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EX-8 - EX-8 - HEALTHCARE REALTY TRUST INCg22138exv8.htm
EX-5 - EX-5 - HEALTHCARE REALTY TRUST INCg22138exv5.htm
EX-1.1 - EX-1.1 - HEALTHCARE REALTY TRUST INCg22138exv1w1.htm
EX-21 - EX-21 - HEALTHCARE REALTY TRUST INCg22138exv21.htm
EX-31.2 - EX-31.2 - HEALTHCARE REALTY TRUST INCg22138exv31w2.htm
EX-23.2 - EX-23.2 - HEALTHCARE REALTY TRUST INCg22138exv23w2.htm
EX-10.16 - EX-10.16 - HEALTHCARE REALTY TRUST INCg22138exv10w16.htm
EX-31.1 - EX-31.1 - HEALTHCARE REALTY TRUST INCg22138exv31w1.htm
EX-10.17 - EX-10.17 - HEALTHCARE REALTY TRUST INCg22138exv10w17.htm
EX-10.15 - EX-10.15 - HEALTHCARE REALTY TRUST INCg22138exv10w15.htm
EX-32 - EX-32 - HEALTHCARE REALTY TRUST INCg22138exv32.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period            to
Commission File Number: 1-11852
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)
Securities Registered Pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common stock, $.01 par value per share   New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ       No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o       No þ
     Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ       No o
     Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o       No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o       No þ
     The aggregate market value of the shares of common stock (based upon the closing price of these shares on the New York Stock Exchange, Inc. on June 30, 2009) of the Registrant held by non-affiliates on June 30, 2009 was approximately $973,457,298.
     As of January 31, 2010, 61,390,762 shares of the Registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 18, 2010 are incorporated by reference into Part III of this Report.
 
 

 


 

TABLE OF CONTENTS
             
        Page  
  Business     1  
 
           
  Risk Factors     17  
 
           
  Unresolved Staff Comments     21  
 
           
  Properties     21  
 
           
  Legal Proceedings     21  
 
           
  Submission of Matters to a Vote of Security Holders     21  
 
           
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     22  
 
           
  Selected Financial Data     23  
 
           
  Management's Discussion and Analysis of Financial Condition and Results of Operations     24  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     42  
 
           
  Financial Statements and Supplementary Data     43  
 
           
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     80  
 
           
  Controls and Procedures     80  
 
           
  Other Information     82  
 
           
  Directors, Executive Officers and Corporate Governance     83  
 
           
  Executive Compensation     84  
 
           
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     84  
 
           
  Certain Relationships and Related Transactions, and Director Independence     84  
 
           
  Principal Accountant Fees and Services     84  
 
           
  Exhibits and Financial Statement Schedules     84  
 
           
        87  
 EX-1.1
 EX-5
 EX-8
 EX-10.15
 EX-10.16
 EX-10.17
 EX-21
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART I
ITEM 1.   BUSINESS
Overview
     Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) was incorporated in Maryland in 1993 and is a self-managed and self-administered 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 operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to net income distributed to its stockholders. See “Federal Income Tax Information” in Item 1 of this report.
     As of December 31, 2009, the Company’s real estate property investments, excluding assets held for sale and including an investment in one unconsolidated joint venture, are shown in the table below:
                                         
    Number of     Gross Investment Square Feet
(Dollars and Square Feet in thousands)   Investments     Amount     %     Footage     %  
 
Owned properties:
                                       
Master leases
                                       
Medical office
    17     $ 160,880       7.1 %     834       6.7 %
Physician clinics
    16       123,611       5.4 %     688       5.6 %
Ambulatory care/surgery
    5       33,351       1.4 %     133       1.1 %
Specialty outpatient
    3       8,265       0.4 %     37       0.3 %
Specialty inpatient
    13       234,624       10.4 %     916       7.4 %
Other
    10       45,390       2.0 %     498       4.0 %
     
 
    64       606,121       26.7 %     3,106       25.1 %
 
                                       
Property operating agreements
                                       
Medical office
    8       83,893       3.7 %     621       5.0 %
     
 
    8       83,893       3.7 %     621       5.0 %
 
                                       
Multi-tenanted with occupancy leases
                                       
Medical office
    105       1,380,176       61.2 %     7,965       64.5 %
Physician clinics
    15       50,691       2.3 %     331       2.7 %
Ambulatory care/surgery
    5       67,293       3.0 %     303       2.5 %
Specialty outpatient
    2       5,221       0.2 %     22       0.2 %
     
 
    127       1,503,381       66.7 %     8,621       69.9 %
 
                                       
Land Held for Development
          17,301       0.8 %            
Corporate property
          14,631       0.6 %            
     
 
          31,932       1.4 %            
     
Total owned properties
    199       2,225,327       98.5 %     12,348       100.0 %
     
 
                                       
Mortgage loans:
                                       
Medical office
    2       14,190       0.6 %            
Physician clinics
    2       16,818       0.8 %            
     
 
    4       31,008       1.4 %            
Unconsolidated joint venture:
                                       
Other
    1       1,266       0.1 %            
     
 
    1       1,266       0.1 %            
     
Total real estate investments
    204     $ 2,257,601       100.0 %     12,348       100.0 %
     
     The Company provided property management services for 140 healthcare-related properties nationwide, totaling approximately 9.3 million square feet at December 31, 2009. The Company’s portfolio of properties is focused predominantly on outpatient services and medical office segments of the healthcare industry and is diversified by tenant, geographic location and facility type.

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          The following table details occupancy of the Company’s owned properties by facility type as of December 31, 2009 and 2008.
                         
    Percentage of     Occupancy (1)  
    Square Feet     2009     2008  
Medical office buildings
    76.2 %     88 %     89 %
Physician clinics
    8.3 %     92 %     97 %
Ambulatory care/surgery centers
    3.6 %     87 %     89 %
Specialty outpatient
    0.5 %     63 %     89 %
Specialty inpatient
    7.4 %     100 %     100 %
Other
    4.0 %     94 %     93 %
 
                 
Total
    100.0 %     90 %     91 %
 
                 
 
(1)   Occupancy represents the percentage of total rentable square feet leased (including month-to-month and holdover leases) as of December 31, 2009 and 2008, excluding six properties in discontinued operations and 10 properties in lease-up. Properties under financial support or master lease agreements are included at 100% occupancy. Upon expiration of these agreements, occupancy reflects underlying tenant leases in the building.
          As of December 31, 2009, the weighted average remaining years to maturity pursuant to the Company’s long-term master leases, financial support agreements, and multi-tenanted occupancy leases was approximately 5.0 years, with expirations through 2029.
          Below is the Company’s 10-year lease maturity schedule, excluding the six properties classified as held for sale, as of December 31, 2009:
                                 
    Annualized                     Average  
Expiration   Minimum     Number of     Percentage     Square Feet  
Year   Rents (1)     Leases     of Revenues     Per Lease  
2010
  $ 29,016       338       13.5 %     3,692  
2011
    26,946       278       12.6 %     3,928  
2012
    25,554       236       11.9 %     4,492  
2013
    31,022       189       14.5 %     6,599  
2014
    33,001       245       15.4 %     5,140  
2015
    8,393       56       3.9 %     7,107  
2016
    10,325       44       4.8 %     8,841  
2017
    13,532       35       6.3 %     20,855  
2018
    9,593       59       4.5 %     8,654  
2019
    9,998       18       4.7 %     8,370  
Thereafter
    17,146       54       7.9 %     14,021  
 
(1)   Represents the annualized minimum rents on leases in-place as of December 31, 2009, excluding the impact of potential lease renewals, future step-ups in rent, sponsor support payments under financial support agreements and straight-line rent.
Business Strategy
          Healthcare Realty’s strategy is to own and operate quality medical office and other outpatient-related facilities that produce stable and growing rental income. Consistent with this strategy, the Company selectively seeks acquisition and development opportunities located on or near the campuses of large, stable healthcare systems. Additionally, the Company provides a broad spectrum of services needed to own, develop, lease, finance and manage its portfolio of healthcare properties.
          The Company’s portfolio focuses on medical office and other outpatient-related facilities associated with large acute care hospitals and leading health systems because it views these facilities as stable, low-risk real estate investments. The nation’s healthcare spending in 2008 was $2.3 trillion. Healthcare spending is currently 16.2% of the nation’s gross national product and is projected to increase to an estimated 19.3% by 2019. Historically, more than half of the nation’s healthcare spending has been received by hospitals and outpatient-related facility tenants. In addition, management believes that the diversity of tenants in the Company’s medical office and other outpatient-related facilities, which includes physicians of nearly two-dozen specialties, as well as surgery, imaging, and diagnostic centers, lowers the Company’s financial and operational risk.

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          The Company plans to continue to meet its liquidity needs, including funding additional investments in 2010, paying dividends and funding debt service, with cash flows from operations, borrowings under the $550.0 million unsecured credit facility due 2012 (the “Unsecured Credit Facility”), proceeds from mortgage notes receivable repayments, proceeds from sales of real estate investments, proceeds from secured debt borrowings, and additional capital market financings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Item 7 and “Risk Factors” in Item 1A of this report for more discussion concerning the Company’s liquidity and capital resources.
Acquisitions and Dispositions
     Acquisition Activity
          During 2009, the Company acquired approximately $106.4 million in real estate assets and funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately $43.9 million, were acquired by a joint venture in which the Company has an 80% controlling interest. These acquisitions were funded with borrowings on the Company’s unsecured credit facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and proceeds from various capital market financings. See Note 4 to the Consolidated Financial Statements for more information on these acquisitions.
     Dispositions
          During 2009, the Company disposed of seven real estate properties for approximately $85.7 million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial Statements for more information on these dispositions.
     2010 Disposition
          In January 2010, pursuant to a purchase option with an operator, the Company disposed of five properties in Virginia. The Company’s aggregate net investment in the buildings was approximately $16.0 million at December 31, 2009. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on sale of approximately $2.7 million, including the write-off of approximately $0.5 million of straight-line rent receivables.
Purchase Options
          Excluding the five properties located in Virginia that were classified as held for sale, the Company had approximately $111.1 million in real estate properties at December 31, 2009 that were subject to exercisable purchase options held by the respective operators and lessees that had not been exercised. On a probability-weighted basis, the Company currently estimates that approximately $32.0 million of these options might be exercised in the future. During 2010, an additional purchase option becomes exercisable on a property in which the Company had a gross investment of approximately $3.1 million at December 31, 2009. The Company does not believe it is likely that the operator will exercise the purchase option in the near future. Other properties may have purchase options exercisable in 2011 and beyond, but the Company does not believe it can reasonably estimate the probability of exercise of these purchase options.
Construction in Progress and Other Commitments
          As of December 31, 2009, the Company had two medical office buildings under construction with budgets totaling $178.2 million and estimated completion dates in the second quarter of 2010 and the third quarter of 2011. At December 31, 2009, the Company had $95.1 million invested in construction in progress, including two parcels of land totaling $17.3 million in land held for future development, and expects to fund $57.0 million, $31.4 million, and $5.2 million in 2010, 2011 and 2012, respectively, on the two projects currently under construction. See Note 14 to the Consolidated Financial Statements for more details on the Company’s construction in progress at December 31, 2009.
          The Company also had various remaining first-generation tenant improvement obligations budgeted as of December 31, 2009 totaling approximately $31.3 million related to properties that were developed by the Company.
          In addition to the projects currently under construction, the Company is financing the development of a six-facility outpatient campus with a budget totaling approximately $72 million. The Company has funded $56.4 million towards the construction of four of the buildings. The Company’s consolidated joint venture acquired three of the buildings and the fourth building was sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to the Consolidated Financial Statements. Construction of the remaining two buildings has not yet begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The

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Company’s consolidated joint venture will have an option to purchase the two remaining buildings at a market price upon completion and full occupancy.
Contractual Obligations
          As of December 31, 2009, the Company had long-term contractual obligations of approximately $1.8 billion, consisting primarily of $1.4 billion of long-term debt obligations. For a more detailed description of these contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Obligations,” in Item 7 of this report.
Competition
          The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other healthcare-related REITs, real estate partnerships and financial institutions, among others. The business of acquiring and constructing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures.
          The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using the healthcare facilities or referring patients there, healthcare employment, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state payment programs and other laws and regulations may also have an effect on the utilization of the properties. Virtually all of the Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time.
Government Regulation
          The healthcare industry continues to face rising costs in the delivery of healthcare services, increased competition for patients, an economy struggling with high unemployment and a growing population of uninsured patients, higher bad debt expense, changes in reimbursement by private and governmental payors, regulatory scrutiny by federal and state administrative authorities, and pressure on government payment rates from high federal and state budget deficits, thus presenting the industry and its individual participants with uncertainty. These varied changes can affect the economic performance of some or all of the Company’s tenants and clients. The Company cannot predict the degree to which these changes may affect the economic performance of the Company, positively or negatively.
          The facilities owned by the Company and the manner in which they are operated are affected by changes in the reimbursement, licensing and certification policies of federal, state and local governments. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. In addition, expansion (including the addition of new beds or services or acquisition of medical equipment) and occasionally the discontinuation of services of healthcare facilities are, in some states, subjected to state regulatory approval through “certificate of need” laws and regulations. Loss by a facility of its ability to participate in government-sponsored programs because of licensing, certification or accreditation deficiencies or because of program exclusion resulting from violations of law would have a material adverse effect on facility revenues.
          Although the Company is not a healthcare provider or in a position to refer patients or order services reimbursable by the federal government, to the extent that a healthcare provider leases space from the Company and, in turn, subleases space to physicians or other referral sources at less than a fair market value rental rate, or otherwise arranges for remuneration to such a referral source, the Anti-Kickback Statute (a provision of the Social Security Act addressing illegal remuneration) and, depending on the type of provider the lessee is, the Stark Law (the federal physician self-referral law) could be implicated. The Company’s leases require the lessees to agree to comply with all applicable laws.
          A significant portion of the revenue of healthcare providers is derived from government reimbursement programs, such as the federal Medicare program and the joint federal and state Medicaid program. Although lease payments to the Company are not directly affected by government reimbursement, changes in these programs could adversely affect healthcare providers’ and tenants’ ability to make payments to the Company.
          The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. Government healthcare spending has increased over time; however, changes from year to year in reimbursement methodology, rates and other regulatory requirements have resulted in a challenging operating environment for healthcare providers. Spending on government reimbursement programs is expected to continue to rise significantly over the next 20 years, particularly as the government seeks to expand public insurance programs for the uninsured. While government proposals for achieving universal healthcare coverage and other

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costly initiatives could benefit healthcare providers by decreasing the level of uninsured patients and bad debt expense, Congress could decide to slow the growth in healthcare spending by limiting Medicare and Medicaid reimbursement rates to healthcare providers, possibly even several years prior to the implementation of expanded health insurance coverage. Reductions in the growth of Medicare and Medicaid payments could have an adverse impact on healthcare providers’ financial condition, in addition to the approximate 30 million patients with low-profit margin public insurance that could crowd out providers’ current levels of private-pay patients. These governmental health insurance reforms could adversely affect the ability of providers to make rental payments. However, the Company expects healthcare providers to continue to adjust to new operating challenges, as they have in the past, by increasing operating efficiency and modifying their strategies for profitable operations and growth. Furthermore, under comprehensive healthcare reform, the Company could benefit from higher demand for medical office space as the newly insured population would require additional healthcare providers and facilities.
          The Company believes its strategic focus on the medical office and outpatient sector of the healthcare industry mitigates risk from changes in public healthcare spending and reimbursement because physician practices generally derive a large portion of their revenue from private insurance and out-of-pocket patient expense. The diversity of the Company’s multi-tenant medical office facilities also provides lower reimbursement risk as payor mix varies from physician to physician, depending on location, specialty, patients, and physician preferences.
Legislative Developments
          Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are enacted by government agencies. These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Among the matters under consideration or recently implemented are:
    comprehensive healthcare reform legislation, currently under consideration in Congress, seeks to provide universal health insurance coverage through tax subsidies, expanded federal health insurance programs, individual and employer mandates for coverage, and health insurance exchanges; to be paid for by cuts to Medicare and Medicaid and increased taxes; also, to include heightened regulations on insurers and pharmaceutical companies and various cost containment initiatives;
 
    cost containment, quality control and payment system refinements for Medicaid, Medicare and other public funding, such as expansion of pay-for-performance criteria and value-based purchasing programs, bundled provider payments, accountable care organizations, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions;
 
    reform of the Medicare physician fee-for-service reimbursement formula that dictates annual updates in payment rates for physician services;
 
    prohibitions on additional types of contractual relationships between physicians and the healthcare facilities and providers to which they refer, and related information-collection activities;
 
    efforts to increase transparency with respect to pricing and financial relationships among healthcare providers and drug/device manufacturers;
 
    heightened health information technology standards for healthcare providers;
 
    increased scrutiny of medical errors and conditions acquired inside health facilities;
 
    patient and drug safety initiatives;
 
    re-importation of pharmaceuticals;
 
    pharmaceutical drug pricing and compliance activities under Medicare part D;
 
    tax law changes affecting non-profit providers;
 
    immigration reform and related healthcare mandates;
 
    modifications to increase requirements for facility accessibility by persons with disabilities; and
 
    facility requirements related to earthquakes and other disasters, including structural retrofitting.
     The Company cannot predict whether any proposals will be adopted or what effect, whether positive or negative, such proposals would have on the Company’s business.
Environmental Matters
          Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and injuries to persons and adjacent property). Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil and criminal fines and penalties upon violators. Such laws often impose liability, without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances and may be imposed on the owner in connection with the activities of an operator of the property.

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The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be negatively impacted either through physical contamination or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties.
          Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws, ordinances and regulations, including those relating to the following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned, developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils, petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of hazardous or toxic materials. Operations of nuclear medicine departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the properties were built during the period that asbestos was commonly used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities.
          The Company has had environmental site assessments conducted on substantially all of the properties currently owned. These site assessments are limited in scope and provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. While it is the Company’s policy to seek indemnification relating to environmental liabilities or conditions, even where leases and sale and purchase agreements do contain such provisions, there can be no assurances that the tenant or seller will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases or financial support agreements do not give the Company control over the operational activities of its lessees or healthcare operators, nor will the Company monitor the lessees or healthcare operators with respect to environmental matters.
Insurance
          The Company generally requires its tenants to maintain comprehensive liability and property insurance that covers the Company as well as the tenants. The Company also carries comprehensive liability insurance and property insurance covering its owned and managed properties, including those held under long-term ground leases. In addition, tenants under long-term net master leases are required to carry property insurance covering the Company’s interest in the buildings. The Company has also obtained title insurance with respect to each of the properties it owns, insuring that the Company holds title to each of the properties free and clear of all liens and encumbrances except those approved by the Company.
Employees
          As of December 31, 2009, the Company employed 229 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.
Federal Income Tax Information
          The Company is and intends to remain qualified as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company’s net income attributable to common stockholders will be exempt from federal taxation to the extent that it is distributed as dividends to stockholders. Distributions to the Company’s stockholders generally will be includable in their income; however, dividends distributed that are in excess of current and/or accumulated earnings and profits will be treated for tax purposes as a return of capital to the extent of a stockholder’s basis and will reduce the basis of the stockholder’s shares.
     Introduction
          The Company is qualified and intends to remain qualified as a REIT for federal income tax purposes under Sections 856 through 860 of the Code. The following discussion addresses the material federal tax considerations relevant to the taxation of the Company and summarizes certain federal income tax consequences that may be relevant to certain stockholders. However, the actual tax consequences of holding particular securities issued by the Company may vary in light of a securities holder’s particular facts and circumstances. Certain holders, such as tax-exempt entities, insurance companies and financial institutions, are generally subject to special rules. In addition, the following discussion does not address issues under any foreign, state or local tax laws. The tax treatment of a holder of any of the securities issued by the Company will vary depending upon the terms of the specific securities acquired by such holder, as well as the holder’s particular situation, and this discussion does not attempt to address aspects of federal income taxation relating to holders of

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particular securities of the Company. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. The Code, rules, regulations, and administrative and judicial interpretations are all subject to change at any time (possibly on a retroactive basis).
          The Company is organized and is operating in conformity with the requirements for qualification and taxation as a REIT and intends to continue operating so as to enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. The Company’s qualification and taxation as a REIT depends upon its ability to meet, through actual annual operating results, the various income, asset, distribution, stock ownership and other tests discussed below. Accordingly, the Company cannot guarantee that the actual results of operations for any one taxable year will satisfy such requirements.
          If the Company were to cease to qualify as a REIT, and the statutory relief provisions were found not to apply, the Company’s income that it distributed to stockholders would be subject to the “double taxation” on earnings (once at the corporate level and again at the stockholder level) that generally results from an investment in the equity securities of a corporation. The distributions would then qualify for the reduced dividend rates created by the Jobs and Growth Tax Relief Reconciliation Act of 2003. However, the reduced dividend rates are scheduled to expire for taxable years beginning after December 31, 2010. Failure to maintain qualification as a REIT would force the Company to significantly reduce its distributions and possibly incur substantial indebtedness or liquidate substantial investments in order to pay the resulting corporate taxes. In addition, the Company, once having obtained REIT status and having thereafter lost such status, would not be eligible to re-elect REIT status for the four subsequent taxable years, unless its failure to maintain its qualification was due to reasonable cause and not willful neglect and certain other requirements were satisfied. In order to elect again to be taxed as a REIT, just as with its original election, the Company would be required to distribute all of its earnings and profits accumulated in any non-REIT taxable year.
     Taxation of the Company
          As long as the Company remains qualified to be taxed as a REIT, it generally will not be subject to federal income taxes on that portion of its ordinary income or capital gain that is currently distributed to stockholders.
          However, the Company will be subject to federal income tax as follows:
    The Company will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including undistributed net capital gains.
 
    Under certain circumstances, the Company may be subject to the “alternative minimum tax” on its items of tax preference, if any.
 
    If the Company has (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business, or (ii) other non-qualifying income from foreclosure property, it will be subject to tax on such income at the highest regular corporate rate.
 
    Any net income that the Company has from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business) will be subject to a 100% tax.
 
    If the Company should fail to satisfy either the 75% or 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a percentage tax calculated by the ratio of REIT taxable income to gross income with certain adjustments multiplied by the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test.
 
    If the Company fails to distribute during each year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from preceding periods, then the Company will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed.
 
    In the event of a more than de minimis failure of any of the asset tests, as described below under “Asset Tests,” as long as the failure was due to reasonable cause and not to willful neglect, the Company files a description of each asset that caused such failure with the Internal Revenue Services (“IRS”), and disposes of the assets or otherwise complies with the asset tests within six months after the last day of the quarter in which the Company identifies such failure, the Company will pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which the Company failed to satisfy the asset tests.
 
    In the event the Company fails to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, and such failure is due to reasonable cause and not to willful neglect, the Company will be required to pay a penalty of $50,000 for each such failure.
 
    To the extent that the Company recognizes gain from the disposition of an asset with respect to which there existed “built-in gain” upon its acquisition by the Company from a Subchapter C corporation in a carry-over basis transaction and such disposition occurs within a maximum ten-year recognition period beginning on the date on which it was acquired by the

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      Company, the Company will be subject to federal income tax at the highest regular corporate rate on the amount of its “net recognized built-in gain.”
 
