 million, or 48.3%, due mainly to a decrease in property operating agreement guaranty income of approximately $1.2 million resulting from the expiration of agreements relating to five properties. Other operating income for third quarter of 2008 also 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 September 30, 2009 increased $3.8 million, or 9.0%, compared to the same period in 2008, mainly for the reasons discussed below:
• General and administrative expenses decreased $0.9 million, or 15.1%, due mainly to a decrease in pension and deferred compensation expenses of approximately $0.4 million and project related costs of approximately $0.6 million.
• Property operating expense increased $2.4 million, or 10.9%, due mainly to the recognition of approximately $3.2 million in expenses in the third 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 and 2009 resulted in approximately $0.4 million in additional property operating expenses in 2009 compared to 2008. Property operating expense also increased approximately $0.6 million for the third quarter of 2009 due to properties whose master leases expired, and the Company began incurring the underlying operating expenses of the buildings. These increases to expense were partially offset by overall decreases in utilities and legal fees of approximately $0.6 million and $1.2 million, respectively.
• An impairment charge totaling $1.6 million was recognized in 2008 on patient accounts receivable assigned to the Company as part of a lease termination and debt restructuring in late 2005 related to a physician clinic owned by the Company.
• Bad debt expense decreased $0.2 million primarily due to the collection of a settlement of approximately $0.1 million received by the Company from a tenant for receivables that the Company had previously reserved. The Company also recognized approximately $0.1 million in bad debt charges related to various tenants in the third quarter of 2008.
• Depreciation expense increased $3.7 million, or 30.7%, due mainly to approximately $2.5 million in additional depreciation recognized in the third quarter of 2009 compared to 2008 related to the Company's 2008 and 2009 real estate acquisitions and $0.5 million related to properties previously under construction that commenced operations during 2008. The remainder of the increase of approximately $0.7 million was mainly due to additional depreciation expense recognized related to various building and tenant improvement expenditures.
• Amortization expense increased $0.5 million, or 60.7%, due mainly to additional amortization of approximately $0.8 million recognized on lease intangibles acquired related to the Company's 2008 real estate

acquisitions, offset partially by a decrease in amortization of approximately $0.4 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 September 30, 2009 decreased unfavorably by $0.6 million, or 7.3%, compared to the same period in 2008 mainly due to the gain on the extinguishment of debt of approximately $2.0 million recorded in the third quarter of 2008. This decrease resulting from the gain was partially offset by a reduction in interest expense of $1.3 million, or 11.7%, from 2008 to 2009. This reduction in interest was mainly attributable to lower interest of approximately $0.5 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 decrease in interest rates on the Company's previous unsecured credit facility resulting in a reduction of approximately $0.9 million in interest. These decreases were partially offset by an increase in interest of approximately $1.2 million related to mortgage notes payable assumed by the Company in connection with its investments in two consolidated joint ventures during 2008 and 2009.
Income from discontinued operations totaled $0.4 million and $1.8 million, respectively, for the three months ended September 30, 2009 and 2008, which includes the results of operations and gains on sale related to assets classified as held for sale or disposed of as of September 30, 2009. The Company disposed of one property during the third quarter of 2009, with one property remaining in held for sale at September 30, 2009.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Income from continuing operations for the nine months ended September 30, 2009 was $25.7 million, compared to $13.4 million for the same period in 2008. Net income attributable to common stockholders for the nine months ended September 30, 2009 was $46.7 million, or $0.80 per basic common share ($0.79 per diluted common share), compared to $26.1 million, or $0.53 per basic common share ($0.52 per diluted common share), for the same period in 2008.

                                                           Nine Months Ended
                                                             September 30,                            Change
(Dollars in thousands)                                  2009               2008                $                  %

REVENUES
Master lease rent                                    $  45,576          $  45,869          $   (293 )             -0.6 %
Property operating                                     134,414             99,736            34,678               34.8 %
. . .