    To the extent that the Company has net income from a taxable REIT subsidiary (“TRS”), the TRS will be subject to federal corporate income tax in much the same manner as other non-REIT Subchapter C corporations, with the exceptions that the deductions for interest expense on debt and rental payments made by the TRS to the Company will be limited and a 100% excise tax may be imposed on transactions between the TRS and the Company or the Company’s tenants that are not conducted on an arm’s length basis. A TRS is a corporation in which a REIT owns stock, directly or indirectly, and for which both the REIT and the corporation have made TRS elections.
     Requirements for Qualification as a REIT
          To qualify as a REIT for a taxable year, the Company must have no earnings and profits accumulated in any non-REIT year. The Company also must elect or have in effect an election to be taxed as a REIT and must meet other requirements, some of which are summarized below, including percentage tests relating to the sources of its gross income, the nature of the Company’s assets and the distribution of its income to stockholders. Such election, if properly made and assuming continuing compliance with the qualification tests described herein, will continue in effect for subsequent years.
     Organizational Requirements and Share Ownership Tests
          Section 856(a) of the Code defines a REIT as a corporation, trust or association:
  (1)   that is managed by one or more trustees or directors;
 
  (2)   the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;
 
  (3)   that would be taxable, but for Sections 856 through 860 of the Code, as a domestic corporation;
 
  (4)   that is neither a financial institution nor an insurance company subject to certain provisions of the Code;
 
  (5)   the beneficial ownership of which is held by 100 or more persons, determined without reference to any rules of attribution (the “share ownership test”);
 
  (6)   that during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) (the “five or fewer test”); and
 
  (7)   that meets certain other tests, described below, regarding the nature of its income and assets.
          Section 856(b) of the Code provides that conditions (1) through (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of fewer than 12 months. The five or fewer test and the share ownership test do not apply to the first taxable year for which an election is made to be treated as a REIT.
          The Company is also required to request annually (within 30 days after the close of its taxable year) from record holders of specified percentages of its shares written information regarding the ownership of such shares. A list of stockholders failing to fully comply with the demand for the written statements is required to be maintained as part of the Company’s records required under the Code. Rather than responding to the Company, the Code allows the stockholder to submit such statement to the IRS with the stockholder’s tax return.
          The Company has issued shares to a sufficient number of people to allow it to satisfy the share ownership test and the five or fewer test. In addition, to assist in complying with the five or fewer test, the Company’s Articles of Incorporation contain provisions restricting share transfers where the transferee (other than specified individuals involved in the formation of the Company, members of their families and certain affiliates, and certain other exceptions) would, after such transfer, own (a) more than 9.9% either in number or value of the outstanding common stock of the Company or (b) more than 9.9% either in number or value of any outstanding preferred stock of the Company. Pension plans and certain other tax-exempt entities have different restrictions on ownership. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of either the outstanding common stock or any preferred stock of the Company, the stock in excess of this 9.9% in value is deemed to be held in trust for transfer at a price that does not

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exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In addition, under these circumstances, the Company has the right to redeem such stock.
          For purposes of determining whether the five or fewer test (but not the share ownership test) is met, any stock held by a qualified trust (generally, pension plans, profit-sharing plans and other employee retirement trusts) is, generally, treated as held directly by the trust’s beneficiaries in proportion to their actuarial interests in the trust and not as held by the trust.
     Income Tests
          In order to maintain qualification as a REIT, two gross income requirements must be satisfied annually.
    First, at least 75% of the Company’s gross income (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) must be derived from “rents from real property;” “interest on obligations secured by mortgages on real property or on interests in real property;” gain (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) from the sale or other disposition of, and certain other gross income related to, real property (including interests in real property and in mortgages on real property); and income received or accrued within one year of the Company’s receipt of, and attributable to the temporary investment of, “new capital” (any amount received in exchange for stock other than through a dividend reinvestment plan or in a public offering of debt obligations having maturities of at least five years).
 
    Second, at least 95% of the Company’s gross income (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) must be derived from dividends; interest; “rents from real property;” gain (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) from the sale or other disposition of, and certain other gross income related to, real property (including interests in real property and in mortgages on real property); and gain from the sale or other disposition of stock and securities.
          The Company may temporarily invest its working capital in short-term investments. Although the Company will use its best efforts to ensure that income generated by these investments will be of a type that satisfies the 75% and 95% gross income tests, there can be no assurance in this regard (see the discussion above of the “new capital” rule under the 75% gross income test).
          For an amount received or accrued to qualify for purposes of an applicable gross income test as “rents from real property” or “interest on obligations secured by mortgages on real property or on interests in real property,” the determination of such amount must not depend in whole or in part on the income or profits derived by any person from such property (except that such amount may be based on a fixed percentage or percentages of receipts or sales). In addition, for an amount received or accrued to qualify as “rents from real property,” such amount may not be received or accrued directly or indirectly from a person in which the Company owns directly or indirectly 10% or more of, in the case of a corporation, the total voting power of all voting stock or the total value of all stock, and, in the case of an unincorporated entity, the assets or net profits of such entity (except for certain amounts received or accrued from a TRS in connection with property substantially rented to persons other than a TRS of the Company and other 10%-or-more owned persons or with respect to certain healthcare facilities, if certain conditions are met). The Company leases and intends to lease property only under circumstances such that substantially all, if not all, rents from such property qualify as “rents from real property.” Although it is possible that a tenant could sublease space to a sublessee in whom the Company is deemed to own directly or indirectly 10% or more of the tenant, the Company believes that as a result of the provisions of the Company’s Articles of Incorporation that limit ownership to 9.9%, such occurrence would be unlikely. Application of the 10% ownership rule is, however, dependent upon complex attribution rules provided in the Code and circumstances beyond the control of the Company. Ownership, directly or by attribution, by an unaffiliated third party of more than 10% of the Company’s stock and more than 10% of the stock of any tenant or subtenant would result in a violation of the rule.
          In addition, the Company must not manage its properties or furnish or render services to the tenants of its properties, except through an independent contractor from whom the Company derives no income or through a TRS unless (i) the Company is performing services that are usually or customarily furnished or rendered in connection with the rental of space for occupancy only and the services are of the sort that a tax-exempt organization could perform without being considered in receipt of unrelated business taxable income or (ii) the income earned by the Company for other services furnished or rendered by the Company to tenants of a property or for the management or operation of the property does not exceed a de minimis threshold generally equal to 1% of the income from such property. The Company self-manages some of its properties, but does not believe it provides services to tenants that are outside the exception.
          If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as “rents from real property.” Generally, this 15% test is applied separately to each lease. The portion of rental income treated as attributable to personal property is

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determined according to the ratio of the fair market value of the personal property to the total fair market value of the property that is rented. The determination of what fixtures and other property constitute personal property for federal tax purposes is difficult and imprecise. The Company does not have 15% by value of any of its properties classified as personal property. If, however, rent payments do not qualify, for reasons discussed above, as rents from real property for purposes of Section 856 of the Code, it will be more difficult for the Company to meet the 95% and 75% gross income tests and continue to qualify as a REIT.
          The Company is and expects to continue performing third-party management and development services. If the gross income to the Company from this or any other activity producing disqualified income for purposes of the 95% or 75% gross income tests approaches a level that could potentially cause the Company to fail to satisfy these tests, the Company intends to take such corrective action as may be necessary to avoid failing to satisfy the 95% or 75% gross income tests.
          The Company may enter into hedging transactions with respect to one or more of its assets or liabilities. The Company’s hedging activities may include entering into interest rate swaps, caps and floors, options to purchase such items, and futures and forward contracts. Income and gain from “hedging transactions” will be excluded from gross income for purposes of the 95% and 75% gross income tests. A “hedging transaction” includes any transaction entered into in the normal course of the Company’s trade or business primarily to manage the risk of interest rate, price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets. The Company will be required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated or entered into. The Company intends to structure any hedging or similar transactions so as not to jeopardize its status as a REIT.
          If the Company were to fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions would generally be available if (i) the Company’s failure to meet such test or tests was due to reasonable cause and not to willful neglect and (ii) following its identification of its failure to meet these tests, the Company files a description of each item of income that fails to meet these tests in a schedule in accordance with Treasury Regulations. It is not possible, however, to know whether the Company would be entitled to the benefit of these relief provisions since the application of the relief provisions is dependent on future facts and circumstances. If these provisions were to apply, the Company would be subjected to tax equal to a percentage tax calculated by the ratio of REIT taxable income to gross income with certain adjustments multiplied by the gross income attributable to the greater of the amount by which the Company failed either of the 75% or the 95% gross income tests.
     Asset Tests
          At the close of each quarter of its taxable year, the Company must also satisfy four tests relating to the nature of its assets.
    At least 75% of the value of the Company’s total assets must consist of real estate assets (including interests in real property and interests in mortgages on real property as well as its allocable share of real estate assets held by joint ventures or partnerships in which the Company participates), cash, cash items and government securities.
 
    Not more than 25% of the Company’s total assets may be represented by securities other than those includable in the 75% asset class.
 
    Not more than 25% of the Company’s total assets may be represented by securities of one or more TRS.
 
    Of the investments included in the 25% asset class, except for TRS, (i) the value of any one issuer’s securities owned by the Company may not exceed 5% of the value of the Company’s total assets, (ii) the Company may not own more than 10% of any one issuer’s outstanding voting securities and (iii) the Company may not hold securities having a value of more than 10% of the total value of the outstanding securities of any one issuer. Securities issued by affiliated qualified REIT subsidiaries (“QRS”), which are corporations wholly owned by the Company, either directly or indirectly, that are not TRS, are not subject to the 25% of total assets limit, the 5% of total assets limit or the 10% of a single issuer’s voting securities limit or the 10% of a single issuer’s value limit. Additionally, “straight debt” and certain other exceptions are not “securities” for purposes of the 10% of a single issuer’s value test. The existence of QRS are ignored, and the assets, income, gain, loss and other attributes of the QRS are treated as being owned or generated by the Company, for federal income tax purposes. The Company currently has 61 subsidiaries and other affiliates that it employs in the conduct of its business.
          If the Company meets the asset tests described above at the close of any quarter, it will not lose its status as a REIT because of a change in value of its assets unless the discrepancy exists immediately after the acquisition of any security or other property that is wholly or partly the result of an acquisition during such quarter. Where a failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of such quarter. The Company maintains adequate records of the value of its assets to maintain compliance with the asset tests and to

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take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter. Nevertheless, if the Company were unable to cure within the 30-day cure period, the Company may cure a violation of the 5% asset test or the 10% asset test so long as the value of the asset causing such violation does not exceed the lesser of 1% of the Company’s assets at the end of the relevant quarter or $10 million and the Company disposes of the asset causing the failure or otherwise complies with the asset tests within six months after the last day of the quarter in which the failure to satisfy the asset test is discovered. For violations due to reasonable cause and not due to willful neglect that are larger than this amount, the Company is permitted to avoid disqualification as a REIT after the 30-day cure period by (i) disposing of an amount of assets sufficient to meet the asset tests, (ii) paying a tax equal to the greater of $50,000 or the highest corporate tax rate times the taxable income generated by the non-qualifying asset and (iii) disclosing certain information to the IRS.
     Distribution Requirement
          In order to qualify as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount equal to or greater than the excess of (a) the sum of (i) 90% of the Company’s “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and the Company’s net capital gain) and (ii) 90% of the net income (after tax on such income), if any, from foreclosure property, over (b) the sum of certain non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). These requirements may be waived by the IRS if the Company establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax described below. To the extent that the Company does not distribute all of its net long-term capital gain and all of its “real estate investment trust taxable income,” it will be subject to tax thereon. In addition, the Company will be subject to a 4% excise tax to the extent it fails within a calendar year to make “required distributions” to its stockholders of 85% of its ordinary income and 95% of its capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for such preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of the taxable income of the Company for the taxable year (without regard to the deduction for dividends paid) and all amounts from earlier years that are not treated as having been distributed under the provision. Dividends declared in the last quarter of the year and paid during the following January will be treated as having been paid and received on December 31 of such earlier year. The Company’s distributions for 2009 were adequate to satisfy its distribution requirement.
          It is possible that the Company, from time to time, may have insufficient cash or other liquid assets to meet the 90% distribution requirement due to timing differences between the actual receipt of income and the actual payment of deductible expenses or dividends on the one hand and the inclusion of such income and deduction of such expenses or dividends in arriving at “real estate investment trust taxable income” on the other hand. The problem of not having adequate cash to make required distributions could also occur as a result of the repayment in cash of principal amounts due on the Company’s outstanding debt, particularly in the case of “balloon” repayments or as a result of capital losses on short-term investments of working capital. Therefore, the Company might find it necessary to arrange for short-term, or possibly long-term, borrowing or new equity financing. If the Company were unable to arrange such borrowing or financing as might be necessary to provide funds for required distributions, its REIT status could be jeopardized.
          Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in the Company’s deduction for dividends paid for the earlier year. The Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company might in certain circumstances remain liable for the 4% excise tax described above.
     Federal Income Tax Treatment of Leases
          The availability to the Company of, among other things, depreciation deductions with respect to the facilities owned and leased by the Company depends upon the treatment of the Company as the owner of the facilities and the classification of the leases of the facilities as true leases, rather than as sales or financing arrangements, for federal income tax purposes. The Company has not requested nor has it received an opinion that it will be treated as the owner of the portion of the facilities constituting real property and that the leases will be treated as true leases of such real property for federal income tax purposes.
     Other Issues
          With respect to property acquired from and leased back to the same or an affiliated party, the IRS could assert that the Company realized prepaid rental income in the year of purchase to the extent that the value of the leased property exceeds the purchase price paid by the Company for that property. In litigated cases involving sale-leasebacks which have considered this issue, courts have concluded that buyers have realized prepaid rent where both parties acknowledged that the purported purchase price for the property was substantially less than fair market value and the purported rents were substantially less than the fair market rentals. Because of the lack of clear precedent and the inherently factual nature of the inquiry, the Company cannot give complete assurance that the IRS could not successfully assert the existence of prepaid rental income in such circumstances. The value of property and the fair market rent for properties involved in sale-leasebacks are inherently factual matters and always subject to challenge.

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          Additionally, it should be noted that Section 467 of the Code (concerning leases with increasing rents) may apply to those leases of the Company that provide for rents that increase from one period to the next. Section 467 provides that in the case of a so-called “disqualified leaseback agreement,” rental income must be accrued at a constant rate. If such constant rent accrual is required, the Company would recognize rental income in excess of cash rents and, as a result, may fail to have adequate funds available to meet the 90% dividend distribution requirement. “Disqualified leaseback agreements” include leaseback transactions where a principal purpose of providing increasing rent under the agreement is the avoidance of federal income tax. Since the Section 467 regulations provide that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts, additional rent provisions of leases containing such clauses should not result in these leases being disqualified leaseback agreements. In addition, the Section 467 regulations provide that leases providing for fluctuations in rents by no more than a reasonable percentage, which is 15% for long-term real property leases, from the average rent payable over the term of the lease will be deemed to not be motivated by tax avoidance. The Company does not believe it has rent subject to the disqualified leaseback provisions of Section 467.
          Subject to a safe harbor exception for annual sales of up to seven properties (or properties with a basis of up to 10% of the REIT’s assets) that have been held for at least four years, gain from sales of property held for sale to customers in the ordinary course of business is subject to a 100% tax. The simultaneous exercise of options to acquire leased property that may be granted to certain tenants or other events could result in sales of properties by the Company that exceed this safe harbor. However, the Company believes that in such event, it will not have held such properties for sale to customers in the ordinary course of business.
     Depreciation of Properties
          For federal income tax purposes, the Company’s real property is being depreciated over 31.5, 39 or 40 years, using the straight-line method of depreciation and its personal property over various periods utilizing accelerated and straight-line methods of depreciation.
     Failure to Qualify as a REIT
          If the Company was to fail to qualify for federal income tax purposes as a REIT in any taxable year, and the relief provisions were found not to apply, the Company would be subject to tax on its taxable income at regular corporate rates (plus any applicable alternative minimum tax). Distributions to stockholders in any year in which the Company failed to qualify would not be deductible by the Company nor would they be required to be made. In such event, to the extent of current and/or accumulated earnings and profits, all distributions to stockholders would be taxable as qualified dividend income, including, presumably, subject to the 15% maximum rate on dividends created by the Jobs and Growth Tax Relief Reconciliation Act of 2003, and, subject to certain limitations in the Code, eligible for the 70% dividends received deduction for corporations that are REIT stockholders. However, this reduced rate for dividend income is set to expire for taxable years beginning after December 31, 2010. Unless entitled to relief under specific statutory provisions, the Company would also be disqualified from taxation as a REIT for the following four taxable years. It is not possible to state whether in all circumstances the Company would be entitled to statutory relief from such disqualification. Failure to qualify for even one year could result in the Company’s incurring substantial indebtedness (to the extent borrowings were feasible) or liquidating substantial investments in order to pay the resulting taxes.
     Taxation of Tax-Exempt Stockholders
          The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a tax-exempt employees’ pension trust do not constitute “unrelated business taxable income,” even though the REIT may have financed certain of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and are subject to revocation or modification by the IRS, based upon the revenue ruling and the analysis therein, distributions made by the Company to a U.S. stockholder that is a tax-exempt entity (such as an individual retirement account (“IRA”) or a 401(k) plan) should not constitute unrelated business taxable income unless such tax-exempt U.S. stockholder has financed the acquisition of its shares with “acquisition indebtedness” within the meaning of the Code, or the shares are otherwise used in an unrelated trade or business conducted by such U.S. stockholder.
          Special rules apply to certain tax-exempt pension funds (including 401(k) plans but excluding IRAs or government pension plans) that own more than 10% (measured by value) of a “pension-held REIT.” Such a pension fund may be required to treat a certain percentage of all dividends received from the REIT during the year as unrelated business taxable income. The percentage is equal to the ratio of the REIT’s gross income (less direct expenses related thereto) derived from the conduct of unrelated trades or businesses determined as if the REIT were a tax-exempt pension fund (including income from activities financed with “acquisition indebtedness”), to the REIT’s gross income (less direct expenses related thereto) from all sources. The special rules will not require a pension fund to recharacterize a portion of its dividends as unrelated business taxable income unless the percentage computed is at least 5%.
          A REIT will be treated as a “pension-held REIT” if the REIT is predominantly held by tax-exempt pension funds and if the REIT would otherwise fail to satisfy the five or fewer test discussed above. A REIT is predominantly held by tax-exempt pension funds if at least one tax-exempt pension fund holds more than 25% (measured by value) of the REIT’s stock or beneficial interests, or if one or

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more tax-exempt pension funds (each of which owns more than 10% (measured by value) of the REIT’s stock or beneficial interests) own in the aggregate more than 50% (measured by value) of the REIT’s stock or beneficial interests. The Company believes that it will not be treated as a pension-held REIT. However, because the shares of the Company will be publicly traded, no assurance can be given that the Company is not or will not become a pension-held REIT.
     Taxation of Non-U.S. Stockholders
          The rules governing United States federal income taxation of any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created in the United States or under the laws of the United States or of any state thereof, (iii) an estate whose income is includable in income for U.S. federal income tax purposes regardless of its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust (“Non-U.S. Stockholders”) are highly complex, and the following discussion is intended only as a summary of such rules. Prospective Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of United States federal, state, and local income tax laws on an investment in stock of the Company, including any reporting requirements.
          In general, Non-U.S. Stockholders are subject to regular United States income tax with respect to their investment in stock of the Company in the same manner as a U.S. stockholder if such investment is “effectively connected” with the Non-U.S. Stockholder’s conduct of a trade or business in the United States. A corporate Non-U.S. Stockholder that receives income with respect to its investment in stock of the Company that is (or is treated as) effectively connected with the conduct of a trade or business in the United States also may be subject to the 30% branch profits tax imposed by the Code, which is payable in addition to regular United States corporate income tax. The following discussion addresses only the United States taxation of Non-U.S. Stockholders whose investment in stock of the Company is not effectively connected with the conduct of a trade or business in the United States.
     Ordinary Dividends
          Distributions made by the Company that are not attributable to gain from the sale or exchange by the Company of United States real property interests (“USRPI”) and that are not designated by the Company as capital gain dividends will be treated as ordinary income dividends to the extent made out of current or accumulated earnings and profits of the Company. Generally, such ordinary income dividends will be subject to United States withholding tax at the rate of 30% on the gross amount of the dividend paid unless reduced or eliminated by an applicable United States income tax treaty. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such dividends paid to a Non-U.S. Stockholder unless a lower treaty rate applies and the Non-U.S. Stockholder has filed an IRS Form W-8BEN with the Company, certifying the Non-U.S. Stockholder’s entitlement to treaty benefits.
     Non-Dividend Distributions
          Distributions made by the Company in excess of its current and accumulated earnings and profits to a Non-U.S. Stockholder who holds 5% or less of the stock of the Company (after application of certain ownership rules) will not be subject to U.S. income or withholding tax. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of the Company’s current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to a dividend distribution. However, the Non-U.S. Stockholder may seek a refund from the IRS of any amount withheld if it is subsequently determined that such distribution was, in fact, in excess of the Company’s then current and accumulated earnings and profits.
     Capital Gain Dividends
          As long as the Company continues to qualify as a REIT, distributions made by the Company after December 31, 2005, that are attributable to gain from the sale or exchange by the Company of any USRPI will not be treated as effectively connected with the conduct of a trade or business in the United States. Instead, such distributions will be treated as REIT dividends that are not capital gains and will not be subject to the branch profits tax as long as the Non-U.S. Stockholder does not hold greater than 5% of the stock of the Company at any time during the one-year period ending on the date of the distribution. Non-U.S. Stockholders who hold more than 5% of the stock of the Company will be treated as if such gains were effectively connected with the conduct of a trade or business in the United States and generally subject to the same capital gains rates applicable to U.S. stockholders. In addition, corporate Non-U.S. Stockholders may also be subject to the 30% branch profits tax and to withholding at the rate of 35% of the gross distribution.
     Disposition of Stock of the Company
          Generally, gain recognized by a Non-U.S. Stockholder upon the sale or exchange of stock of the Company will not be subject to United States taxation unless such stock constitutes a USRPI within the meaning of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). The stock of the Company will not constitute a USRPI so long as the Company is a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT in which at all times during a specified testing period less than 50% in value of its stock or

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beneficial interests are held directly or indirectly by Non-U.S. Stockholders. The Company believes that it will be a “domestically controlled REIT,” and therefore that the sale of stock of the Company will generally not be subject to taxation under FIRPTA. However, because the stock of the Company is publicly traded, no assurance can be given that the Company is or will continue to be a “domestically controlled REIT.”
          Under recently enacted “wash sale” rules applicable to certain dispositions of interests in “domestically controlled REITs,” a Non-U.S. Stockholder could be subject to taxation under FIRPTA on the disposition of stock of the Company if certain conditions are met. If the Company is a “domestically controlled REIT,” a Non-U.S. Stockholder will be treated as having disposed of USRPI, if such Non-U.S. Stockholder disposes of an interest in the Company in an “applicable wash sale transaction.” An “applicable wash sale transaction” is any transaction in which a Non-U.S. Stockholder avoids receiving a distribution from a REIT by (i) disposing of an interest in a “domestically controlled REIT” during the 30-day period preceding a distribution, any portion of which distribution would have been treated as gain from the sale of a USRPI if it had been received by the Non-U.S. Stockholder and (ii) acquiring, or entering into a contract or option to acquire, a substantially identical interest in the REIT during the 61-day period beginning the first day of the 30-day period preceding the distribution. The wash sale rule does not apply to a Non-U.S. Stockholder who actually receives the distribution from the Company or, so long as the Company is publicly traded, to any Non-U.S. Stockholder holding greater than 5% of the outstanding stock of the Company at any time during the one-year period ending on the date of the distribution.
          If the Company did not constitute a “domestically controlled REIT,” gain arising from the sale or exchange by a Non-U.S. Stockholder of stock of the Company would be subject to United States taxation under FIRPTA as a sale of a USRPI unless (i) the stock of the Company is “regularly traded” (as defined in the applicable Treasury regulations) and (ii) the selling Non-U.S. Stockholder’s interest (after application of certain constructive ownership rules) in the Company is 5% or less at all times during the five years preceding the sale or exchange. If gain on the sale or exchange of the stock of the Company were subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to regular United States income tax with respect to such gain in the same manner as a U.S. stockholder (subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the 30% branch profits tax in the case of foreign corporations), and the purchaser of the stock of the Company (including the Company) would be required to withhold and remit to the IRS 10% of the purchase price. Additionally, in such case, distributions on the stock of the Company to the extent they represent a return of capital or capital gain from the sale of the stock of the Company, rather than dividends, would be subject to a 10% withholding tax.
          Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Stockholder in two cases:
    if the Non-U.S. Stockholder’s investment in the stock of the Company is effectively connected with a U.S. trade or business conducted by such Non-U.S. Stockholder, the Non-U.S. Stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain; or
    if the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.
     Information Reporting Requirements and Backup Withholding Tax
          The Company will report to its U.S. stockholders and to the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any, with respect thereto. Under the backup withholding rules, a U.S. stockholder may be subject to backup withholding, currently at a rate of 28% on dividends paid unless such U.S. stockholder:
    is a corporation or falls within certain other exempt categories and, when required, can demonstrate this fact; or
    provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules.
          A U.S. stockholder who does not provide the Company with his correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the U.S. stockholder’s federal income tax liability. In addition, the Company may be required to withhold a portion of any capital gain distributions made to U.S. stockholders who fail to certify their non-foreign status to the Company.
          Additional issues may arise pertaining to information reporting and backup withholding with respect to Non-U.S. Stockholders, and Non-U.S. Stockholders should consult their tax advisors with respect to any such information reporting and backup withholding requirements.

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     State and Local Taxes
          The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective holders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the stock of the Company.
     Real Estate Investment Trust Tax Proposals
          Investors must recognize that the present federal income tax treatment of the Company may be modified by future legislative, judicial or administrative actions or decisions at any time, which may be retroactive in effect, and, as a result, any such action or decision may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the Treasury Department, resulting in statutory changes as well as promulgation of new, or revisions to existing, regulations and revised interpretations of established concepts. No prediction can be made as to the likelihood of the passage of any new tax legislation or other provisions either directly or indirectly affecting the Company or its stockholders.
     Other Legislation
          The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual tax rate for long-term capital gains generally from 20% to 15% (for sales occurring after May 6, 2003 through December 31, 2008) and for dividends generally from 38.6% to 15% (for tax years from 2003 through 2008). These provisions have been extended through the 2010 tax year. Without future congressional action, the maximum tax rate on long-term capital gains will return to 20% in 2011, and the maximum rate on dividends will move to 39.6% in 2011. Because a REIT is not generally subject to federal income tax on the portion of its REIT taxable income or capital gains distributed to its stockholders, distributions of dividends by a REIT are generally not eligible for the new 15% tax rate on dividends. As a result, the Company’s ordinary REIT dividends will continue to be taxed at the higher tax rates (currently, a maximum of 35%) applicable to ordinary income.
ERISA Considerations
          The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a holder of stock of the Company. This discussion does not propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the extent not preempted, state law that may be relevant to particular employee benefit plan stockholders (including plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, and governmental plans and church plans that are exempt from ERISA and Section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances.
          A fiduciary making the decision to invest in stock of the Company on behalf of a prospective purchaser which is an ERISA plan, a tax-qualified retirement plan, an IRA or other employee benefit plan is advised to consult its own legal advisor regarding the specific considerations arising under ERISA, Section 4975 of the Code, and (to the extent not preempted) state law with respect to the purchase, ownership or sale of stock by such plan or IRA.
     Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs
          Each fiduciary of an employee benefit plan subject to Title I of ERISA (an “ERISA Plan”) should carefully consider whether an investment in stock of the Company is consistent with its fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i) an ERISA Plan’s investments to be prudent and in the best interests of the ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan’s investments to be diversified in order to reduce the risk of large losses, unless it is clearly prudent not to do so, (iii) an ERISA Plan’s investments to be authorized under ERISA and the terms of the governing documents of the ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into transactions prohibited under Section 406 of ERISA. In determining whether an investment in stock of the Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan’s portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow and funding requirements of the ERISA Plan and the liquidity and current return of the ERISA Plan’s portfolio. A fiduciary should also take into account the nature of the Company’s business, the length of the Company’s operating history and other matters described below under “Risk Factors.”
          The fiduciary of an IRA or of an employee benefit plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a “Non-ERISA Plan”) should consider that such an IRA or Non-ERISA Plan

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may only make investments that are authorized by the appropriate governing documents, not prohibited under Section 4975 of the Code and permitted under applicable state law.
     Status of the Company under ERISA
          A prohibited transaction may occur if the assets of the Company are deemed to be assets of the investing Plans and “parties in interest” or “disqualified persons” as defined in ERISA and Section 4975 of the Code, respectively, deal with such assets. In certain circumstances where a Plan holds an interest in an entity, the assets of the entity are deemed to be Plan assets (the “look-through rule”). Under such circumstances, any person that exercises authority or control with respect to the management or disposition of such assets is a Plan fiduciary. Plan assets are not defined in ERISA or the Code, but the United States Department of Labor issued regulations in 1987 (the “Regulations”) that outline the circumstances under which a Plan’s interest in an entity will be subject to the look-through rule.
          The Regulations apply only to the purchase by a Plan of an “equity interest” in an entity, such as common stock or common shares of beneficial interest of a REIT. However, the Regulations provide an exception to the look-through rule for equity interests that are “publicly-offered securities.”
          Under the Regulations, a “publicly-offered security” is a security that is (i) freely transferable, (ii) part of a class of securities that is widely held and (iii) either (a) part of a class of securities that is registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or (b) sold to a Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) and the class of securities of which such security is a part of is registered under the Securities Act within 120 days (or such longer period allowed by the Securities and Exchange Commission (“SEC”)) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. Whether a security is considered “freely transferable” depends on the facts and circumstances of each case. Generally, if the security is part of an offering in which the minimum investment is $10,000 or less, any restriction on or prohibition against any transfer or assignment of such security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not of itself prevent the security from being considered freely transferable. A class of securities is considered “widely held” if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another.
          Management believes that the stock of the Company will meet the criteria of the publicly offered securities exception to the look-through rule in that the stock of the Company is freely transferable, the minimum investment is less than $10,000 and the only restrictions upon its transfer are those required under federal income tax laws to maintain the Company’s status as a REIT. Second, stock of the Company is held by 100 or more investors and at least 100 or more of these investors are independent of the Company and of one another. Third, the stock of the Company has been and will be part of offerings of securities to the public pursuant to an effective registration statement under the Securities Exchange Act and will be registered under the Securities Act within 120 days after the end of the fiscal year of the Company during which an offering of such securities to the public occurs. Accordingly, management believes that if a Plan purchases stock of the Company, the Company’s assets should not be deemed to be Plan assets and, therefore, that any person who exercises authority or control with respect to the Company’s assets should not be treated as a Plan fiduciary for purposes of the prohibited transaction rules of ERISA and Section 4975 to the Code.
Available Information
          The Company makes available to the public free of charge through its internet website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the SEC. The Company’s Internet website address is www.healthcarerealty.com.
          The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov.
Corporate Governance Principles
          The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.

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Committee Charters
          The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee and Executive Committee. The Board of Directors has adopted written charters for each committee except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.
Executive Officers
          Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference.
ITEM 1A.   RISK FACTORS
          The following are some of the risks and uncertainties that could negatively affect the Company’s financial condition, results of operations, business and prospects. These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Environmental Matters,” and “Federal Income Tax Information” and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements” should be carefully considered before making an investment decision regarding the Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of or that the Company currently considers not likely to have a significant impact. If any of the events underlying the following risks actually occurred, the Company’s business, financial condition and operating results could suffer, and the trading price of its common stock could decline.
The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity.
          A REIT is required by IRS regulations to make dividend distributions, thereby retaining less of its capital for growth. As a result, a REIT typically grows through steady investments of new capital in real estate assets. Presently, the Company has sufficient capital availability. However, there may be times when the Company will have limited access to capital from the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. The capital and credit markets have recently experienced volatility and limited the availability of funds. The Company’s ability to access the capital and credit markets may be limited by these or other factors, which could have an impact on its ability to refinance maturing debt, including its unsecured senior notes due 2011 (the “Senior Notes due 2011”), fund dividend payments and operations, acquire healthcare properties and complete construction projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying any of its debts or honoring its debt covenants, it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would otherwise receive.
The Company is exposed to increases in interest rates, which could reduce its profitability and adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity.
          The Company receives a significant portion of its revenues by leasing its assets under long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A significant portion of the Company’s debt will be from time to time subject to floating rates, based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Such increased costs could have the effect of reducing the Company’s profitability and could make the financing of any acquisition or investment activity more costly. Rising interest rates could limit the Company’s ability to refinance existing debt when it matures, such as the Senior Notes due 2011, or cause the Company to pay higher rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could limit the Company’s ability to sell assets at times when it might be advantageous to do so in response to changes in economic conditions.
Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s financial condition and results of operations.
          The terms of the Unsecured Credit Facility, the indentures governing the Company’s outstanding senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. The Company’s continued ability to incur debt and operate its business is subject to compliance with these covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied.

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Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s revenues depend on the ability of its tenants and sponsors under its leases and financial support agreements to generate sufficient income from their operations to make loan, rent and support payments to the Company.
          The Company’s revenues are subject to the financial strength of its tenants and sponsors. The Company has no operational control over the business of these tenants and sponsors who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. The slowdown in the economy, decline in the availability of financing from the capital markets, and widened credit spreads have affected, or may in the future adversely affect, the businesses of the Company’s tenants and sponsors to varying degrees. Such conditions may further impact such tenants’ and sponsors’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings, disruptions, or bankruptcies of such tenants and sponsors. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations.
If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility.
          If the Company loses a tenant or sponsor and is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer. In addition, many of the Company’s properties are special purpose healthcare facilities that may not be easily adaptable to other uses. Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s financial position would be negatively impacted.
          Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations, financial condition and ability to meet its obligations, including the payment of dividends to stockholders.
Many of the Company’s medical office properties are held under long-term ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties.
          The Company’s ground lease agreements with hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit physician tenants from providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or assignment of the Company’s leasehold interest. These ground lease provisions may limit the Company’s ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of the ground lease, which may have a material adverse effect on the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock.
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than expected or if the Company is required to undertake significant capital expenditures to attract new tenants, then the Company’s business and results of operations would be adversely affected.
          A significant portion of the Company’s leases will mature over the course of any year. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company may be required to make significant capital expenditures to renovate or reconfigure space to attract new tenants. If it is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than expected, or if the Company is required to undertake significant capital expenditures in connection with re-letting units, the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock may be materially and adversely affected.

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The Company may incur impairment charges on its real estate properties or other assets.
     The Company performs an annual impairment review on its real estate properties in the third quarter of every fiscal year. In addition, the Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. At some future date, the Company may determine that an impairment has occurred in the value of one or more of its real estate properties or other assets. In such an event, the Company may be required to recognize an impairment loss which could have a material adverse affect on the Company’s financial condition and results of operations.
The Company may be required to sell certain properties to tenants or sponsors whose leases or financial support agreements provide for options to purchase. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold. The Company may recognize asset impairment charges as a result of the exercise of a purchase option.
          At December 31, 2009, the Company had approximately $111.1 million in real estate properties that are subject to exercisable purchase options held by lessees or financial support agreement sponsors that had not been exercised. Other properties have purchase options that become exercisable in 2010 and beyond. The exercise of these purchase options exposes the Company to reinvestment risk. In certain cases, the option purchase price may not be as great as the Company’s capital investment in the property, causing an asset impairment charge. If the Company is unable to reinvest the proceeds of sale at rates of return equal to the return received on the properties that are sold, it may experience a decline in lease revenues and a corresponding material adverse effect on the Company’s business and financial condition, the Company’s ability to make distributions to its stockholders, and the market price of its common stock.
Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses.
          Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result may have a material adverse effect on the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to its stockholders, and the market price of the Company’s common stock.
The Company is subject to risks associated with the development of properties.
          The Company is subject to certain risks associated with the development of properties including the following:
    The construction of properties generally requires various government and other approvals which may not be received when expected, or at all, which could delay or preclude commencement of construction;
 
    Unsuccessful development opportunities could result in the recognition of direct expenses which could impact the Company’s results of operations;
 
    Construction costs could exceed original estimates, which would impact the building’s profitability to the Company;
 
    Operating expenses could be higher than forecasted;
 
    Time required to initiate and complete the construction of a property and lease up a completed development property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;
 
    Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and
 
    Favorable capital sources to fund the Company’s development activities may not be available when needed.
     The Company may be unsuccessful in operating new and existing real estate properties.
          The Company’s acquired, developed and existing real estate properties may not perform in accordance with management’s expectations because of many factors including the following:
    The Company’s purchase price for acquired facilities may be based upon a series of market judgments which may be incorrect;

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    The costs of any improvements required to bring an acquired facility up to standards necessary to establish the market position intended for that facility might exceed budgeted costs;
 
    The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and
 
    Leasing of real estate properties may not occur within expected timeframes or at expected rental rates.
          Further, the Company can give no assurance that acquisition and development opportunities that will meet management’s investment criteria will be available when needed or anticipated.
     The Company’s long-term master leases and financial support agreements may expire and not be extended.
          Long-term master leases and financial support agreements that are expiring may not be extended. To the extent these properties have vacancies or subleases at lower rates upon expiration, income may decline if the Company is not able to re-let the properties at rental rates that are as high as the former rates.
     The market price of the Company’s stock may be affected adversely by changes in the Company’s dividend policy.
          The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow, to make accretive new investments and to access capital. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s stock.
Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments.
          The healthcare service industry is currently experiencing:
    Regulatory and government reimbursement uncertainty resulting from comprehensive healthcare reform efforts;
 
    Changing trends in the method of delivery of healthcare services;
 
    Increased expense for uninsured patients and uncompensated care;
 
    Increased competition among healthcare providers;
 
    Continuing pressure by private and governmental payors to contain costs and reimbursements while increasing patients’ access to healthcare services;
 
    Lower pricing, admissions growth and operating profit margins in an uncertain economy;
 
    Investment losses;
 
    Constrained availability of capital;
 
    Credit downgrades;
 
    Increased liability insurance expense; and
 
    Increased scrutiny and formal investigations by federal and state authorities.
          These changes, among others, can adversely affect the economic performance of some or all of the tenants and sponsors who provide financial support to the Company’s investments and, in turn, negatively affect the lease revenues and the value of the Company’s property investments.

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     The Company is exposed to risks associated with entering new geographic markets.
          The Company’s acquisition and development activities may involve entering geographic markets where the Company has not previously had a presence. The construction and/or acquisition of properties in new geographic areas involves risks, including the risk that the property will not perform as anticipated and the risk that any actual costs for site development and improvements identified in the pre-construction or pre-acquisition due diligence process will exceed estimates. There is, and it is expected that there will continue to be, significant competition for investment opportunities that meet management’s investment criteria, as well as risks associated with obtaining financing for acquisition activities, if necessary.
     The Company may experience uninsured or underinsured losses related to casualty or liability.
          The Company generally requires its tenants to maintain comprehensive liability and property insurance that covers the Company as well as the tenants. The Company also carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under long-term master leases are required to carry property insurance covering the Company’s interest in the buildings. Some types of losses, however, either may be uninsurable or too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the property. In such an event, the Company might remain obligated for any mortgage debt or other financial obligation related to the property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future.
     The Company owns facilities that are occupied by tenants that may experience regulatory and legal problems.
          The Company’s tenants and sponsors are subject to a complex system of federal and state regulations relating to the delivery of healthcare services. If a tenant or sponsor experiences regulatory or legal problems, the Company could be at risk for amounts owed to it by the tenant under leases or financial support agreements.
     Failure to maintain its status as a REIT, even in one taxable year, could cause the Company to reduce its dividends dramatically.
          The Company intends to qualify at all times as a REIT under the Code. If in any taxable year the Company does not qualify as a REIT, it would be taxed as a corporation. As a result, the Company could not deduct its distributions to the stockholders in computing its taxable income. Depending upon the circumstances, a REIT that loses its qualification in one year may not be eligible to re-qualify during the four succeeding years. Further, certain transactions or other events could lead to the Company being taxed at rates ranging from four to 100 percent on certain income or gains. For more information about the Company’s status as a REIT, see “Federal Income Tax Information” in Item 1 of this Annual Report on Form 10-K.
          None.
ITEM 2.   PROPERTIES
          In addition to the properties described under Item 1, “Business,” in Note 9 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space for its headquarters. The Company’s headquarters, located in offices at 3310 West End Avenue in Nashville, Tennessee, are leased from an unrelated third party. The Company’s current lease agreement, which commenced on November 1, 2003, covers approximately 30,934 square feet of rented space and expires on October 31, 2010, with two five-year renewal options. Annual base rent was approximately $656,883 in 2009 with increases of approximately 3.25% annually.
ITEM 3.   LEGAL PROCEEDINGS
          The Company is, from time to time, involved in litigation arising in the ordinary course of business and which is expected to be covered by insurance. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial condition or results of operations.
          No matter was submitted to a vote of stockholders during the fourth quarter of 2009.

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PART II
          Shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “HR.” As of December 31, 2009, there were approximately 1,322 stockholders of record. The following table sets forth the high and low sales prices per share of common stock and the dividend declared and paid per share of common stock related to the periods indicated.
                         
                    Dividends Declared  
    High     Low     and Paid per Share  
2009
                       
First Quarter
  $ 23.59     $ 12.06     $ 0.385  
Second Quarter
    18.35       13.93       0.385  
Third Quarter
    23.26       15.78       0.385  
Fourth Quarter (Payable on March 4, 2010)
    22.77       19.75       0.300  
 
                       
2008
                       
First Quarter
  $ 27.07     $ 22.02     $ 0.385  
Second Quarter
    29.89       23.55       0.385  
Third Quarter
    32.00       23.45       0.385  
Fourth Quarter
    29.75       14.29       0.385  
          Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds from operations, cash flows, and to make accretive new investments.
Equity Compensation Plan Information
          The following table provides information as of December 31, 2009 about the Company’s common stock that may be issued upon grants of restricted stock and the exercise of options, warrants and rights under all of the Company’s existing compensation plans, including the 2007 Employees Stock Incentive Plan and the 2000 Employee Stock Purchase Plan.
                         
                    Number of  
                    Securities  
                    Remaining Available  
    Number of             for Future Issuance  
    Securities to be             Under Equity  
    Issued upon     Weighted Average     Compensation Plans  
    Exercise of     Exercise Price of     (Excluding  
    Outstanding     Outstanding     Securities  
    Options, Warrants     Options, Warrants     Reflected in the  
Plan Category   and Rights (1)     and Rights (1)     First Column)  
Equity compensation plans approved by security holders
    335,608             1,882,074  
 
                       
Equity compensation plans not approved by security holders
                 
 
                 
Total
    335,608             1,882,074  
 
                 
 
(1)   The Company is unable to ascertain with specificity the number of securities to be used upon exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of common stock may be purchased at a per share price equal to 85% of the fair market value of the common stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.

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          The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements of the Company:
                                         
    Years Ended December 31,  
(Dollars in thousands except per share data)   2009     2008 (1) (2)     2007 (1) (2) (3)     2006 (1) (2)     2005 (1) (2)  
Statement of Income Data:
                                       
Total revenues
  $ 253,304     $ 213,931     $ 197,081     $ 197,899     $ 191,901  
Total expenses
  $ 185,877     $ 160,148     $ 139,190     $ 137,214     $ 133,144  
Other income (expense)
  $ (39,206 )   $ (35,585 )   $ (46,848 )   $ (49,747 )   $ (44,907 )
 
                             
Income from continuing operations
  $ 28,221     $ 18,198     $ 11,043     $ 10,938     $ 13,850  
Discontinued operations
  $ 22,927     $ 23,562     $ 49,037     $ 28,858     $ 38,900  
 
                             
Net income
  $ 51,148     $ 41,760     $ 60,080     $ 39,796     $ 52,750  
Less: Net income attributable to noncontrolling interests
  $ (57 )   $ (68 )   $ (18 )   $ (77 )   $ (82 )
 
                             
Net income attributable to common stockholders
  $ 51,091     $ 41,692     $ 60,062     $ 39,719     $ 52,668  
 
                             
 
                                       
Per Share Data:
                                       
Basic earnings per common share:
                                       
Income from continuing operations
  $ 0.48     $ 0.35     $ 0.23     $ 0.24     $ 0.30  
Discontinued operations
  $ 0.40     $ 0.46     $ 1.03     $ 0.61     $ 0.83  
 
                             
Net income attributable to common stockholders
  $ 0.88     $ 0.81     $ 1.26     $ 0.85     $ 1.13  
 
                             
Diluted earnings per common share:
                                       
Income from continuing operations
  $ 0.48     $ 0.35     $ 0.23     $ 0.23     $ 0.29  
Discontinued operations
  $ 0.39     $ 0.44     $ 1.01     $ 0.61     $ 0.82  
 
                             
Net income attributable to common stockholders
  $ 0.87     $ 0.79     $ 1.24     $ 0.84     $ 1.11  
 
                             
Weighted average common shares outstanding — Basic
    58,199,592       51,547,279       47,536,133       46,527,857       46,465,215  
 
                             
Weighted average common shares outstanding — Diluted
    59,047,314       52,564,944       48,291,330       47,498,937       47,406,798  
 
                             
 
                                       
Balance Sheet Data (as of the end of the period):
                                       
Real estate properties, net
  $ 1,791,693     $ 1,634,364     $ 1,351,173     $ 1,554,620     $ 1,513,247  
Mortgage notes receivable
  $ 31,008     $ 59,001     $ 30,117     $ 73,856     $ 105,795  
Assets held for sale and discontinued operations, net
  $ 17,745     $ 90,233     $ 15,639     $     $ 21,415  
Total assets
  $ 1,935,764     $ 1,864,780     $ 1,495,492     $ 1,736,603     $ 1,747,652  
Notes and bonds payable
  $ 1,046,422     $ 940,186     $ 785,289     $ 849,982     $ 778,446  
Total stockholders’ equity
  $ 786,766     $ 794,820     $ 631,995     $ 825,672     $ 912,468  
Noncontrolling interests
  $ 3,382     $ 1,427     $     $     $  
Total equity
  $ 790,148     $ 796,247     $ 631,995     $ 825,672     $ 912,468  
 
                                       
Other Data:
                                       
Funds from operations — Basic and Diluted (4)
  $ 97,882     $ 85,437     $ 73,156     $ 101,106     $ 107,943  
Funds from operations per common share — Basic (4)
  $ 1.68     $ 1.66     $ 1.54     $ 2.17     $ 2.32  
Funds from operations per common share — Diluted (4)
  $ 1.66     $ 1.63     $ 1.51     $ 2.13     $ 2.28  
Quarterly dividends declared and paid per common share
  $ 1.54     $ 1.54     $ 2.09     $ 2.64     $ 2.63  
Special dividend declared and paid per common share
  $     $     $ 4.75     $     $  
 
(1)   The years ended December 31, 2008, 2007, 2006 and 2005 are restated to conform to the discontinued operations presentation for 2009. See Note 5 to the Consolidated Financial Statements for more information on the Company’s discontinued operations at December 31, 2009.
 
(2)   The years ended December 31, 2008, 2007, 2006 and 2005 are restated to retroactively apply the provisions of FAS ASC No. 810 (previously SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”) See Note 1 to the Consolidated Financial Statements.
 
(3)   The Company completed the sale of its senior living assets in 2007 and paid a $4.75 per share special dividend with a portion of the proceeds.
 
(4)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of funds from operations (“FFO”), including why the Company presents FFO and a reconciliation of net income attributable to common stockholders to FFO.

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Disclosure Regarding Forward-Looking Statements
     This report and other materials Healthcare Realty 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 that could significantly affect the Company’s current plans and expectations and future financial condition and results.
     Such risks and uncertainties include, among other things, the following:
    The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings;
 
    The financial health of the Company’s tenants and sponsors and their ability to make loan and rent payments to the Company;
 
    The ability and willingness of the Company’s lenders to make their funding commitments to the Company;
 
    The Company’s long-term master leases and financial support agreements may expire and not be extended;
 
    Restrictions under ground leases through which the Company holds many of its medical office properties could limit the Company’s ability to lease, sell or finance these properties;
 
    The ability of the Company to re-let properties on favorable terms as leases expire;
 
    The Company may incur impairment charges on its assets;
 
    The Company may be required to sell certain assets through purchase options held by tenants or sponsors and may not be able to reinvest the proceeds from such sales at equal rates of return;
 
    The construction of properties generally requires various government and other approvals which may not be received;
 
    Unsuccessful development opportunities could result in the recognition of direct expenses which could impact the Company’s results of operations;
 
    Construction costs of a development property may exceed original estimates, which could impact its profitability to the Company;
 
    Time required to lease up a completed development property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;
 
    Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and
 
    Changes in the Company’s dividend policy.
     Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are detailed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time.
     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.

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Overview
  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 mostly derived from rentals on its healthcare real estate properties. The Company incurs operating and administrative expenses, including compensation, office rent and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio and acquiring additional properties. The Company also incurs interest expense on its various debt instruments and depreciation and amortization expense on its real estate portfolio.
     The Company’s real estate portfolio, diversified by facility type, geography, tenant and payor mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice patterns.
  Executive Overview
     During 2009, the Company acquired approximately $106.4 million in real estate assets and funded a $9.9 million mortgage note receivable. On the development front, the Company began construction of a 206,000 square foot medical office building in Washington with a budget of approximately $92.2 million, completed the construction of three medical office buildings, located in Texas and Illinois, totaling 342,153 square feet with aggregate budgets of approximately $88.0 million, and continued construction of a 133,000 square foot medical office building in Hawaii with a budget of approximately $86.0 million. The Company believes that its construction projects will provide solid, long-term investment returns and high quality buildings. See Notes 4 and 14 to the Consolidated Financial Statements for more details of the Company’s acquisition and development activities during 2009.
     Management also focused on financing activities during 2009, successfully completing the refinancing of the unsecured credit facility, as well as issuing $300.0 million of unsecured senior notes due 2017 (the “Senior Notes due 2017”) and $80.0 million of mortgage debt. With the completion of these financing transactions, the Company was able to replenish its capacity on its unsecured credit facility, as well as provide additional capacity by increasing its unsecured credit facility from $400.0 million to $550.0 million.
     At December 31, 2009, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 46.5%, with 72.4% of its debt portfolio maturing after 2011. The Company had borrowings outstanding under its unsecured credit facility due 2012 (the “Unsecured Credit Facility”) totaling $50.0 million at December 31, 2009, with a remaining borrowing capacity of $500.0 million.
Trends and Matters Impacting Operating Results
     Management monitors factors and trends important to the Company and REIT industry in order to gauge the potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company.
     As of December 31, 2009, approximately 30.4% of the Company’s real estate investments consisted of properties leased to unaffiliated lessees pursuant to long-term net lease agreements or subject to financial support agreements; approximately 66.7% were multi-tenanted properties with shorter-term occupancy leases; and the remaining 2.9% of investments were related to land held for development, corporate property, mortgage notes receivable and one investment in an unconsolidated joint venture which is invested in real estate properties. The Company’s long-term net leases and financial support agreements are generally designed to ensure the continuity of revenues and coverage of costs and expenses relating to the properties by the tenants and the sponsoring healthcare operators. There is no assurance that the Company’s leases and financial support agreements will be extended past their expiration dates, which could impact the Company’s operating results as described in more detail below in “Expiring Leases.”
  Cost of Capital
     During 2009, the Company refinanced its unsecured credit facility due 2010 and subsequently repaid most of the outstanding balance on the facility with $300.0 million of the Senior Notes due 2017 and $80.0 million of mortgage debt issued during the fourth quarter of 2009. The cost of the Company’s short-term borrowings increased upon refinancing the unsecured credit facility on September 30, 2009. The rate of the facility increased from 0.90% over LIBOR with a 0.20% facility fee to 2.80% over LIBOR with a 0.40% facility fee. Also, the Senior Notes due 2017, issued on December 4, 2009, bear interest at a fixed rate of 6.50% per annum, and the mortgage debt

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due 2016, entered into on November 25, 2009, bears interest at a fixed rate of 7.25%. The additional interest expense that the Company will incur related to the new debt will have a negative impact on its future net income attributable to common stockholders, funds from operations, and cash flows.
  Acquisition Activity
     During 2009, the Company acquired approximately $106.4 million in real estate assets and funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately $43.9 million, were acquired by a joint venture in which the Company has an 80% controlling interest. These acquisitions were funded with borrowings on the Company’s unsecured credit facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and proceeds from various capital market financings. See Note 4 to the Consolidated Financial Statements for more information on these acquisitions.
  Development Activity
     During 2009, three medical office buildings that were previously under construction with aggregate budgets of approximately $88.0 million commenced operations, and construction began on one medical office building with a budget of approximately $92.2 million, resulting in two medical office buildings remaining in construction in progress at December 31, 2009 with budgets totaling approximately $178.2 million. The Company expects completion of the core and shell of one project with a budget of approximately $86.0 million during the second quarter of 2010 and expects completion of the core and shell of the second project with a budget of approximately $92.2 million during the third quarter of 2011. The three medical office buildings that commenced operations during 2009 are currently in lease-up, which generally takes two to three years before reaching stabilization.
     In addition to the projects currently under construction, the Company is financing the development of a six-facility outpatient campus with a budget totaling approximately $72 million. The Company has funded $56.4 million towards the construction of four of the buildings. The Company’s consolidated joint venture acquired three of the buildings and the fourth building was sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to the Consolidated Financial Statements. Construction of the remaining two buildings has not yet begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The Company’s consolidated joint venture will have an option to purchase the two remaining buildings at a market price upon completion and full occupancy.
     The Company’s ability to complete, lease-up and operate these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, lease-up periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, lease-up periods and rental rates will likely result in less favorable results of operations and cash flows. The Company’s disclosures regarding projections or estimates of completion dates and leasing may not reflect actual results. See Note 14 to the Consolidated Financial Statements for more information on the Company’s development activities.
  Dispositions
     During 2009, the Company disposed of seven real estate properties for approximately $85.7 million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial Statements for more information on these dispositions.
  2010 Disposition
     In January 2010, pursuant to a purchase option with an operator, the Company disposed of five properties in Virginia. The Company’s aggregate net investment in the buildings was approximately $16.0 million at December 31, 2009. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on sale of approximately $2.7 million, including the write-off of approximately $0.5 million of straight-line rent receivables.
  Purchase Options
     As discussed in “Liquidity and Capital Resources,” certain of the Company’s leases include purchase option provisions, which if exercised, could require the Company to sell a property to a lessee or operator, which could have a negative impact on the Company’s future results of operations and cash flows.

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  Expiring Leases
     Master leases on seven of the Company’s properties will expire during 2010. The Company expects to extend the master lease on one of the properties. For the remaining six properties, the Company expects that it will not renew the master leases but will assume any tenant leases in the buildings and will manage the operations of those buildings.
     The Company also has 331 leases in its multi-tenanted buildings that will expire during 2010, with each of the tenants occupying an average of approximately 3,088 square feet. Approximately 78% of these leases, with each tenant occupying on average approximately 2,535 square feet, are related to leases located in on-campus buildings, which traditionally have a high probability of renewal. The 2010 expirations are widely distributed throughout the portfolio and are not concentrated with one tenant, health system or location.
     With the expirations discussed above, the Company expects there could be a short-term negative impact to its results of operations, but anticipates that over time it will be able to re-lease the properties or increase tenant rents to offset any short-term decline in revenue.
  Discontinued Operations
     As discussed in more detail in Note 1 to the Consolidated Financial Statements, a company must present the results of operations of real estate assets disposed of or held for sale as discontinued operations. Therefore, the results of operations from such assets are classified as discontinued operations for the current period, and all prior periods presented are restated to conform to the current period presentation. Readers of the Company’s Consolidated Financial Statements should be aware that each future disposal will result in a change to the presentation of the Company’s operations in the historical Consolidated Statements of Income as previously filed. Such reclassifications to the Consolidated Statements of Income will have no impact on previously reported net income attributable to common stockholders.
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 attributable to common stockholders in calculating FFO, which have the effect of decreasing FFO in the period recorded.
     The comparability of FFO for the three years ended December 31, 2009 was affected by the various acquisitions and dispositions of the Company’s real estate portfolio and the results of operations of the portfolio from period to period, as well as from the commencement of operations of properties that were previously under construction. The comparability of FFO was also impacted by certain unusual items. FFO for 2009 was favorably impacted by a re-measurement gain totaling $2.7 million, or $0.05 per diluted common share, recognized in connection with the acquisition of the remaining interests in a joint venture. FFO for 2008 was favorably impacted by the recognition of a net gain from certain repurchases of its Senior Notes due 2011 and its unsecured senior notes due 2014 (the “Senior Notes due 2014”) totaling approximately $4.1 million, or $0.08 per diluted common share. FFO for 2008 and 2007 was reduced by impairment charges recorded totaling $2.5 million and $7.1 million, or $0.05 and $0.15, respectively, which reduced FFO for each of those years.
     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 generally accepted accounting principles (“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 attributable to common

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stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.
     The table below reconciles net income attributable to common stockholders to FFO for the three years ended December 31, 2009.
                         
    Year Ended December 31,  
(Dollars in thousands, except per share data)   2009     2008     2007  
Net income attributable to common stockholders
  $ 51,091     $ 41,692     $ 60,062  
 
Gain on sales of real estate properties
    (20,136 )     (10,227 )     (40,405 )
Real estate depreciation and amortization
    66,927       53,972       53,499  
 
                 
Total adjustments
    46,791       43,745       13,094  
 
                 
 
                       
Funds from Operations — Basic and Diluted
  $ 97,882     $ 85,437     $ 73,156  
 
                 
 
                       
Funds from Operations per Common Share — Basic
  $ 1.68     $ 1.66     $ 1.54  
 
                 
Funds from Operations per Common Share — Diluted
  $ 1.66     $ 1.63     $ 1.51  
 
                 
 
                       
Weighted Average Common Shares Outstanding — Basic
    58,199,592       51,547,279       47,536,133  
 
                 
Weighted Average Common Shares Outstanding — Diluted
    59,047,314       52,564,944       48,291,330  
 
                 

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Results of Operations
  2009 Compared to 2008
     The Company’s income from continuing operations and net income attributable to common stockholders for 2009 compared to 2008 was significantly impacted by the Company’s acquisitions of real estate properties in the latter half of 2008 of approximately $337.1 million and in 2009 of approximately $106.4 million. The acquisition of the real estate properties were initially funded at a relatively low interest rate on the Company’s unsecured credit facility until the Company completed its capital financing transactions in the latter part of 2009, which were previously at higher interest rates.
                                 
                    Change  
(Dollars in thousands)   2009     2008     $     %  
REVENUES
                               
Master lease rent
  $ 57,648     $ 58,073     $ (425 )     (0.7 )%
Property operating
    180,024       136,745       43,279       31.6 %
Straight-line rent
    2,027       651       1,376       211.4 %
Mortgage interest
    2,646       2,207       439       19.9 %
Other operating
    10,959       16,255       (5,296 )     (32.6 )%
 
                       
 
    253,304       213,931       39,373       18.4 %
 
                               
EXPENSES
                               
General and administrative
    22,493       23,514       (1,021 )     (4.3 )%
Property operating
    95,141       82,223       12,918       15.7 %
Impairment
          1,600       (1,600 )      
Bad debts, net of recoveries
    537       1,833       (1,296 )     (70.7 )%
Depreciation
    62,447       48,129       14,318       29.7 %
Amortization
    5,259       2,849       2,410       84.6 %
 
                       
 
    185,877       160,148       25,729       16.1 %
 
                               
OTHER INCOME (EXPENSE)
                               
Gain on extinguishment of debt, net
          4,102       (4,102 )      
Re-measurement gain of equity interest upon acquisition
    2,701             2,701        
Interest expense
    (43,080 )     (42,126 )     (954 )     2.3 %
Interest and other income, net
    1,173       2,439       (1,266 )     (51.9 )%
 
                       
 
    (39,206 )     (35,585 )     (3,621 )     10.2 %
 
                               
INCOME FROM CONTINUING OPERATIONS
    28,221       18,198       10,023       55.1 %
 
                               
DISCONTINUED OPERATIONS
                               
Income from discontinued operations
    2,813       14,605       (11,792 )     (80.7 )%
Impairments
    (22 )     (886 )     864       (97.5 )%
Gain on sales of real estate properties
    20,136       9,843       10,293       104.6 %
 
                       
INCOME FROM DISCONTINUED OPERATIONS
    22,927       23,562       (635 )     (2.7 )%
 
                       
 
                               
NET INCOME
    51,148       41,760       9,388       22.5 %
 
                               
Less: Net income attributable to noncontrolling interests
    (57 )     (68 )     11       (16.2 )%
 
                       
 
                               
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 51,091     $ 41,692     $ 9,399       22.5 %
 
                       
 
                               
EARNINGS PER COMMON SHARE
                               
Net income attributable to common stockholders — Basic
  $ 0.88     $ 0.81     $ 0.07       8.6 %
 
                       
Net income attributable to common stockholders — Diluted
  $ 0.87     $ 0.79     $ 0.08       10.1 %
 
                       
     Total revenues from continuing operations for the year ended December 31, 2009 increased $39.4 million, or 18.4%, compared to 2008 mainly for the reasons discussed below:

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    Master lease rental income decreased $0.4 million, or 0.7%, from 2008 to 2009. Master lease income decreased approximately $4.5 million due to properties whose master leases have expired and the Company began recognizing the underlying tenant rents in property operating income. Partially offsetting this decrease, the Company recognized approximately $2.7 million of additional master lease rental income in 2009 related to its 2009 acquisitions, with the remaining $1.4 million increase related mainly to annual contractual rent increases.
 
    Property operating income increased $43.3 million, or 31.6%, from 2008 to 2009. The Company’s acquisitions of real estate properties during 2009 and 2008 resulted in additional property operating income in 2009 compared to 2008 of approximately $36.4 million. Also, properties previously under construction that commenced operations during 2008 and 2009 resulted in approximately $1.4 million in additional property operating income from 2008 to 2009, and for properties whose master leases had expired, the Company began recognizing the underlying tenant rents totaling approximately $3.2 million. The remaining increase of approximately $2.3 million was mainly related to annual contractual rent increases, rental increases related to lease renewals and new leases executed with various tenants.
 
    Straight-line rent increased $1.4 million from 2008 to 2009. Additional straight-line rent recognized on leases subject to straight-lining from properties acquired in 2008 and 2009 was approximately $2.6 million, partially offset by reductions in straight-line rent on leases with contractual rent increases of approximately $1.2 million.
 
    Mortgage interest income increased $0.4 million, or 19.9%, from 2008 to 2009 due mainly to additional fundings on construction mortgage notes.
 
    Other operating income decreased $5.3 million, or 32.6%, from 2008 to 2009. The decrease is due primarily to the expirations in 2008 and 2009 of five property operating agreements totaling approximately $3.7 million with one operator and the expiration of replacement rent received from an operator of approximately $1.2 million.
     Total expenses for the year ended December 31, 2009 compared to the year ended December 31, 2008 increased $25.7 million, or 16.1%, mainly for the reasons discussed below:
    General and administrative expenses decreased $1.0 million, or 4.3%, from 2008 to 2009. This decrease was mainly attributable to lower pension costs in 2009 of approximately $1.5 million, net of additional pension expense recorded in 2009 related to the partial settlement of an officer’s pension benefit, and a decrease in acquisition and development costs of approximately $0.7 million. These amounts were partially offset by an increase in other compensation related items of approximately $1.3 million. See Note 11 to the Consolidated Financial Statements for more details on the Company’s pension plans.
 
    Property operating expenses increased $12.9 million, or 15.7%, from 2008 to 2009. The Company’s real estate acquisitions during 2008 and 2009 resulted in additional property operating expense in 2009 of approximately $13.7 million. Also, the Company recognized additional expense in 2009 of approximately $2.1 million related to properties that were previously under construction and commenced operations during 2008 and 2009 and approximately $1.6 million related to properties whose master leases have expired and the Company began incurring the underlying operating expenses. Partially offsetting these increases were reductions in legal expenses of approximately $3.5 million in 2009 compared to 2008 and in real estate taxes of approximately $0.8 million.
 
    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 $1.3 million from 2008 to 2009 mainly due to a reserve recorded by the Company in 2008 related to additional rental income due from an operator on four properties.
 
    Depreciation expense increased $14.3 million, or 29.7%, from 2008 to 2009 mainly due to increases of approximately $9.8 million related to the Company’s real estate acquisitions, approximately $1.6 million related to the commencement of operations during 2008 and 2009 of buildings that were previously under construction, as well as approximately $2.9 million related to additional building and tenant improvement expenditures during 2008 and 2009.
 
    Amortization expense increased $2.4 million, or 84.6% from 2008 to 2009, mainly due to the amortization of lease intangibles associated with properties acquired during 2008 and 2009, partially offset by a decrease in amortization of lease intangibles becoming fully amortized on properties acquired during 2003 and 2004.

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     Other income (expense) for the year ended December 31, 2009 compared to the year ended December 31, 2008 changed unfavorably by $3.6 million, or 10.2%, mainly for the reasons discussed below:
    The Company recognized a net gain on extinguishment of debt in 2008 of approximately $4.1 million related to repurchases of the Senior Notes due 2011 and 2014, which is discussed in more detail in Note 9 to the Consolidated Financial Statements.
 
    The Company recognized a $2.7 million gain in 2009 related to the valuation and re-measurement of the Company’s equity interest in a joint venture in connection with the Company’s acquisition of the remaining equity interests in the joint venture.
 
    Interest expense increased $1.0 million, or 2.3%, from 2008 to 2009. The increase was mainly attributable to additional interest expense of approximately $3.8 million related to mortgage notes payable assumed in the 2008 and 2009 real estate acquisitions, a higher average outstanding balance on the unsecured credit facility of approximately $0.4 million, as well as interest incurred on the Senior Notes due 2017 of approximately $1.5 million and interest on the mortgage debt entered into during 2009 of approximately $0.6 million. These amounts are partially offset by interest savings of approximately $1.9 million related to the repurchases of the Senior Notes due 2011 and 2014 in 2008, as well as an increase in capitalized interest of approximately $3.4 million on development projects during 2009.
 
    Interest and other income decreased $1.3 million, or 51.9%, from 2008 to 2009. The decrease is primarily a result of additional equity income recognized in 2008 of approximately $1.0 million related to a joint venture investment that the Company accounted for under the equity method until it acquired the remaining interests in the joint venture in 2009, at which time the Company began to consolidate the accounts of the joint venture.
     Income from discontinued operations totaled $22.9 million and $23.6 million for the years ended December 31, 2009 and 2008, respectively, which includes the results of operations, net gains and impairments related to property disposals and properties classified as held for sale. The Company disposed of seven properties in 2009 and seven properties and two parcels of land in 2008. Six properties were classified as held for sale at December 31, 2009. Income from discontinued operations for 2008 also included a $7.2 million fee received from an operator to terminate its financial support agreement with the Company in connection with the disposition of the property.

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2008 Compared to 2007
     The Company’s net income attributable to common stockholders and net income attributable to common stockholders per share for 2008 compared to 2007 was impacted by senior living asset dispositions in 2007 and the resulting gain on sale. Included in the sale were 56 real estate properties in which the Company had investments totaling approximately $328.4 million ($259.9 million, net), 16 mortgage notes and notes receivable totaling approximately $63.2 million, and certain other assets and liabilities related to the assets. The Company received cash proceeds from the sale totaling approximately $369.4 million, recorded a deferred gain of approximately $5.7 million and recognized a net gain of approximately $40.2 million. The sale also included the 21 properties associated with all of the Company’s variable interest entities (“VIEs”), including the six VIEs that the Company consolidated.
                                 
                    Change  
(Dollars in thousands)   2008     2007     $     %  
REVENUES
                               
Master lease rent
  $ 58,073     $ 56,086     $ 1,987       3.5 %
Property operating
    136,745       121,644       15,101       12.4 %
Straight-line rent
    651       959       (308 )     (32.1 )%
Mortgage interest
    2,207       1,752       455       26.0 %
Other operating
    16,255       16,640       (385 )     (2.3 )%
 
                       
 
    213,931       197,081       16,850       8.5 %
 
                               
EXPENSES
                               
General and administrative
    23,514       20,619       2,895       14.0 %
Property operating
    82,223       71,680       10,543       14.7 %
Impairment
    1,600             1,600        
Bad debts, net of recoveries
    1,833       222       1,611       725.7 %
Depreciation
    48,129       42,141       5,988       14.2 %
Amortization
    2,849       4,528       (1,679 )     (37.1 )%
 
                       
 
    160,148       139,190       20,958       15.1 %
 
                               
OTHER INCOME (EXPENSE)
                               
Gain on extinguishment of debt, net
    4,102             4,102        
Interest expense
    (42,126 )     (48,307 )     6,181       (12.8 )%
Interest and other income, net
    2,439       1,459       980       67.2 %
 
                       
 
    (35,585 )     (46,848 )     11,263       (24.0 )%
 
                               
INCOME FROM CONTINUING OPERATIONS
    18,198       11,043       7,155       64.8 %
 
                               
DISCONTINUED OPERATIONS
                               
Income from discontinued operations
    14,605       15,721       (1,116 )     (7.1 )%
Impairments
    (886 )     (7,089 )     6,203       (87.5 )%
Gain on sales of real estate properties
    9,843       40,405       (30,562 )     (75.6 )%
 
                       
INCOME FROM DISCONTINUED OPERATIONS
    23,562       49,037       (25,475 )     (52.0 )%
 
                       
 
                               
NET INCOME
    41,760       60,080       (18,320 )     (30.5 )%
 
                               
Less: Net income attributable to noncontrolling interests
    (68 )     (18 )     (50 )     277.8 %
 
                       
 
                               
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 41,692     $ 60,062     $ (18,370 )     (30.6 )%
 
                       
 
                               
EARNINGS PER COMMON SHARE
                               
Net income attributable to common stockholders — Basic
  $ 0.81     $ 1.26     $ (0.45 )     (35.7 )%
 
                       
Net income attributable to common stockholders — Diluted
  $ 0.79     $ 1.24     $ (0.45 )     (36.3 )%
 
                       
     Total revenues from continuing operations for the year ended December 31, 2008 increased $16.9 million, or 8.5%, compared to 2007, mainly for the reasons discussed below:
    Master lease rental income increased $2.0 million, or 3.5%, from 2007 to 2008. The majority of the increase was due to annual contractual rent increases from 2007 to 2008 of approximately $1.3 million. During 2008, the Company also

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      recognized additional master lease rental income totaling approximately $0.2 million related to its 2008 acquisitions and a $0.8 million lease termination fee, offset partially by prior year rental income of the property of approximately $0.3 million.
 
    Property operating income increased $15.1 million, or 12.4%, from 2007 to 2008. The Company’s acquisitions of real estate properties during 2008 and 2007 resulted in additional property operating income in 2008 compared to 2007 of approximately $6.7 million. Also, properties previously under construction that commenced operations during 2007 and 2008 resulted in approximately $2.9 million in additional property operating income from 2007 to 2008. The remaining increase of approximately $5.5 million was related generally to annual contractual rent increases, rental increases related to lease renewals and new leases executed with various tenants.
 
    Mortgage interest income increased $0.5 million, or 26.0%, from 2007 to 2008 due mainly to additional fundings on construction mortgage notes.
     Total expenses for the year ended December 31, 2008 compared to the year ended December 31, 2007 increased $21.0 million, or 15.1%, mainly for the reasons discussed below:
    General and administrative expenses increased $2.9 million, or 14.0%, from 2007 to 2008. This increase was attributable mainly to higher compensation-related expenses in 2008 of approximately $1.8 million related to annual salary increases and amortization of restricted shares, an increase in pension expense recorded of approximately $0.7 million and expenses recognized related to acquisition and development efforts of approximately $1.8 million. Also, the Company recorded a charge in 2007 of approximately $1.5 million related to the retirement of an officer and the termination of five employees.
 
    Property operating expenses increased $10.5 million, or 14.7%, from 2007 to 2008. The Company recognized expense of approximately $2.7 million related to properties that were previously under construction and commenced operations during 2007 and 2008. Also, the Company’s acquisitions of real estate properties during 2008 and 2007 resulted in additional property operating expense in 2008 compared to 2007 of approximately $2.7 million. In addition, legal expense increased approximately $3.5 million in 2008 compared to 2007 mainly due to legal fee reimbursements received in 2007 and a litigation settlement of $1.0 million in 2008. Also, utility and real estate tax rate increases in 2008 resulted in additional expenses of approximately $1.3 million and $0.6 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. See Note 6 to the Consolidated Financial Statements.
 
    Bad debt expense increased $1.6 million from 2007 to 2008 mainly due to a reserve recorded by the Company in 2008 related to additional rental income due from an operator on four properties.
 
    Depreciation expense increased $6.0 million, or 14.2%, from 2007 to 2008 mainly due to increases related to the acquisitions of real estate properties of approximately $1.4 million, the commencement of operations of buildings during 2007 and 2008 that were previously under construction of approximately $1.0 million, as well as approximately $3.6 million related to additional building and tenant improvement expenditures during 2007 and 2008.
 
    Amortization expense decreased $1.7 million, or 37.1% from 2007 to 2008, mainly due to a decrease in amortization of lease intangibles associated with properties acquired during 2003 and 2004 becoming fully amortized, offset partially by amortization of lease intangibles related to properties acquired during 2007 and 2008.
     Other income (expense) for the year ended December 31, 2008 compared to the year ended December 31, 2007 improved $11.3 million, or 24.0%, mainly for the reasons discussed below:
    The Company recognized a net gain on extinguishment of debt in 2008 of approximately $4.1 million related to repurchases of the Company’s Senior Notes due 2011 and 2014 which is discussed in more detail in Note 9 to the Consolidated Financial Statements.
 
    Interest expense decreased $6.2 million, or 12.8%, from 2007 to 2008. The decrease was mainly attributable to an increase in the capitalization of interest of approximately $2.7 million related to the Company’s construction projects, interest savings of approximately $1.0 million related to repurchases of the Senior Notes due 2011 and 2014 and a reduction of interest expense of approximately $3.1 million related mainly to a decrease in interest rates in 2008 compared to 2007 on the unsecured credit facility.

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    Interest and other income increased $1.0 million, or 67.2%, from 2007 to 2008. In connection with the Company’s acquisition of the remaining interest in a joint venture in which it previously had an equity interest and the related transition of accounting from the joint venture to the Company, the joint venture recorded an adjustment to straight-line rent on the properties. As such, the Company recognized its portion of the adjustment through equity income on the joint venture of approximately $1.1 million (of which $0.8 million was related to prior years). Also, the Company recorded a gain on the sale of a land parcel of approximately $0.4 million. These amounts are partially offset by a reduction in income recognized on one joint venture of approximately $0.4 million due to the partial repurchase of the Company’s preferred equity investment.
     Income from discontinued operations totaled $23.6 million and $49.0 million for the years ended December 31, 2008 and 2007, respectively, which includes the results of operations, net gains and impairments related to property disposals and properties classified as held for sale. The Company disposed of seven properties and two parcels of land in 2008 and 59 properties in 2007, and had six properties classified as held for sale at December 31, 2009. Income from discontinued operations for 2008 also included a $7.2 million fee received from an operator to terminate its financial support agreement with the Company in connection with the disposition of the property.
Liquidity and Capital Resources
     The Company derives most of its revenues from its real estate property portfolio based on contractual arrangements with its tenants and sponsors. The Company may, from time to time, also generate funds from capital market financings, sales of real estate properties or mortgages, borrowings under the Unsecured Credit Facility, secured debt borrowings, or from other private debt or equity offerings. For the year ended December 31, 2009, the Company generated approximately $103.2 million in cash from operations and used $101.5 million in total cash for investing and financing activities, including dividend payments, as detailed in the Company’s Consolidated Statements of Cash Flows.
  Cost of Capital
     On September 30, 2009, the Company refinanced its Unsecured Credit Facility and repaid most of the outstanding balance on the Unsecured Credit Facility with the $300.0 million of Senior Notes due 2017 and the $80.0 million of mortgage debt entered into during the fourth quarter of 2009. The cost of the Company’s short-term borrowings increased upon refinancing the Unsecured Credit Facility. The rate of the facility increased from 0.90% over LIBOR with a 0.20% facility fee to 2.80% over LIBOR with a 0.40% facility fee. Also, the unsecured notes due 2017, issued on December 4, 2009, bear interest at a fixed rate of 6.50% per annum and the mortgage debt due 2016, entered into on November 25, 2009, bears interest at a fixed rate of 7.25%.
     The additional interest expense that the Company will incur related to the new debt will have a negative impact on its future consolidated net income attributable to common stockholders, funds from operations, and cash flows.
  Key Indicators
     The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:
    Debt metrics;
 
    Dividend payout percentage; and
 
    Interest rates, underlying treasury rates, debt market spreads and equity markets.
     The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

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     Contractual Obligations
          The Company monitors its contractual obligations to ensure funds are available to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments at December 31, 2009, including interest payments due where applicable. At December 31, 2009, the Company had no long-term capital lease or purchase obligations.
                                         
    Payments Due by Period  
            Less than     1 -3     3 - 5     More than 5  
(Dollars in thousands)   Total     1 Year     Years     Years     Years  
Long-term debt obligations, including interest (1)
  $ 1,438,767     $ 61,427     $ 438,995     $ 349,017     $ 589,328  
Operating lease commitments (2)
    269,104       4,107       7,183       7,235       250,579  
Construction in progress (3)
    100,442       57,036       36,577       6,829        
Tenant improvements (4)
                             
Pension obligations (5)
    2,581       2,581                    
 
                             
Total contractual obligations
  $ 1,810,894     $ 125,151     $ 482,755     $ 363,081     $ 839,907  
 
                             
 
(1)   The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility. Excluded from the table above are the premium on the Senior Notes due 2011 of $0.4 million, the discount on the Senior Notes due 2014 of $0.6 million, and the discount on the Senior Notes due 2017 of $2.0 million which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2009. Also excluded from the table above are discounts on five mortgage notes payable, totaling approximately $7.7 million. The Company’s long-term debt principal obligations are presented in more detail in the table below.
                                 
    Principal     Principal                  
    Balance at     Balance at         Contractual Interest        
    December 31,     December 31,         Rates at December   Principal   Interest
(In thousands)   2009     2008     Maturity Date   31, 2009   Payments   Payments
Unsecured Credit Facility due 2010 (a)
  $     $ 329.0     1/10   LIBOR + 0.90%   At maturity   Quarterly
Unsecured Credit Facility due 2012 (a)
    50.0           9/12   LIBOR + 2.80%   At maturity   Quarterly
Senior Notes due 2011
    286.3       286.3     5/11   8.125%   At maturity   Semi-Annual
Senior Notes due 2014
    264.7       264.7     4/14   5.125%   At maturity   Semi-Annual
Senior Notes due 2017
    300.0           1/17   6.500%   At maturity   Semi-Annual
Mortgage Notes Payable
    155.4       67.7     5/15-10/30   5.000%-7.765%   Monthly   Monthly
 
                           
 
  $ 1,056.4     $ 947.7                  
 
                           
 
(a)   In September 2009, the Company entered into a $550.0 million amended and restated Unsecured Credit Facility due in 2012 and incurred an annual facility fee of 0.40%. The new credit facility replaced the Company’s $400.0 million Unsecured Credit Facility due 2010 in which it incurred an annual facility fee of 0.20%.
(2)   Includes primarily the corporate office and ground leases, with expiration dates through 2101, related to various real estate investments for which the Company is currently making payments.
 
(3)   Includes cash flow projections related to the construction of two buildings, a portion of which relates to tenant improvements that will generally be funded after the core and shell of the building is substantially completed.
 
(4)   The Company has various first-generation tenant improvements budgeted as of December 31, 2009 totaling approximately $31.3 million related to properties that were developed by the Company that the Company may fund for tenant improvements as leases are signed. The Company has not included these budgeted amounts in the table above.
 
(5)   At December 31, 2009, one employee, the Company’s chief executive officer, was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $29.9 million as of December 31, 2009. In 2008, the Company froze the maximum annual benefit payable under the Executive Retirement Plan at $896,000, which resulted in a reduction of benefits payable to the Company’s chief executive officer. In consideration of the curtailment and as a partial settlement of the plan, the Company made a one-time cash payment of $2.3 million to its chief executive officer in early 2009. Because the Company does not know when its chief executive officer will retire, it has not projected when the retirement benefits would be paid in this table. At December 31, 2009, the Company had recorded a $16.1 million liability, included in other liabilities, related to its pension plan obligations. Also, in November 2009, the Company terminated its Retirement Plan for Outside Directors. As a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or earlier upon retirement, to the outside directors that participated in the plan, which are included in the table above.

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          The Company has a $550.0 million Unsecured Credit Facility with a syndicate of 16 lenders. Loans outstanding under the Unsecured Credit Facility will 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%. As of December 31, 2009, the Company had $50.0 million outstanding on the Unsecured Credit Facility with a remaining borrowing capacity of $500.0 million. At December 31, 2009, 72.4% of the Company’s debt balances were due after 2011, and the Unsecured Credit Facility, the Company’s only variable rate debt, was approximately 4.8% of total outstanding debt. The Unsecured Credit Facility contains certain representations, warranties, and financial and other covenants customary in such loan agreements.
          Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings rate the Company’s senior debt Baa3, BBB-, and BBB, respectively. For the year ended December 31, 2009, the Company’s earnings from continuing operations covered fixed charges at a ratio of 1.33 to 1.00; the Company’s stockholders’ equity totaled approximately $786.8 million; and the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 46.5%.
          As of December 31, 2009, the Company was in compliance with its financial covenant provisions under its various debt instruments.
     At-The-Market Equity Offering Program
          On December 31, 2008, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 2,600,000 shares of its common stock through an at-the-market equity offering program under which Cantor Fitzgerald acts as agent and/or principal. During 2009, the Company sold 1,201,600 shares of common stock, at prices ranging from $21.62 per share to $22.50 per share, generating approximately $25.7 million in net proceeds. In January 2010, the Company sold an additional 698,700 shares of common stock under the plan for net proceeds totaling approximately $14.9 million. On February 22, 2010, the Company entered into a new sales agreement with Cantor Fitzgerald to sell up to 5,000,000 shares of its common stock through the at-the-market equity offering program. The 5,000,000 shares include 699,700 shares that remained unsold under the prior sales agreement and 4,300,300 new shares. This agreement supersedes the prior sales agreement.
     Security Deposits and Letters of Credit
          As of December 31, 2009, the Company held approximately $6.2 million in letters of credit, security deposits, and capital replacement reserves for the benefit of the Company in the event the obligated lessee or borrower fails to perform under the terms of its respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.
     Acquisition Activity
          During 2009, the Company acquired approximately $106.4 million in real estate assets and funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately $43.9 million, were acquired by a joint venture in which the Company has an 80% controlling interest. These acquisitions were funded with borrowings on the Company’s unsecured credit facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and proceeds from various capital market financings. See Note 4 to the Consolidated Financial Statements for more information on these acquisitions.
     Dispositions
          During 2009, the Company disposed of seven real estate properties for approximately $85.7 million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial Statements for more information on these dispositions.
     2010 Disposition
          In January 2010, pursuant to a purchase option with an operator, the Company disposed of five properties in Virginia. The Company’s aggregate net investment in the buildings was approximately $16.0 million at December 31, 2009. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on sale of approximately $2.7 million, including the write-off of approximately $0.5 million of straight-line rent receivables.

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     Purchase Options
          Excluding the five properties located in Virginia that were classified as held for sale, the Company had approximately $111.1 million in real estate properties at December 31, 2009 that were subject to exercisable purchase options held by the respective operators and lessees that had not been exercised. On a probability-weighted basis, the Company currently estimates that approximately $32.0 million of these options might be exercised in the future. During 2010, an additional purchase option becomes exercisable on a property in which the Company had a gross investment of approximately $3.1 million at December 31, 2009. The Company does not believe it is likely that the operator will exercise the purchase option in the near future. Other properties may have purchase options exercisable in 2011 and beyond, but the Company does not believe it can reasonably estimate the probability of exercise of these purchase options.
     Construction in Progress and Other Commitments
          As of December 31, 2009, the Company had two medical office buildings under construction with budgets totaling $178.2 million and estimated completion dates in the second quarter of 2010 and the third quarter of 2011. At December 31, 2009, the Company had $95.1 million invested in construction in progress, including two parcels of land totaling $17.3 million in land held for future development, and expects to fund $57.0 million, $31.4 million, and $5.2 million in 2010, 2011 and 2012, respectively, on the two projects currently under construction. See Note 14 to the Consolidated Financial Statements for more details on the Company’s construction in progress at December 31, 2009.
          The Company also had various remaining first-generation tenant improvement obligations budgeted as of December 31, 2009 totaling approximately $31.3 million related to properties that were developed by the Company.
          In addition to the projects currently under construction, the Company is financing the development of a six-facility outpatient campus with a budget totaling approximately $72 million. The Company has funded $56.4 million towards the construction of four of the buildings. The Company’s consolidated joint venture acquired three of the buildings and the fourth building was sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to the Consolidated Financial Statements. Construction of the remaining two buildings has not yet begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The Company’s consolidated joint venture will have an option to purchase the two remaining buildings at a market price upon completion and full occupancy.
          The Company intends to fund these commitments with internally generated cash flows, proceeds from the Unsecured Credit Facility, proceeds from the sale of real estate properties, proceeds from repayments of mortgage notes receivable, proceeds from secured debt, capital market financings, or private debt or equity offerings.
     Operating Leases
          As of December 31, 2009, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 42 real estate investments, excluding leases the Company has prepaid. These operating leases have expiration dates through 2101. Rental expense relating to the operating leases for the years ended December 31, 2009, 2008 and 2007 was $3.8 million, $3.3 million, and $3.0 million, respectively.
     Dividends
          The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a real estate investment trust. Common stock cash dividends paid during 2009 or related to 2009 are shown in the table below:
                                 
    Quarterly            
Quarter   Dividend   Date of Declaration   Date of Record   Date Paid/*Payable
4th Quarter 2008
  $ 0.385     February 3, 2009   February 20, 2009   March 5, 2009
1st Quarter 2009
  $ 0.385     May 11, 2009   May 22, 2009   June 5, 2009
2nd Quarter 2009
  $ 0.385     August 10, 2009   August 21, 2009   September 4, 2009
3rd Quarter 2009
  $ 0.385     November 9, 2009   November 20, 2009   December 4, 2009
4th Quarter 2009
  $ 0.300     February 2, 2010   February 18, 2010   *March 4, 2010
          The ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.

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     Liquidity
          Net cash provided by operating activities was $103.2 million, $105.3 million and $90.9 million for 2009, 2008 and 2007, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.
          The Company plans to continue to meet its liquidity needs, including funding additional investments in 2010, paying dividends, and funding debt service, with cash flows from operations, borrowings under the Unsecured Credit Facility, proceeds of mortgage notes receivable repayments, proceeds from sales of real estate investments, proceeds from secured debt borrowings, or additional capital market financings. The Company also had unencumbered real estate assets of approximately $1.9 billion at December 31, 2009, which could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
          The Company has some exposure to variable interest rates and its stock price has been impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, are generally fixed in nature, have terms of approximately one to 15 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices.
     Impact of Inflation
          Inflation has not significantly affected the Company’s earnings due to the moderate inflation rate in recent years and the fact that most of the Company’s leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing the Company’s risk to the adverse effects of inflation. In addition, inflation has the effect of increasing gross revenue the Company is to receive under the terms of certain leases and financial support arrangements. Leases and financial support arrangements vary in the remaining terms of obligations, further reducing the Company’s risk to any adverse effects of inflation. Interest payable under the Unsecured Credit Facility is calculated at a variable rate; therefore, the amount of interest payable under the Unsecured Credit Facility is influenced by changes in short-term rates, which tend to be sensitive to inflation. During periods where interest rate increases outpace inflation, the Company’s operating results should be negatively impacted. Conversely, when increases in inflation outpace increases in interest rates, the Company’s operating results should be positively impacted.
     New Accounting Pronouncements
          Note 1 to the Consolidated Financial Statements provides a discussion of new accounting standards. The Company does not believe these new standards will have a significant impact on the Company’s Consolidated Financial Statements or results of operations.
     Market Risk
          The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk.
          At December 31, 2009, approximately $996.4 million, or 95.2%, of the Company’s total debt, bore interest at fixed rates. Additionally, $30.0 million of the Company’s mortgage notes and other notes receivable bore interest at fixed rates.
          The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market interest rates.

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                    Impact on Earnings and Cash Flows  
    Outstanding             Assuming 10%     Assuming 10%  
    Principal Balance     Calculated Annual     Increase in Market     Decrease in Market  
(Dollars in thousands)          As of 12/31/09     Interest Expense (1)     Interest Rates     Interest Rates  
Variable Rate Debt:
                               
Unsecured Credit Facility
  $ 50,000           $ 1,515            $ (12 )   $ 12  
 
                       
Variable Rate Receivables:
                               
Mortgage Notes Receivable
  $ 4,290     $ 267     $ 1     $ (1 )
 
                       
                                         
            Fair Value  
                    Assuming 10%     Assuming 10%        
    Carrying Value             Increase in     Decrease in        
    at December 31,     December 31,     Market Interest     Market Interest     December 31,  
(Dollars in thousands)   2009     2009     Rates     Rates     2008 (2)  
Fixed Rate Debt:
                                       
Senior Notes due 2011, including premium
  $ 286,655     $ 307,568     $ 307,231     $ 307,883     $ 320,269  
Senior Notes due 2014, net of discount
    264,090       282,883       280,328       285,497       298,025  
Senior Notes due 2017, net of discount
    297,988       297,988       292,779       304,680        
Mortgage Notes Payable
    147,689       150,115       146,151       154,352       94,590  
 
                             
 
  $ 996,422     $ 1,038,554     $ 1,026,489     $ 1,052,412     $ 712,884  
 
                             
 
                                       
Fixed Rate Receivables:
                                       
Mortgage Notes Receivable
  $ 26,718     $ 26,485     $ 25,547     $ 27,463     $ 16,597  
Other Notes Receivable
    3,276       3,276       3,225       3,328       487  
 
                             
 
  $ 29,994     $ 29,761     $ 28,772     $ 30,791     $ 17,084  
 
                             
 
(1)   Annual interest expense on the variable rate debt and variable rate receivables was calculated using a constant principal balance and the December 31, 2009 market rates of 3.03% and 6.23%, respectively. The increase or decrease in market interest rate is based on the variable LIBOR portion of the interest rate which is 0.23% as of December 31, 2009.
 
(2)   Fair values as of December 31, 2008 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments. Mortgage notes payable for 2008 include four mortgage notes classified as held for sale with an aggregate fair value at December 31, 2008 of approximately $28.7 million.
     Off-Balance Sheet Arrangements
          The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Application of Critical Accounting Policies to Accounting Estimates
          The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements.
          Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors.
          Management believes the following paragraphs in this section describe the application of critical accounting policies by management to arrive at the critical accounting estimates reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements.

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     Valuation of Long-Lived and Intangible Assets and Goodwill
          The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. Important factors that could cause management to review for impairment include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment those assets subject to purchase options and those impacted by casualties, such as hurricanes. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property. The Company recorded impairments of $0.02 million, $2.5 million, and $7.1 million, respectively, for the years ended December 31, 2009, 2008 and 2007 related to real estate properties and other long-lived assets. The impairment charge in 2009 was recorded in connection with the sale of a property in Washington. The impairment charges in 2008 included $1.6 million related to a long-lived asset, $0.1 million related to two properties sold in 2008, and $0.8 million related to two properties classified as held for sale in 2008, reducing the Company’s carrying values on the properties to the estimated fair values of the properties less costs to sell. The impairment charges in 2007 included $4.1 million recorded in connection with the sale of a property in Texas and $3.0 million related to six properties classified as held for sale as of December 31, 2007, reducing the Company’s carrying values on the properties to the estimated fair values of the properties less costs to sell.
          The Company also performs an annual goodwill impairment review. The Company’s reviews are performed as of December 31 of each year. The Company’s 2009 and 2008 reviews indicated that no impairment had occurred with the respect to the Company’s $3.5 million goodwill asset.
     Capitalization of Costs
          GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs.
          Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. The Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, occupancy and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s acquisitions and development departments who work on these projects maintain and report their hours daily, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred.
          Acquisition-related costs of an existing building include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs. These costs are also expensed in the period incurred.
          Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for these types of costs based on their classification.
          The Company classifies its pursuit projects into four categories, of which three relate to development and one relates to acquisitions. The first category includes pursuits of developments that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes pursuits of developments that might reasonably be expected to produce new business opportunities although there can be no assurance that they will result in a new project or contract. Costs for these projects are capitalized but, due to the uncertainty of projects in this category, these costs are reserved at 50%, which means that 50% of the costs are expensed in the period incurred. The third category includes those pursuits of developments that are either highly probable to result in a project or contract or already have resulted in a project or contract in which the contract requires the operator to reimburse the Company’s costs. Many times, these are pursuits involving operators with which the Company is already doing business. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve. The fourth category includes pursuits that involve the acquisition of existing buildings. As discussed above, costs related to acquisitions of existing buildings are expensed in the period incurred.

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          Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to general and administrative expenses on the Consolidated Statements of Income. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset.
          As of December 31, 2009 and 2008, the Company had capitalized pursuit costs totaling $2.2 million and $2.5 million, respectively, and had provided reserves against its capitalized pursuit costs of $2.1 million and $0.6 million, respectively.
     Depreciation of Real Estate Assets and Amortization of Related Intangible Assets
          As of December 31, 2009, the Company had investments of approximately $2.3 billion in depreciable real estate assets and related intangible assets. When real estate assets and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate assets are purchased that have in-place leases.
          As described in more detail in Note 1 to the Consolidated Financial Statements, when the Company acquires real estate properties with in-place leases, the cost of the acquisition must be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-) market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining new leases such as tenant improvements, and customer relationship assets. Any remaining excess purchase price is then allocated to goodwill. The identifiable tangible and intangible assets are then subject to depreciation and amortization. Goodwill is evaluated for impairment on an annual basis unless circumstances suggest that a more frequent evaluation is warranted.
          If assumptions used to estimate the “as if vacant” value of the building or the intangible asset values prove to be inaccurate, the pro-ration of the purchase price between building and intangibles and resulting depreciation and amortization could be incorrect. The amortization period for the intangible assets is the average remaining term of the actual in-place leases as of the acquisition date. To help prevent errors in its estimates from occurring, management applies consistent assumptions with regard to the elements of estimating the “as if vacant” values of the building and the intangible assets, including the absorption period, occupancy increases during the absorption period, and tenant improvement amounts. The Company uses the same absorption period and occupancy assumptions for similar building types, adding the future cash flows expected to occur over the next 10 years as a fully occupied building. The net present value of these future cash flows, discounted using a market rate of return, becomes the estimated “as if vacant” value of the building.
          With respect to the building components, there are several depreciation methods available under GAAP. Some methods record relatively more depreciation expense on an asset in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The straight-line method of depreciating real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset over its estimated life. The Company assigns a useful life to its owned buildings based on many factors, including the age of the property when acquired.
     Allowance for Doubtful Accounts and Credit Losses
          Many of the Company’s investments are subject to long-term leases or other financial support arrangements with hospital systems and healthcare providers affiliated with the properties. Due to the nature of the Company’s agreements, the Company’s accounts receivable, notes receivable and interest receivables result mainly from monthly billings of contractual tenant rents, lease guaranty amounts, principal and interest payments due on notes and mortgage notes receivable, late fees and additional rent.
     Accounts Receivable
          Payments on the Company’s accounts receivable are normally collected within 30 days of billing. When receivables remain uncollected, management must decide whether it believes the receivable is collectible and whether to provide an allowance for all or a portion of these receivables. Unlike a financial institution with a large volume of homogeneous retail receivables such as credit card loans or automobile loans that have a predictable loss pattern over time, the Company’s receivable losses have historically been infrequent and are tied to a unique or specific event. The Company’s allowance for doubtful accounts is generally based on specific identification and is recorded for a specific receivable amount once determined that such an allowance is needed.

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          Management monitors the age and collectibility of receivables on an ongoing basis. At least monthly, a report is produced whereby all receivables are “aged” or placed into groups based on the number of days that have elapsed since the receivable was billed. Management reviews the aging report for evidence of deterioration in the timeliness of payments from tenants, sponsors or borrowers. Whenever deterioration is noted, management investigates and determines the reason(s) for the delay, which may include discussions with the delinquent tenant, sponsor or borrower. Considering all information gathered, management’s judgment must be exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining uncollectibility are the following:
    type of contractual arrangement under which the receivable was recorded, e.g., a mortgage note, a triple net lease, a gross lease, a sponsor guaranty agreement or some other type of agreement;
 
    tenant’s or debtor’s reason for slow payment;
 
    industry influences and healthcare segment under which the tenant or debtor operates;
 
    evidence of willingness and ability of the tenant or debtor to pay the receivable;
 
    credit-worthiness of the tenant or debtor;
 
    collateral, security deposit, letters of credit or other monies held as security;
 
    tenant’s or debtor’s historical payment pattern;
 
    other contractual agreements between the tenant or debtor and the Company;
 
    relationship between the tenant or debtor and the Company;
 
    state in which the tenant or debtor operates; and
 
    existence of a guarantor and the willingness and ability of the guarantor to pay the receivable.
       Considering these factors and others, management must conclude whether all or some of the aged receivable balance is likely uncollectible. If management determines that some portion of a receivable is likely uncollectible, the Company records a provision for bad debt expense for the amount expected to be uncollectible. There is a risk that management’s estimate is over- or under-stated; however, management believes that this risk is mitigated by the fact that it re-evaluates the allowance at least once each quarter and bases its estimates on the most current information available. As such, any over- or under-stated estimates in the allowance should be adjusted for as soon as new and better information becomes available.
          Mortgage Notes and Notes Receivable
          The Company also evaluates collectibility of its mortgage notes and notes receivable. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. The Company did not record any provisions for doubtful accounts on its mortgage notes or notes receivable during 2009 or 2008. However, in connection with the sale of the senior living assets in 2007, the Company forgave approximately $2.6 million in notes receivable which was reflected in the gain on sale in 2007.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
          See “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” incorporated herein by reference to Item 7 of this Annual Report on Form 10-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee
     We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Realty Trust Incorporated at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
     Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements as a whole, present fairly, in all material respects, the information set forth therein.
     As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (which was later codified in ASC No. 810-10-45).
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Healthcare Realty Trust Incorporated’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22, 2010 expressed an unqualified opinion thereon.
         
     
  /s/ BDO Seidman, LLP    
 
Nashville, Tennessee
February 22, 2010

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Consolidated
BALANCE SHEETS
                 
    December 31,  
(Dollars in thousands, except per share amounts)   2009     2008  
ASSETS
               
 
               
Real estate properties:
               
Land
  $ 135,495     $ 107,555  
Buildings, improvements and lease intangibles
    1,977,264       1,792,402  
Personal property
    17,509       16,985  
Construction in progress
    95,059       84,782  
 
           
 
    2,225,327       2,001,724  
Less accumulated depreciation
    (433,634 )     (367,360 )
 
           
Total real estate properties, net
    1,791,693       1,634,364  
 
               
Cash and cash equivalents
    5,851       4,138  
 
               
Mortgage notes receivable
    31,008       59,001  
 
               
Assets held for sale and discontinued operations, net
    17,745       90,233  
 
               
Other assets, net
    89,467       77,044  
 
           
 
               
Total assets
  $ 1,935,764     $ 1,864,780  
 
           
 
               
LIABILITIES AND EQUITY
               
 
               
Liabilities:
               
Notes and bonds payable
  $ 1,046,422     $ 940,186  
 
               
Accounts payable and accrued liabilities
    55,043       45,937  
 
               
Liabilities held for sale and discontinued operations
    251       32,821  
 
               
Other liabilities
    43,900       49,589  
 
           
 
               
Total liabilities
    1,145,616       1,068,533  
 
               
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; 60,614,931 and 59,264,284 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively
    606       592  
 
               
Additional paid-in capital
    1,520,893       1,490,535  
 
               
Accumulated other comprehensive loss
    (4,593 )     (6,461 )
 
               
Cumulative net income attributable to common stockholders
    787,965       736,874  
 
               
Cumulative dividends
    (1,518,105 )     (1,426,720 )
 
           
 
               
Total stockholders’ equity
    786,766       794,820  
 
               
Noncontrolling interests
    3,382       1,427  
 
           
 
               
Total equity
    790,148       796,247  
 
           
 
               
Total liabilities and equity
  $ 1,935,764     $ 1,864,780  
 
           
 
               
See accompanying notes.

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Consolidated
STATEMENTS OF INCOME
                         
    Year Ended December 31,  
(Dollars in thousands, except per share data)   2009     2008     2007  
REVENUES
                       
Master lease rent
  $ 57,648     $ 58,073     $ 56,086  
Property operating
    180,024       136,745       121,644  
Straight-line rent
    2,027       651       959  
Mortgage interest
    2,646       2,207       1,752  
Other operating
    10,959       16,255       16,640  
 
                 
 
    253,304       213,931       197,081  
 
                       
EXPENSES
                       
General and administrative
    22,493       23,514       20,619  
Property operating
    95,141       82,223       71,680  
Impairment
          1,600        
Bad debts, net of recoveries
    537       1,833       222  
Depreciation
    62,447       48,129       42,141  
Amortization
    5,259       2,849       4,528  
 
                 
 
    185,877       160,148       139,190  
 
                       
OTHER INCOME (EXPENSE)
                       
Gain on extinguishment of debt, net
          4,102        
Re-measurement gain of equity interest upon acquisition
    2,701              
Interest expense
    (43,080 )     (42,126 )     (48,307 )
Interest and other income, net
    1,173       2,439       1,459  
 
                 
 
    (39,206 )     (35,585 )     (46,848 )
 
                       
INCOME FROM CONTINUING OPERATIONS
    28,221       18,198       11,043  
 
                       
DISCONTINUED OPERATIONS
                       
Income from discontinued operations
    2,813       14,605       15,721  
Impairments
    (22 )     (886 )     (7,089 )
Gain on sales of real estate properties
    20,136       9,843       40,405  
 
                 
INCOME FROM DISCONTINUED OPERATIONS
    22,927       23,562       49,037  
 
                 
 
                       
NET INCOME
    51,148       41,760       60,080  
 
                       
Less: Net income attributable to noncontrolling interests
    (57 )     (68 )     (18 )
 
                 
 
                       
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 51,091     $ 41,692     $ 60,062  
 
                 
 
                       
BASIC EARNINGS PER COMMON SHARE:
                       
Income from continuing operations
  $ 0.48     $ 0.35     $ 0.23  
Discontinued operations
    0.40       0.46       1.03  
 
                 
Net income attributable to common stockholders
  $ 0.88     $ 0.81     $ 1.26  
 
                 
 
                       
DILUTED EARNINGS PER COMMON SHARE:
                       
Income from continuing operations
  $ 0.48     $ 0.35     $ 0.23  
Discontinued operations
    0.39       0.44       1.01  
 
                 
Net income attributable to common stockholders
  $ 0.87     $ 0.79     $ 1.24  
 
                 
 
                       
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC
    58,199,592       51,547,279       47,536,133  
 
                 
 
                       
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED
    59,047,314       52,564,944       48,291,330  
 
                 
See accompanying notes.

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Consolidated
STATEMENTS OF STOCKHOLDERS’ EQUITY
                                                                         
                            Accumulated                                  
                    Additional     Other     Cumulative             Total     Non-        
    Preferred     Common     Paid-In     Comprehensive     Net     Cumulative     Stockholders’     controlling     Total  
(Dollars in thousands, except per share data)   Stock     Stock     Capital     Loss     Income     Dividends     Equity     Interests     Equity  
Balance at December 31, 2006
  $     $ 478     $ 1,211,234     $ (4,035 )   $ 635,120     $ (1,017,125 )   $ 825,672     $     $ 825,672  
Issuance of stock, net of costs
          29       70,545                         70,574             70,574  
Common stock redemption
                (386 )                       (386 )           (386 )
Stock-based compensation
                4,678                         4,678             4,678  
Net income
                            60,062             60,062       18       60,080  
Other comprehensive loss
                      (311 )                 (311 )           (311 )
 
                                                                     
Comprehensive income
                                                                  59,769  
Special dividend to common stockholders ($4.75 per share)
                                  (227,157 )     (227,157 )           (227,157 )
Dividends to common stockholders ($2.09 per share)
                                  (101,137 )     (101,137 )           (101,137 )
Distributions to noncontrolling interests
                                              (18 )     (18 )
 
                                                     
Balance at December 31, 2007
          507       1,286,071       (4,346 )     695,182       (1,345,419 )     631,995             631,995  
 
                                                                       
Issuance of stock, net of costs
          83       201,966                         202,049             202,049  
Common stock redemption
                (282 )                       (282 )           (282 )
Stock-based compensation
          2       2,780                         2,782             2,782  
Net income
                            41,692             41,692       68       41,760  
Other comprehensive loss
                      (2,115 )                   (2,115 )           (2,115 )
 
                                                                     
Comprehensive income
                                                                  39,645  
Dividends to common stockholders ($1.54 per share)
                                  (81,301 )     (81,301 )           (81,301 )
Distributions to noncontrolling interests
                                              (110 )     (110 )
Proceeds from noncontrolling interests
                                              1,469       1,469  
 
                                                     
Balance at December 31, 2008
          592       1,490,535       (6,461 )     736,874       (1,426,720 )     794,820       1,427       796,247  
 
                                                                       
Issuance of stock, net of costs
          13       26,655                         26,668             26,668  
Common stock redemption
                (8 )                       (8 )           (8 )
Stock-based compensation
          1       3,711                         3,712             3,712  
Net income
                            51,091             51,091       57       51,148  
Other comprehensive loss
                      1,868                   1,868             1,868  
 
                                                                     
Comprehensive income
                                                                  53,016  
Dividends to common stockholders ($1.54 per share)
                                  (91,385 )     (91,385 )           (91,385 )
Distributions to noncontrolling interests
                                              (330 )     (330 )
Proceeds from noncontrolling interests
                                              2,228       2,228  
 
                                                     
Balance at December 31, 2009
  $     $ 606     $ 1,520,893     $ (4,593 )   $ 787,965     $ (1,518,105 )   $ 786,766     $ 3,382     $ 790,148  
 
                                                     
See accompanying notes.

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Consolidated
STATEMENTS OF CASH FLOWS
                         
    Year Ended December 31,  
(Dollars in thousands)   2009     2008     2007  
OPERATING ACTIVITIES
                       
Net income
  $ 51,148     $ 41,760     $ 60,080  
Adjustments to reconcile net income to cash provided by operating activities:
                       
Depreciation and amortization
    70,921       54,748       53,924  
Stock-based compensation
    3,711       2,780       4,678  
Straight-line rent receivable
    (1,925 )     (643 )     (1,043 )
Straight-line rent liability
    444       423       954  
Gain on sales of real estate properties
    (20,136 )     (9,843 )     (40,405 )
Gain on sales of land
          (384 )      
Gain on extinguishment of debt
          (4,102 )      
Re-measurement gain of equity interest upon acquisition
    (2,701 )            
Impairments
    22       2,486       7,089  
Equity in (income) losses from unconsolidated joint ventures
    2       (1,021 )     309  
Provision for bad debts, net of recoveries
    517       1,904       198  
State income taxes paid, net of refunds
    (674 )     (612 )     (137 )
Payment of partial pension settlement
    (2,300 )            
Changes in operating assets and liabilities:
                       
Other assets
    (1,017 )     6,794       (94 )
Accounts payable and accrued liabilities
    5,127       3,097       (2,065 )
Other liabilities
    75       7,864       7,450  
 
                 
Net cash provided by operating activities
    103,214       105,251       90,938  
 
                       
INVESTING ACTIVITIES
                       
Acquisition and development of real estate properties
    (170,520 )     (383,702 )     (130,799 )
Funding of mortgages and notes receivable
    (23,391 )     (36,970 )     (14,759 )
Investments in unconsolidated joint venture
    (184 )            
Distributions from unconsolidated joint ventures
          882       1,414  
Partial redemption of preferred equity investment in an unconsolidated joint venture
          5,546        
Proceeds from sales of real estate
    83,441       37,133       311,927  
Proceeds from mortgages and notes receivable repayments
    12,893       8,236       65,572  
 
                 
Net cash provided by (used in) investing activities
    (97,761 )     (368,875 )     233,355  
 
                       
FINANCING ACTIVITIES
                       
Net borrowings (repayments) on unsecured credit facilities
    (279,000 )     193,000       (54,000 )
Borrowings on notes and bonds payable
    377,969             1,840  
Repayments on notes and bonds payable
    (28,433 )     (3,813 )     (7,440 )
Repurchase of notes payable
          (45,460 )      
Special dividend paid
                (227,157 )
Quarterly dividends paid
    (91,385 )     (81,301 )     (101,137 )
Proceeds from issuance of common stock
    26,467       197,255       70,780  
Common stock redemptions
    (8 )     (282 )     (386 )
Capital contributions received from noncontrolling interests
    2,228       1,469        
Distributions to noncontrolling interest holders
    (282 )     (110 )     (18 )
Credit facility amendment and extension fees
          (1,126 )      
Equity issuance costs
    (3 )     (389 )     (206 )
Debt issuance costs
    (11,293 )            
 
                 
Net cash provided by (used in) financing activities
    (3,740 )     259,243       (317,724 )
 
                 
 
                       
Increase (decrease) in cash and cash equivalents
    1,713       (4,381 )     6,569  
Cash and cash equivalents, beginning of year
    4,138       8,519       1,950  
 
                 
Cash and cash equivalents, end of year
  $ 5,851     $ 4,138     $ 8,519  
 
                 
Supplemental Cash Flow Information:
                       
Interest paid
  $ 50,052     $ 49,997     $ 53,233  
Capitalized interest
  $ 10,087     $ 6,679     $ 4,022  
Capital expenditures included in accounts payable and accrued liabilities
  $ 16,266     $ 12,500     $ 6,699  
Mortgage notes payable assumed upon acquisition of a joint venture interest (adjusted to fair value)
  $ 11,716     $ 50,825     $  
Mortgage note payable disposed of upon sale of joint venture interest
  $ 5,425     $     $  
Forgiveness of notes receivable upon sale of certain senior living assets
  $     $     $ 2,640  
See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
     Business Overview
          Healthcare Realty Trust Incorporated is a real estate investment trust 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. As of December 31, 2009, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture, the Company had investments of approximately $2.3 billion in 204 real estate properties and mortgages. The Company’s 199 owned real estate properties, excluding assets classified as held for sale, are located in 28 states, totaling approximately 12.3 million square feet. In addition, the Company provided property management services to approximately 9.3 million square feet nationwide. Square footage disclosures in this Annual Report on Form 10-K are unaudited.
     Principles of Consolidation
          The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, joint ventures and partnerships where the Company controls the operating activities. The Company’s Consolidated Statement of Income for 2007 also includes the results of operations of six VIEs of which the Company had concluded it was the primary beneficiary. The real estate properties associated with these VIEs were sold in 2007.
          The Company’s investments in its unconsolidated joint ventures are included in other assets and the related equity income is recognized in other income (expense) on the Company’s Consolidated Financial Statements. The Company also consolidates one joint venture in which it has an 80% controlling interest. Included in the Company’s Consolidated Financial Statements related to this consolidated joint venture was approximately $91.4 million in real estate investments, including mortgage notes receivable, at December 31, 2009. The Company reports noncontrolling (minority) interests in subsidiaries as equity and the related net income attributable to the noncontrolling interests as part of consolidated net income in its financial statements.
          All significant intercompany accounts, transactions and balances have been eliminated in the Consolidated Financial Statements. The Company evaluated subsequent events for recognition or disclosure through February 22, 2010, which is the date the Consolidated Financial Statements were issued.
     Use of Estimates in the Consolidated Financial Statements
          Preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the 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 reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single segment.
     Reclassifications
          Certain reclassifications have been made in the Consolidated Financial Statements for the years ended December 31, 2008 and 2007 to conform to the 2009 presentation.
          Discontinued Operations
          Certain amounts in the Company’s 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 Consolidated Balance Sheets, and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          Noncontrolling interests
          Upon adoption of Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” on January 1, 2009, codified in Accounting Standards Codification (“ASC”) No. 805, all prior period noncontrolling interests on the Company’s Consolidated Balance Sheets have been reclassified from liabilities to equity, and all prior period noncontrolling interests’ net income on the Company’s Consolidated Statements of Income have been reclassified to specifically identify net income or loss attributable to the noncontrolling interests. The components of noncontrolling interests for prior years have also been reclassified on the Company’s Consolidated Statements of Cash Flows.
     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’s gross real estate assets, on a book-basis, including at-market in-place lease intangibles and assets held for sale, totaled approximately $2.3 billion and $2.1 billion, respectively, as of December 31, 2009 and 2008.
          Depreciation and amortization of real estate assets and liabilities in place as of December 31, 2009, is provided for on a straight-line basis over the asset’s estimated useful life:
         
Land improvements
    9.5 to 15 years  
Buildings and improvements
    3.0 to 39 years  
Lease intangibles (including ground lease intangibles)
    1.3 to 93 years  
Personal property
    3 to 15 years  
     Land Held for Development
          Included in construction in progress on the Company’s Consolidated Balance Sheets are two parcels of land held for future development. As of December 31, 2009 and 2008, the Company’s investment in land held for development totaled approximately $17.3 million.
     Accounting for Acquisitions of Real Estate Properties with In-Place Leases
          When a building is acquired with in-place leases, the cost of the acquisition must be allocated between the tangible real estate assets and the intangible real estate assets related to in-place leases based on their fair values. Where appropriate, the intangible assets recorded could include goodwill or customer relationship assets. The values related to above- or below-market in-place lease intangibles are amortized to rental income where the Company is the lessor, are amortized to property operating expense where the Company is the lessee, and are amortized over the average remaining term of the leases upon acquisition. The values of at-market in-place leases and other intangible assets, such as customer relationship assets, are amortized and reflected in amortization expense in the Company’s Consolidated Statements of Income.
          The Company’s approach to estimating the value of in-place leases is a multi-step process.
    First, the Company considers whether any of the in-place lease rental rates are above- or below-market. An asset (if the actual rental rate is above-market) or a liability (if the actual rental rate is below-market) is calculated and recorded in an amount equal to the present value of the future cash flows that represent the difference between the actual lease rate and the average market rate.
 
    Second, the Company estimates an absorption period assuming the building is vacant and must be leased up to the actual level of occupancy when acquired. During that absorption period the owner would incur direct costs, such as tenant improvements, and would suffer lost rental income. Likewise, the owner would have acquired a measurable asset in that, assuming the building was vacant, certain fixed costs would be avoided because the actual in-place lessees would reimburse a certain portion of fixed costs through expense reimbursements during the absorption period. All of these assets (tenant improvement costs avoided, rental income lost, and fixed costs recovered through in-place lessee reimbursements) are estimated and recorded in amounts equal to the present value of future cash flows.
 
    Third, the Company estimates the value of the building “as if vacant.” The Company uses the same absorption period and occupancy assumptions used in step two, adding to those the future cash flows expected in a fully occupied building. The net present value of these future cash flows, discounted at a market rate of return, becomes the estimated “as if vacant” value of the building.

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    Fourth, the actual purchase price is allocated based on the various asset fair values described above. The building and tenant improvement components of the purchase price are depreciated over the useful life of the building or the average remaining term of the in-places leases. The above- or below-market rental rate assets or liabilities are amortized to rental income or property operating expense over the remaining term of the leases. The at-market, in-place leases are amortized to amortization expense over the average remaining term of the leases, customer relationship assets are amortized to amortization expense over terms applicable to each acquisition, and any goodwill recorded would be reviewed for impairment at least annually.
          See Note 8 for more details on the Company’s intangible assets as of December 31, 2009 and 2008.
     Fair Value Measurements
          Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.
          A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
    Level 1 — quoted prices for identical instruments in active markets;
 
    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
 
    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 acquisition of real estate assets during 2009, the Company assumed mortgage notes payable. The valuation of the mortgage notes payable was determined using level two inputs.
     Cash and Cash Equivalents
          Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased.
     Allowance for Doubtful Accounts and Credit Losses
          Accounts Receivable
          Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. At least monthly, a report is produced whereby all receivables are “aged” or placed into groups based on the number of days that have elapsed since the receivable was billed. Management reviews the aging report for evidence of deterioration in the timeliness of payment from a tenant or sponsor. Whenever deterioration is noted, management investigates and determines the reason(s) for the delay, which may include discussions with the delinquent tenant or sponsor. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are the type of contractual arrangement under which the receivable was recorded, e.g., a triple net lease, a gross lease, a sponsor guaranty agreement, or some other type of agreement; the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; other contractual agreements between the tenant and the Company; relationship between the tenant and the Company; the state in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable.
          Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad

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debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance. The Company does not hold any accounts receivable for sale.
          Mortgage Notes and Notes Receivable
          The Company also evaluates collectibility of its mortgage notes and notes receivable and records allowances on the notes as necessary. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. If a mortgage loan or note receivable becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms. As of December 31, 2009 and 2008, there were no recorded investments in mortgage notes or notes receivable that were either on non-accrual status or were past due more than ninety days and continued to accrue interest.
          The Company’s notes receivable balances were approximately $3.3 million and $0.5 million, respectively, as of December 31, 2009 and 2008. Interest rates on the notes are fixed and ranged from 8.0% to 11.6% with maturity dates ranging from 2011 through 2016 as of December 31, 2009. The Company did not record allowances or reserves related to its mortgage notes or notes receivable during 2009 or 2008.
          The Company had four mortgage notes receivable outstanding as of December 31, 2009 and 2008 with aggregate balances totaling $31.0 million and $59.0 million, respectively. The weighted average maturities of the notes were approximately 4.7 years and 2.7 years, respectively, with interest rates ranging from 6.2% to 8.5% and 1.5% to 8.5%, respectively, as of December 31, 2009 and 2008.
          As of December 31, 2009, the Company did not hold any of its mortgage notes or notes receivable available for sale. Also, management believes that its mortgage notes and notes receivable outstanding as of December 31, 2009 and 2008 are collectible.
     Goodwill and Other Intangible Assets
          Goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and are reviewed for impairment only when impairment indicators are present.
          Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place lease intangible assets, customer relationship intangible assets, and deferred financing costs. In-place lease and customer relationship intangible assets are amortized on a straight-line basis over the applicable lives of the assets. Deferred financing costs are amortized over the term of the related credit facility under the straight-line method, which approximates amortization under the effective interest method. Goodwill is not amortized but is evaluated annually on December 31 for impairment. The 2009 and 2008 impairment evaluations each indicated that no impairment had occurred with respect to the $3.5 million goodwill asset. See Note 8 for more detail on the Company’s intangible assets.
     Contingent Liabilities
          From time to time, the Company may be subject to loss contingencies arising from legal proceedings, which are discussed in Note 14. Additionally, while the Company maintains comprehensive liability and property insurance with respect to each of its properties, the Company may be exposed to unforeseen losses related to uninsured or underinsured damages.
          The Company continually monitors any matters that may present a contingent liability, and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as necessary in view of changes in available information. Contingent liabilities are recorded when a loss is determined to be both probable and can be reasonably estimated. Changes in estimates regarding the exposure to a contingent loss are reflected as adjustments to the related liability in the periods when they occur.
          Because of uncertainties inherent in the estimation of contingent liabilities, it is possible that management’s provision for contingent losses could change materially in the near term. To the extent that any losses, in addition to amounts recognized, are at least reasonably possible, such amounts will be disclosed in the notes to the Consolidated Financial Statements.

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     Accounting for Defined Benefit Pension Plans
          The Company has pension plans under which the Company’s Board of Directors and certain designated officers may receive retirement benefits upon retirement and the completion of five years of service with the Company. The plans are unfunded and benefits will be paid from earnings of the Company. The 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. In November 2009, the Company terminated the Outside Director Plan. As a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or earlier upon retirement, to the eight outside directors who participated in the plan. See Note 11.
     Incentive Plans
          The Company has issued and outstanding various employee stock-based awards. These awards include stock issued to employees pursuant to the 2007 Employees Stock Incentive Plan and its predecessor plan (the “Incentive Plan”), the Optional Deferral Plan and the 2000 Employee Stock Purchase Plan (“Employee Stock Purchase Plan”). See Note 12 for details on the Company’s stock-based awards. The Employee Stock Purchase Plan features a “look-back” provision which enables the employee to purchase a fixed number of shares at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise, with optional purchase dates occurring once each quarter for 27 months.
          The Company accounts for awards to its employees based on fair value, using the Black-Scholes model, and generally recognizes expense over the award’s vesting period, net of estimated forfeitures. Since the options granted under the Employee Stock Purchase Plan immediately vest, the Company records compensation expense for those options in the first quarter of each year, when granted. In each of the first quarters of 2009, 2008 and 2007, the Company recognized in general and administrative expenses approximately $0.3 million, $0.2 million and $0.2 million of compensation expense, respectively, related to each year’s grants of options to purchase shares under the Employee Stock Purchase Plan.
     Accumulated Other Comprehensive Loss
          Certain items must be included in comprehensive income (loss), including items 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 the cumulative pension liability adjustments, which are generally recognized in the fourth quarter of each year.
     Revenue Recognition
          The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must all be met before a Company may recognize revenue, including persuasive evidence of 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 collectibility is reasonably assured.
          The Company derives most of its revenues from its real estate property and mortgage notes receivable portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in master lease income, property operating income, or mortgage interest income on the Company’s Consolidated Statements of Income, based on the type of contractual agreement.
          Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Consolidated Balance Sheets, was $18.8 million and $19.4 million, respectively, at December 31, 2009 and 2008.
     Rental Income
          Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. Additional rent, generally defined in most lease agreements as the cumulative increase in a Consumer Price Index (“CPI”) from the lease start date to the CPI as of the end of the previous year, is calculated as of the beginning of each year, and is then billed and recognized as income during the year as provided for in the lease. Included in income from continuing operations, the Company recognized additional rental income, net of reserves, of approximately $2.5 million, $1.7 million and $1.7 million, respectively,

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for the years ended December 31, 2009, 2008 and 2007. During the fourth quarter of 2008, the Company recorded a $1.4 million allowance related to additional rent due from an operator. Rental income from properties under a master lease arrangement with the tenant is included in master lease rental income and rental income from properties under various tenant lease arrangements, including operating expense recoveries, is included in property operating income on the Company’s Consolidated Statements of Income. Operating expense recoveries recognized in income from continuing operations for the years ended December 31, 2009, 2008 and 2007 were approximately $20.8 million, $10.3 million and $6.2 million, respectively.
     Mortgage Interest Income
          Interest income on the Company’s mortgage notes receivable is recognized based on the interest rates, maturity dates and amortization periods in accordance with each note agreement. Interest rates on three of its mortgage notes receivable outstanding as of December 31, 2009 were fixed and one was variable.
     Other Operating Income
          Other operating income on the Company’s Consolidated Statements of Income generally includes shortfall income recognized under its property operating agreements, interest income on notes receivable, replacement rent from an operator, management fee income, and prepayment penalty income.
          Property operating agreements, between the Company and sponsoring health systems, applicable to eight of the Company’s 199 owned real estate properties as of December 31, 2009, contractually obligate the sponsoring health system to provide to the Company, for a short term, 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 Company will calculate and accrue any shortfalls as income that the sponsor is responsible to pay to the Company under the terms of the property operating agreement.
          The Company provides property management services for both third-party and owned real estate properties. Management fees are generally calculated, accrued and billed monthly based on a percentage of cash collections of tenant receivables for the month.
          Other operating income for the years ended December 31, 2009, 2008 and 2007 is detailed in the table below:
                         
    Year Ended December 31,
(Dollars in millions)   2009   2008   2007
 
Property lease guaranty revenue
  $ 8.2     $ 12.8     $ 13.2  
Interest income on notes receivable
    0.6       0.6       0.3  
Management fee income
    0.2       0.2       0.3  
Replacement rent
    1.3       2.5       2.5  
Other
    0.7       0.2       0.3  
         
 
  $ 11.0     $ 16.3     $ 16.6  
         
     Federal Income Taxes
          No provision has been made for federal income taxes. The Company intends at all times to qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986 (the “Code”), as amended. The Company must distribute at least 90% per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real estate investment trust. See Note 15 for further discussion.
          The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Financial Statements as a component of general and administrative expense. No such amounts were recognized during the three years ended December 31, 2009.
          Federal tax returns for the years 2006, 2007 and 2008 are currently still subject to examination by taxing authorities.
     State Income Taxes
          The Company must pay certain state income taxes which are generally included in general and administrative expense on the Company’s Consolidated Statements of Income. See Note 15 for further discussion.

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     Sales and Use Taxes
          The Company must pay sales and use taxes to certain state tax authorities based on rents collected from tenants in properties located in those states. The Company is generally reimbursed for these taxes by the tenant. The Company accounts for the payments to the taxing authority and subsequent reimbursement from the tenant on a net basis in the Company’s Consolidated Statements of Income.
     Discontinued Operations
          The Company sells properties from time to time due to a variety of factors, such as 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 Consolidated Statements of Income. 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 held for sale are reported at the lower of their carrying amount or their fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale of such properties are characterized as impairment losses relating to discontinued operations in the Consolidated Statements of Income.
          In the Company’s Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, income related to properties sold or to be sold as of December 31, 2009 was included in discontinued operations for each of the three years totaling approximately $22.9 million, $23.6 million, and $49.0 million, respectively.
          Assets held for sale at December 31, 2009 and 2008 included six and 12 properties, respectively.
     Earnings per Share
          Basic earnings per share is calculated using weighted average shares outstanding less issued and outstanding but unvested restricted shares of common stock. Diluted earnings per share is calculated using weighted average shares outstanding plus the dilutive effect of the outstanding stock options from the Employee Stock Purchase Plan and restricted shares of common stock, using the treasury stock method and the average stock price during the period. See Note 13 for the calculations of earnings per share.
     New Pronouncements
          Business Combinations and Noncontrolling Interests in Consolidated Financial Statements
          SFAS No. 141 (R), “Business Combinations” (“SFAS No. 141 (R)”) codified in ASC No. 805 and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS No. 160”) codified in ASC No. 810 became effective for the Company on January 1, 2009. These standards were designed to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. SFAS No. 141 (R) requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquiring entity to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 also eliminates the diversity that existed in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. The adoption of SFAS No. 141 (R) and SFAS No. 160 did not have a material impact on the Company’s Consolidated Financial Statements, except that, upon adoption, the Company was required to retroactively restate its Consolidated Balance Sheets to reflect the reclassification of its noncontrolling interests from other liabilities to equity and restate its Consolidated Statements of Income to specifically identify net income or loss attributable to the noncontrolling interests.
          Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
          Financial Accounting Standards Board’s (“FASB”) Staff Position (“FSP”) EITF Issue No. 03-6, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (“FSP EITF 03-6-1”) codified in ASC No. 260 became effective for the Company on January 1, 2009. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing

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earnings per share under the two-class method. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s calculation of earnings per share.
          The Codification
          Beginning with interim or annual periods ending after September 15, 2009, the FASB Accounting Standards Codification (“the Codification”) became the single source of authoritative nongovernmental GAAP. Previously existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), were superseded by the Codification. As such, all references to authoritative accounting literature are referenced in accordance with the Codification. The Codification was not designed to change GAAP, but instead to introduce a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification has not changed the content of the Company’s financial statements or other disclosures.

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2. Real Estate and Mortgage Notes Receivable Investments
          The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and development services, and capital for the construction of new facilities, as well as for the acquisition of existing properties. The Company had investments of approximately $2.3 billion in 204 real estate properties and mortgage notes receivable as of December 31, 2009, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture. The following table summarizes the Company’s investments.
                                                 
                    Buildings,                      
                    Improvements,                      
    Number of             Lease Intangibles     Personal             Accumulated  
(Dollars in thousands)   Facilities (1)     Land     and CIP     Property     Total     Depreciation  
Medical Office:
                                               
Arizona
    8     $ 3,320     $ 66,295     $ 54     $ 69,669     $ (10,567 )
Florida
    14       8,671       125,789       157       134,617       (44,806 )
Hawaii
    3             91,581       5       91,586       (5,994 )
North Carolina
    14             141,414       66       141,480       (6,308 )
Tennessee
    15       6,782       160,497       157       167,436       (41,201 )
Texas
    30       27,522       447,529       1,061       476,112       (77,178 )
Washington
    5       2,200       67,822       1       70,023       (2,311 )
Other states
    41       39,995       433,785       246       474,026       (77,703 )
 
                                   
 
    130       88,490       1,534,712       1,747       1,624,949       (266,068 )
 
                                               
Physician Clinics:
                                               
Florida
    8       10,639       44,668             55,307       (14,794 )
Virginia
    3       1,623       29,169       127       30,919       (10,060 )
Other states
    20       5,812       82,000       264       88,076       (21,667 )
 
                                   
 
    31       18,074       155,837       391       174,302       (46,521 )
 
                                               
Ambulatory care/surgery:
                                               
California
    2       4,898       33,530       23       38,451       (12,439 )
Texas
    3       6,882       35,392       81       42,355       (14,490 )
Other states
    5       5,897       13,941             19,838       (5,308 )
 
                                   
 
    10       17,677       82,863       104       100,644       (32,237 )
 
                                               
Specialty outpatient:
                                               
Arkansas
    1       647       2,408             3,055       (979 )
Florida
    1       911       2,500             3,411       (943 )
Other states
    3       246       6,774             7,020       (1,844 )
 
                                   
 
    5       1,804       11,682             13,486       (3,766 )
 
                                               
Specialty inpatient:
                                               
Indiana
    1       1,071       42,335             43,406       (3,799 )
Pennsylvania
    6       1,214       112,653             113,867       (37,315 )
Other states
    6       5,265       72,086             77,351       (19,894 )
 
                                   
 
    13       7,550       227,074             234,624       (61,008 )
 
                                               
Other:
                                               
Michigan
    5       193       12,728       183       13,104       (6,395 )
Virginia
    2       1,178       10,084       5       11,267       (3,479 )
Other states
    3       529       20,042       448       21,019       (7,492 )
 
                                   
 
    10       1,900       42,854       636       45,390       (17,366 )
 
                                               
Land held for development
                17,301             17,301        
Corporate Property
                      14,631       14,631       (6,668 )
 
                                   
Total owned properties
    199       135,495       2,072,323       17,509       2,225,327       (433,634 )
 
                                   
Mortgage notes receivable
    4                         31,008        
Unconsolidated joint venture investment
    1                         1,266        
 
                                   
Total real estate investments
    204     $ 135,495     $ 2,072,323     $ 17,509     $ 2,257,601     $ (433,634 )
 
                                   
 
(1)   Includes two properties under construction.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Real Estate Property Leases
          The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases or are supported through other financial support arrangements with expiration dates through 2029. Some leases and financial arrangements provide for fixed rent renewal terms of five years, or multiples thereof, in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease and for a short period thereafter, with an option or a right of first refusal to purchase the leased property. The Company’s portfolio of master leases generally requires the lessee to pay minimum rent, additional rent based upon fixed percentage increases or increases in the Consumer Price Index and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.
          Future minimum lease payments under the non-cancelable operating leases and guaranteed amounts due to the Company under property operating agreements as of December 31, 2009 are as follows (in thousands):
         
2010
  $ 196,525  
2011
    172,414  
2012
    146,003  
2013
    119,808  
2014
    90,272  
2015 and thereafter
    289,742  
 
     
 
  $ 1,014,764  
 
     
     Customer Concentrations
          The Company’s real estate portfolio is leased to a diverse tenant base. The Company did not have any customers that accounted for 10% or more of the Company’s revenues, including revenues from discontinued operations, for the year ended December 31, 2009 and had only one customer that accounted for 10% or more of the Company’s revenues for the years ended December 31, 2008 and 2007, HealthSouth at 11%.
     Purchase Option Provisions
          Certain of the Company’s leases include purchase option provisions. The provisions vary from lease to lease but generally allow the lessee to purchase the property covered by the lease at the greater of fair market value or an amount equal to the Company’s gross investment. As of December 31, 2009, the Company had a gross investment of approximately $111.1 million in real estate properties that were subject to outstanding, exercisable contractual options to purchase, with various conditions and terms, by the respective operators and lessees that had not been exercised.
4. Acquisitions and Dispositions and Mortgage Repayments
     2009 Real Estate Acquisitions
          During 2009, the Company acquired the following properties:
    the remaining 50% equity interest in a joint venture (Unico 2006 MOB), which owns a 62,246 square foot on-campus medical office building in Oregon, for approximately $4.4 million in cash consideration. The building was approximately 97% occupied with lease maturities through 2025. In connection with the acquisition, the Company assumed an outstanding mortgage note payable held by the joint venture totaling $12.8 million ($11.7 million including a $1.1 fair value adjustment) which bears an effective interest rate of 6.43% and matures in 2021. Prior to the acquisition, the Company had a 50% equity investment in the joint venture totaling approximately $1.7 million which it accounted for under the equity method. In connection with the acquisition, the Company re-measured its previously held equity interest at the acquisition-date fair value and recognized a gain on the re-measurement of approximately $2.7 million which was recognized as income;
 
    a 51,903 square foot specialty inpatient facility in Arizona for a purchase price of approximately $15.5 million. The building was 100% occupied by one tenant whose lease expires in 2024;

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
    a medical office building with 146,097 square feet in Indiana for a purchase price of approximately $25.8 million. The building was 100% occupied with lease expiration dates ranging from 2011 to 2021;
 
    four medical office buildings in Iowa, aggregating 155,189 square feet, were acquired by a joint venture (HR Ladco Holdings, LLC), in which the Company has an 80% controlling interest, for a total purchase price of approximately $44.6 million. All four buildings were 100% leased upon acquisition with lease expirations ranging from 2010 through 2029. Three of the buildings were constructed by the Company’s joint venture partner, and the construction was funded by the Company through a construction loan. Upon acquisition of the buildings by the joint venture, $30.8 million of the Company’s construction loan was converted to a permanent mortgage note payable to the Company, which is eliminated in consolidation, with the remaining balance of the construction loan of $5.0 million added to the Company’s equity investment in the joint venture; and
 
    a mortgage note receivable was originated for $9.9 million in connection with a medical office building in Iowa.
          A summary of the Company’s 2009 acquisitions follows:
                                                         
                            Mortgage     Mortgage                
      Dates     Cash     Real     Note     Notes Payable             Square  
(Dollars in millions)     Acquired     Consideration     Estate     Financing     Assumed     Other     Footage  
     
Real estate acquisitions
                                                       
Oregon (1)
    01/16/09     $ 4.4     $ 20.5     $     $ (11.7 )   $ (4.4 )     62,246  
Arizona
    10/20/09       16.0       16.0                         51,903  
Indiana
    12/18/09       28.2       26.0                   2.2       146,097  
Iowa
    2/23/09, 7/16/09       6.8       43.9       (35.7 )           (1.4 )     155,189  
    7/23/09, 12/08/09                                  
                 
 
            55.4       106.4       (35.7 )     (11.7 )     (3.6 )     415,435  
 
                                                       
Mortgage note financings
                                                       
Iowa
    12/30/2009       9.9             9.9                    
                 
Total 2009 Acquisitions
          $ 65.3     $ 106.4     $ (25.8 )   $ (11.7 )   $ (3.6 )     415,435  
                 
 
(1)   The mortgage note payable assumed in the Oregon acquisition reflects a fair value adjustment of $1.1 million recorded by the Company upon acquisition.
          The Company assigned $8.2 million to real estate lease intangible assets, net of ground lease intangible liabilities, related to its 2009 acquisitions with amortization periods ranging from 7.3 years to 75 years.
     2008 Real Estate Acquisitions
          During 2008, the Company acquired the following properties:
    two fully-leased, six-story office buildings each containing approximately 146,000 square feet, and a six-level parking structure, containing 977 parking spaces, in Dallas, Texas for purchase price of approximately $59.2 million;
 
    a medical office building and surgery center with 102,566 square feet in Indiana for a purchase price of approximately $28.2 million. The building is 100% occupied by three tenants with lease expiration dates ranging from 2017 to 2024;
 
    a portfolio of 15 medical office buildings from The Charlotte-Mecklenburg Hospital Authority and certain of its affiliates (collectively, “CHS”) for a purchase price of approximately $162.1 million, including ground lease prepayments of $8.3 million. The portfolio includes 764,092 square feet of on- and off-campus properties which are located in or around Charlotte, North Carolina and are approximately 90% occupied. CHS leases approximately 71% of the total square feet of the portfolio with lease terms averaging approximately 10 years. CHS is the third largest public health system in the United States and owns, leases and manages 23 hospitals, and operates approximately 5,000 patient beds. The weighted average

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
remaining lease terms for the non-CHS portion of leased space is five years. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:
                 
    Estimated     Estimated  
    Fair Value     Useful Life  
    (In millions)     (In years)  
Buildings
  $ 140.4       20.0-39.0  
Prepaid ground lease
    8.3       75.0  
Intangibles:
               
At-market lease intangibles
    11.1       0.9-15.0  
Below-market lease intangibles
    (0.1 )     3.4  
Above-market ground lease intangibles
    (0.1 )     75.0  
Below-market ground lease intangibles
    2.5       75.0  
 
           
Total intangibles
    13.4       22.5  
 
           
 
  $ 162.1          
 
             
    the remaining equity membership interest in a joint venture, which owns five on-campus medical office buildings in Washington, for a purchase price of approximately $14.5 million plus the assumption of outstanding debt of approximately $42.2 million, net of fair value adjustments. At the time of the acquisition, the Company had a $9.2 million net equity investment in the joint venture which it accounted for under the equity method. The debt assumed has a weighted average interest rate of 5.8% with maturities beginning in 2015. In connection with the Company’s acquisition and related transition of accounting from the joint venture to the Company, the joint venture recorded an adjustment to straight-line rent on the properties. As such, the Company recognized its portion of the adjustment through equity income of the joint venture of approximately $1.1 million (of which $0.8 million, or $0.02 per diluted share, is related to prior years);
 
    an 80% interest in a joint venture that concurrently acquired two medical office buildings, a specialty outpatient facility and a physician clinic in Iowa for cash consideration of approximately $25.8 million, plus the assumption of outstanding debt of approximately $1.2 million, net of a fair value adjustment. The debt assumed has an interest rate of 5.8% which matures in 2016. The accounts of the joint venture are included in the Company’s Consolidated Financial Statements; and
 
    a mortgage note receivable was originated for $8.0 million in connection with the construction of an ambulatory care/surgery center in Iowa.
          A summary of the Company’s 2008 acquisitions follows:
                                                         
                            Mortgage     Mortgage                
    Date     Cash     Real     Note     Notes Payable             Square  
(Dollars in millions)   Acquired     Consideration     Estate     Financing     Assumed     Other     Footgage  
Real estate acquisitions
                                                       
Texas
    7/25/08     $ 56.0     $ 57.9     $     $     $ (1.9 )     291,389  
Indiana
    12/19/08       28.1       27.7                   0.4       102,566  
North and South Carolina
    12/29/08       162.1       151.5                   10.6       764,092  
Washington (1)
    11/26/08       14.5       69.7             (42.2 )     (13.0 )     319,561  
Iowa (1)
    9/30/08, 10/31/08       25.8       28.8             (1.2 )     (1.8 )     145,457  
 
                                           
 
            286.5       335.6             (43.4 )     (5.7 )     1,623,065  
 
                                                       
Mortgage note financings
                                                       
Iowa
    10/30/08       8.0             8.0                    
 
                                           
 
                                                       
Total 2008 Acquisitions
          $ 294.5     $ 335.6     $ 8.0     $ (43.4 )   $ (5.7 )     1,623,065  
 
                                           
 
(1)   The mortgage notes payable assumed in the Washington and Iowa acquisitions reflect fair value adjustments of $7.2 million and $0.2 million, respectively, recorded by the Company upon acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          The Company assigned $23.7 million to intangible assets net of intangible liabilities, related to the 2008 acquisitions as shown in the table below.
                 
    Intangibles     Amortization  
    Assigned     Periods  
    (In thousands)     (In years)  
Above-market lease intangibles
  $ 1,297       2.0-16.5  
Below-market lease intangibles
    (6,615 )     4.3-12.3  
At-market lease intangibles
    25,277       2.0-16.5  
Above-market ground lease intangibles
    (128 )     75  
Below-market ground lease intangibles
    3,850       56.5-93.1  
 
           
 
  $ 23,681       17.7  
 
           
     2009 Real Estate Dispositions
          During 2009, the Company disposed of the following properties:
    an 11,538 square foot medical office building in Florida in which the Company had a total gross investment of approximately $1.4 million ($1.0 million, net) was sold for approximately $1.4 million in net proceeds, and the Company recognized a $0.4 million net gain on the sale;
 
    a 139,647 square foot medical office building in Wyoming to the sponsor for $21.4 million. During 2008, the Company received a $2.4 million deposit from the sponsor on the sale and received a $7.2 million termination fee from the sponsor in accordance with its financial support agreement with the Company. In 2009, the Company received the remaining consideration of approximately $19.0 million (plus $0.2 million of interest). The Company had an aggregate investment of approximately $20.0 million ($15.8 million, net) in the medical office building and recognized a gain on sale of approximately $5.6 million;
 
    the Company’s membership interests in an entity which owns an 86,942 square foot medical office building in Washington. The Company acquired the entity in December 2008 and had an aggregate and net investment of approximately $10.7 million. The Company received approximately $5.3 million in net proceeds, and the purchaser assumed the mortgage note secured by the property of approximately $5.4 million. The Company recognized an insignificant impairment charge on the disposition related to closing costs;
 
    a 198,064 square foot medical office building in Nevada in which the Company had a gross investment of approximately $46.8 million ($32.7 million, net) was sold for approximately $38.0 million in net proceeds, and the Company concurrently paid off a $19.5 million mortgage note secured by the property. The Company recognized a gain on sale of approximately $6.5 million, net of liabilities of $1.2 million;
 
    a 113,555 square foot specialty inpatient facility in Michigan in which the Company had a gross investment of approximately $13.9 million ($10.8 million, net) was sold for approximately $18.5 million in net proceeds, and the Company recognized a gain on sale of approximately $7.5 million, net of liabilities of $0.2 million;
 
    a 10,255 square foot ambulatory surgery center in Florida in which the Company had a gross investment of approximately $3.4 million ($2.0 million, net) was sold for approximately $0.5 million in net cash proceeds and title to a land parcel adjoining another medical office building owned by the Company valued at $1.5 million. The Company recognized no gain on the transaction; and
 
    an 8,243 square foot physician clinic in Virginia in which the Company had a gross investment of approximately $0.7 million ($0.5 million, net) was sold for approximately $0.6 million in net proceeds, and the Company recognized a gain on sale of approximately $0.1 million.
     2009 Mortgage Note Repayment
          During 2009, one mortgage note receivable totaling approximately $12.6 million was repaid. This mortgage note, which provided financing for the construction of a building in Iowa, was repaid upon acquisition of the building by a third party.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          A summary of the Company’s 2009 dispositions follows:
                                                 
            Net Real     Other     Mortgage              
    Net     Estate     (Including     Note     Gain/     Square  
(Dollars in millions)   Proceeds     Investment     Receivables)     Receivable     (Loss)     Footage  
Real estate dispositions
                                               
Florida
  $ 1.4     $ 1.0     $     $     $ 0.4       11,538  
Wyoming (1)
    21.4       15.8                   5.6       139,647  
Washington
    5.3       10.7       (5.4 )           0.0       86,942  
Nevada
    38.0       32.7       (1.2 )           6.5       198,064  
Michigan
    18.5       10.8       0.2             7.5       113,555  
Florida
    0.5       0.5                         10,255  
Virginia
    0.6       0.5                   0.1       8,243  
 
                                   
 
    85.7       72.0       (6.4 )           20.1       568,244  
 
                                               
Mortgage note repayments
    12.6                   12.6              
 
                                               
 
                                   
Total 2009 Dispositions
  $ 98.3     $ 72.0     $ (6.4 )   $ 12.6     $ 20.1       568,244  
 
                                   
 
(1)   Net proceeds include $2.4 million in proceeds received in 2008 as a deposit for the Wyoming property sale.
     2008 Real Estate Dispositions
          During 2008, the Company disposed of the following properties:
    a 10,818 square foot physician clinic in Texas in which the Company had a gross investment of approximately $1.5 million ($1.3 million, net) was sold for $1.6 million in net proceeds, and the Company recognized a $0.3 million net gain from the sale;
 
    a 4,913 square foot ambulatory surgery center in California in which the Company had a gross investment of approximately $1.0 million ($0.6 million, net) was sold for $1.0 million in net proceeds, and the Company recognized a $0.4 million net gain from the sale;
 
    a 36,951 square foot building in Mississippi in which the Company had a gross investment of approximately $2.9 million ($1.6 million, net) was sold for $1.9 million in net proceeds, and the Company recognized a $0.3 million net gain from the sale;
 
    a 7,500 square foot physician clinic in Texas in which the Company had a total gross investment of approximately $0.5 million ($0.4 million, net) was sold for $0.5 million in net proceeds, and the Company recognized a $0.1 million net gain from the sale;
 
    pursuant to a purchase option exercised by a tenant in the third quarter of 2008, a 25,456 square foot physician clinic in Tennessee in which the Company had a gross investment of approximately $3.3 million ($2.3 million, net) was sold for $3.0 million in net proceeds, and the Company recognized a $0.7 million net gain from the sale;
 
    a parcel of land in Pennsylvania was sold for approximately $0.8 million in net proceeds, which approximated the Company’s net book value;
 
    pursuant to a purchase option exercised by a tenant in 2007, an 83,718 square foot medical office building in Texas in which the Company had a gross investment of approximately $18.5 million ($10.4 million, net) was sold for net proceeds of $18.7 million. The Company recognized an $8.0 million net gain from the sale, net of receivables of $0.3 million;
 
    a parcel of land held for development in Illinois was sold for $9.0 million in net proceeds. The Company’s investment in the land was $8.6 million and it recognized $0.4 million net gain from the sale, which is recorded in other income (expense) on the Company’s Consolidated Statement of Income; and
 
    a 7,093 square foot building in Virginia in which the Company had a gross investment of approximately $1.0 million ($0.5 million, net) was sold for $0.4 million in net proceeds, resulting in a $0.1 million impairment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     2008 Mortgage Note Repayment
          During 2008, one mortgage note receivable totaling approximately $2.5 million was repaid.
     2008 Joint Venture Equity Interest Disposition
          During 2008, a portion of the Company’s preferred equity investment in a joint venture, in which it owned a 10% equity ownership interest, was redeemed for $5.5 million.
          A summary of the Company’s 2008 dispositions follows:
                                                 
            Net Real     Other     Mortgage              
    Net     Estate     (Including     Note     Gain/     Square  
(Dollars in millions)   Proceeds     Investment     Receivables)     Receivable     (Loss)     Footage  
Real estate dispositions
                                               
Texas
  $ 1.6     $ 1.3     $     $     $ 0.3       10,818  
California
    1.0       0.6                   0.4       4,913  
Mississippi
    1.9       1.6                   0.3       36,951  
Texas
    0.5       0.4                   0.1       7,500  
Tennessee
    3.0       2.3                   0.7       25,456  
Pennsylvania (land)
    0.8       0.8                          
Texas
    18.7       10.4       0.3             8.0       83,718  
Illinois (land held for development) (1)
    9.0       8.6                   0.4        
Virginia
    0.4       0.5                   (0.1 )     7,093  
 
                                   
 
    36.9       26.5       0.3             10.1       176,449  
 
                                               
Mortgage note repayments
    2.5                   2.5              
 
                                               
Joint venture preferred equity interest
                                               
Utah
    5.5             5.5                    
 
                                   
Total 2008 Dispositions
  $ 44.9     $ 26.5     $ 5.8     $ 2.5     $ 10.1       176,449  
 
                                   
 
(1)   The gain related to the sale of this land parcel is recognized in other income (expense) on the Company’s Consolidated Statement of Income.
     2010 Disposition
          In January 2010, pursuant to a purchase option with an operator, the Company disposed of five properties in Virginia. The Company’s aggregate net investment in the buildings was approximately $16.0 million at December 31, 2009. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on sale of approximately $2.7 million, including the write-off of approximately $0.5 million of straight-line rent receivables.
5. Discontinued Operations
          The major categories of assets and liabilities of properties sold or to be sold are classified as held for sale, to the extent not sold, on the Company’s Consolidated Balance Sheets, and the results of operations of such properties are included in discontinued operations on the Company’s Consolidated Statements of Income for all periods. Properties classified as held for sale at December 31, 2009 include the properties discussed in “2010 Disposition” in Note 4, as well as one other property that the Company decided to sell in 2007.
          The tables below reflect the assets and liabilities of the properties classified as held for sale and discontinued operations as of December 31, 2009 and the results of operations of the properties included in discontinued operations on the Company’s Consolidated Statements of Income for the periods ended December 31, 2009, 2008 and 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                 
    December 31,  
(Dollars in thousands)   2009     2008  
Balance Sheet data (as of the period ended):
               
Land
  $ 3,374     $ 9,503  
Buildings, improvements and lease intangibles
    22,178       109,596  
Personal property
          30  
 
           
 
    25,552       119,129  
Accumulated depreciation
    (8,697 )     (29,905 )
 
           
Assets held for sale, net
    16,855       89,224  
 
               
Other assets, net (including receivables)
    890       1,009  
 
           
Assets of discontinued operations, net
    890       1,009  
 
               
Assets held for sale and discontinued operations, net
  $ 17,745     $ 90,233  
 
           
 
               
Notes and bonds payable
  $     $ 5,452  
 
           
Liabilities held for sale
          5,452  
 
               
Notes and bonds payable
          23,281  
Accounts payable and accrued liabilities
          409  
Other liabilities
    251       3,679  
 
           
Liabilities of discontinued operations
    251       27,369  
 
               
Liabilities held for sale and discontinued operations
  $ 251     $ 32,821  
 
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                         
    Year Ended December 31,  
(Dollars in thousands, except per share data)   2009     2008     2007  
Statements of Income data (for the period ended):
                       
Revenues (1)
                       
Master lease rent
  $ 4,242     $ 6,887     $ 15,691  
Property operating
    828       7,999       8,125  
Straight-line rent
    (102 )     (9 )     84  
Mortgage interest
                1,841  
Other operating
    216       8,014       18,813  
 
                 
 
    5,184       22,891       44,554  
 
                       
Expenses (2)
                       
General and administrative
          (26 )      
Property operating
    969       3,902       4,134  
Other operating
                16,688  
Bad debts, net of recoveries
    (20 )     71       (24 )
Depreciation
    1,039       2,331       5,897  
Amortization
          25       38  
 
                 
 
    1,988       6,303       26,733  
 
                       
Other Income (Expense) (3)
                       
Interest expense
    (667 )     (2,008 )     (2,378 )
Interest and other income, net
    284       25       278  
 
                 
 
    (383 )     (1,983 )     (2,100 )
 
                       
Income from Discontinued Operations
    2,813       14,605       15,721  
 
                 
 
                       
Impairments (4)
    (22 )     (886 )     (7,089 )
Gain on sales of real estate properties (5)
    20,136       9,843       40,405  
 
                 
 
                       
Discontinued Operations
  $ 22,927     $ 23,562     $ 49,037  
 
                 
 
                       
Income from Discontinued Operations per common share — basic
  $ 0.40     $ 0.46     $ 1.03  
 
                 
 
                       
Income from Discontinued Operations per common share — diluted
  $ 0.39     $ 0.44     $ 1.01  
 
                 
 
(1)   Total revenues for the years ended December 31, 2009, 2008 and 2007 include $0, $0 and $27.4 million, respectively, related to the sale of the senior living assets; $1.9 million, $19.6 million (including a $7.2 million fee received from an operator to terminate its financial support agreement with the Company) and $13.9 million, respectively, related to other properties sold; and $3.3 million, $3.3 million and $3.3 million, respectively, related to six properties held for sale at December 31, 2009.
 
(2)   Total expenses for the years ended December 31, 2009, 2008 and 2007 include $0, $0 and $19.0 million, respectively, related to the sale of the senior living assets; $0.9 million, $6.0 million and $7.1 million, respectively, related to other properties sold; and $1.1 million, $0.3 million and $0.6 million, respectively, related to six properties held for sale at December 31, 2009.
 
(3)   Other income (expense) for the years ended December 31, 2009, 2008 and 2007 include ($0.2) million, ($0.3) million and ($0.4) million related to properties held for sale; ($0.5) million, ($1.7) million and ($1.7) million related to other properties sold; and December 31, 2009 also includes $0.3 million related to the sale of the senior living assets.
 
(4)   Impairments for the year ended December 31, 2009 includes $0.02 million related to one property sold; December 31, 2008 includes approximately $0.6 million related to one property held for sale and $0.3 million related to three properties sold; December 31, 2007 includes $6.6 million related to four properties sold and $0.5 million related to one property held for sale.
 
(5)   Gain on sales of real estate properties for the year ended December 31, 2009 includes $20.1 million related to six properties sold; December 31, 2008 includes $9.8 million related to six properties sold; December 31, 2007 includes $40.2 million related to the sale of senior living assets during 2007 and $0.2 million related to the sale of a property pursuant to a purchase option exercised by the operator.
6. Impairment Charges
          A Company must assess the potential for impairment of its long-lived assets, including real estate properties, whenever events occur or there is a change in circumstances, such as the sale of a property or the decision to sell a property, that indicates that the recorded

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value might not be fully recoverable. An asset is impaired when undiscounted cash flows expected to be generated by the asset are less than the carrying value of the asset.
     The Company recorded impairment charges, which are included in continuing operations, for the year ended December 31, 2008 totaling $1.6 million related to changes in management’s estimate of fair value and collectibility of patient receivables assigned to the Company in late 2005 resulting from a lease termination and debt restructuring of a physician clinic owned by the Company. No such impairment charges resulted from the Company’s assessments for the years ending December 31, 2009 or 2007.
     The Company also recorded impairment charges, which are included in discontinued operations, for the years ended December 31, 2009, 2008 and 2007 totaling $0.02 million, $0.9 million and $7.1 million, respectively, relating to properties that were sold or classified as held for sale.
7. 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 Consolidated Balance Sheets as of December 31, 2009 and 2008 are detailed in the table below.
                 
    December 31,  
(Dollars in millions)   2009     2008  
Straight-line rent receivables
  $ 25.2     $ 23.2  
Prepaid assets
    24.7       21.0  
Deferred financing costs, net
    12.1       3.1  
Above-market intangible assets, net
    12.0       11.7  
Accounts receivable
    9.0       10.3  
Goodwill
    3.5       3.5  
Notes receivable
    3.3       0.5  
Equity investments in joint ventures
    1.3       2.8  
Customer relationship intangible assets, net
    1.2       1.2  
Allowance for uncollectible accounts
    (3.7 )     (3.3 )
Other
    0.9       3.0  
 
           
 
  $ 89.5     $ 77.0  
 
           
Equity Investments in Joint Ventures
     At December 31, 2009 and 2008, the Company had investments in one and two unconsolidated joint ventures, respectively, which had investments in real estate properties. In January 2009, the Company acquired the remaining membership interest in one of its joint ventures previously accounted for under the equity method. The Company accounts for its remaining joint venture investment under the cost method. The Company’s net investments in the joint ventures are included in other assets on the Company’s Consolidated Balance Sheets, and the related income or loss is included in interest and other income, net on the Company’s Consolidated Statements of Income.
     The Company recognized income related to the joint venture accounted for under the cost method of approximately $0.3 million, $0.7 million and $1.1 million, respectively, for the years ended December 31, 2009, 2008 and 2007.
                         
    December 31,  
(Dollars in thousands)   2009     2008     2007  
Net joint venture investments, beginning of year
  $ 2,784     $ 18,356     $ 20,079  
Equity in income (losses) recognized during the year
    (2 )     1,021       (309 )
Acquisition of remaining equity interest in a joint venture
    (1,700 )     (10,165 )      
Partial redemption of preferred equity investment in an unconsolidated joint venture
          (5,546 )      
Additional investment in a joint venture
    184              
Distributions received during the year
          (882 )     (1,414 )
 
                 
Net joint venture investments, end of year
  $ 1,266     $ 2,784     $ 18,356  
 
                 

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8. Intangible Assets and Liabilities
     The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets, including goodwill, deferred financing costs, above-, below-, and at-market lease intangibles, and customer relationship intangibles. The Company’s intangible assets and liabilities as of December 31, 2009 and 2008 consisted of the following:
                                                 
    Gross     Accumulated              
    Balance at     Amortization     Weighted        
    December 31,     at December 31,     Avg. Life     Balance Sheet  
(Dollars in millions)   2009     2008     2009     2008     (Years)     Classification  
Goodwill
  $ 3.5     $ 3.5     $     $       N/A     Other assets
Deferred financing costs
    17.1       11.4       5.0       8.3       4.1     Other assets
Above-market lease intangibles
    12.8       12.2       0.8       0.5       49.1     Other assets
Customer relationship intangibles
    1.4       1.4       0.2       0.2       33.6     Other assets
Below-market lease intangibles
    (7.2 )     (7.2 )     (1.8 )     (0.7 )     9.8     Other liabilities
At-market lease intangibles
    72.9       65.3       43.7       38.5       9.4     Real estate properties
 
                                     
 
  $ 100.5     $ 86.6     $ 47.9     $ 46.8       18.7          
 
                                     
     Amortization of the Company’s intangible assets and liabilities, in place as of December 31, 2009, is expected to be approximately $7.7 million, $7.1 million, $6.2 million, $3.6 million, and $3.2 million, respectively, for the years ended December 31, 2010 through 2014.
9. Notes and Bonds Payable
     The table below details the Company’s notes and bonds payable. At December 31, 2008, the Company had classified four mortgage notes payable totaling $28.7 million as liabilities held for sale and discontinued operations on the Company’s Consolidated Balance Sheet that were subsequently repaid. As such, those mortgage notes are not reflected in the December 31, 2008 balances in the following table:
                 
    December 31,  
(Dollars in thousands)   2009     2008  
Unsecured Credit Facility due 2012
  $ 50,000     $  
Unsecured Credit Facility due 2010
          329,000  
Senior Notes due 2011, including premium
    286,655       286,898  
Senior Notes due 2014, net of discount
    264,090       263,961  
Senior Notes due 2017, net of discount
    297,988        
Mortgage notes payable, net of discount
    147,689       60,327  
 
           
 
  $ 1,046,422     $ 940,186  
 
           
     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 (as defined in the agreement) and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At December 31, 2009, the Company was in compliance with its 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”) with a syndicate of 16 lenders that matures on September 30, 2012. Amounts outstanding under the Unsecured Credit Facility will 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 December 31, 2009, the

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Company had $50.0 million outstanding under the facility with a weighted average interest rate of approximately 3.03% and had borrowing capacity remaining, under its financial covenants, of approximately $500.0 million.
     Unsecured Credit Facility due 2010
          The Company’s $400.0 million unsecured credit facility due 2010 was repaid on September 30, 2009 with proceeds from the Unsecured Credit Facility. The $400.0 million unsecured credit facility bore interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate or the Federal Funds rate plus 0.50%) plus (y) a margin ranging from 0.60% to 1.20% (0.90% at September 30, 2009), based upon the Company’s unsecured debt ratings. Additionally, the Company paid a facility fee per annum on the aggregate amount of commitments, ranging from 0.15% to 0.30% per annum (0.20% at September 30, 2009), based on the Company’s unsecured debt ratings. Upon repayment of the $400.0 million unsecured credit facility on September 30, 2009, the Company had $368.0 million outstanding on the facility with a weighted average interest rate of approximately 1.27%.
     Senior Notes due 2011
          In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125%, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. During 2008, the Company repurchased $13.7 million of the Senior Notes due 2011. 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 Consolidated Balance Sheets and is being amortized against interest expense over the remaining term of the notes yielding an effective interest rate on the notes of 7.896%. For each of the years ended December 31, 2009, 2008 and 2007, the Company amortized approximately $0.2 million of the net premium which is included in interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Consolidated Balance Sheets as of December 31, 2009 and 2008.
                 
    December 31,  
(Dollars in thousands)   2009     2008  
Senior Notes due 2011 face value
  $ 286,300     $ 286,300  
Unamortized net gain (net of discount)
    355       598  
 
           
Senior Notes due 2011 carrying amount
  $ 286,655     $ 286,898  
 
           
     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%, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. During 2008, the Company repurchased approximately $35.3 million of the Senior Notes due 2014. The notes were issued at a discount of approximately $1.5 million, which yielded a 5.19% interest rate per annum upon issuance. For each of the years ended December 31, 2009, 2008 and 2007, the Company amortized approximately $0.1 million of the discount which is included in interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Consolidated Balance Sheets as of December 31, 2009 and 2008:
                 
    December 31,  
(Dollars in thousands)   2009     2008  
             
Senior Notes due 2014 face value
  $ 264,737     $ 264,737  
Unaccreted discount
    (647 )     (776 )
 
           
Senior Notes due 2014 carrying amount
  $ 264,090     $ 263,961  
 
           
     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%, 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, which yielded a 6.618% interest rate per annum upon issuance. For the year ended December 31, 2009, the Company amortized approximately $0.02

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million of the discount which is included in interest expense on the Company’s Consolidated Statement of Income. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Consolidated Balance Sheet as of December 31, 2009:
         
    December 31,  
(Dollars in thousands)   2009  
       
Senior Notes due 2017 face value
  $ 300,000  
Unaccreted discount
    (2,012 )
 
     
Senior Notes due 2017 carrying amount
  $ 297,988  
 
     
     Senior Note Repurchases
          During 2008, the Company repurchased $13.7 million of the Senior Notes due 2011 and $35.3 million of the Senior Notes due 2014, amortized a pro-rata portion of the premium or discount related to the notes and recognized a net gain of $4.1 million. The Company may elect, from time to time, to repurchase and retire its notes when market conditions are appropriate.
     Mortgage Notes Payable
          The following table details the Company’s mortgage notes payable, with related collateral. At December 31, 2008, the Company had classified four mortgage notes payable totaling $28.7 million to liabilities held for sale and discontinued operations on the Company’s Consolidated Balance Sheet. As such, the four mortgages are not shown in the table below.
                                                                 
                                            Investment in        
            Effective             Number             Collateral at     Balance at  
    Original     Interest     Maturity     of Notes             December 31,     December 31,  
(Dollars in millions)   Balance     Rate (11)     Date     Payable (12)     Collateral (13)     2009     2009     2008  
 
Life Insurance Co. (1)
  $ 4.7       7.765 %     1/17       1     MOB   $ 11.4     $ 2.5     $ 2.7  
Commercial Bank (2)
    11.7       7.220 %     5/11           2 MOB’s/1 ASC                 3.7  
Commercial Bank (3)
    1.8       5.550 %     10/30       1     OTH     7.7       1.7       1.8  
Life Insurance Co. (4)
    15.1       5.490 %     1/16       1     ASC     32.5       13.9       14.2  
Commercial Bank (5)
    17.4       6.480 %     5/15       1     MOB     19.9       14.4       14.3  
Commercial Bank (6)
    12.0       6.110 %     7/15       1     2 MOBs     19.5       9.7       9.6  
Commercial Bank (7)
    15.2       7.650 %     7/20       1     MOB     20.2       12.8       12.8  
Life Insurance Co. (8)
    1.5       6.810 %     7/16       1     SOP     2.2       1.2       1.2  
Commercial Bank (9)
    12.8       6.430 %     2/21       1     MOB     20.5       11.6        
Investment Fund (10)
    80.0       7.250 %     12/16       1     15 MOBs     152.4       79.9        
 
                                                       
 
                            9             $ 286.3     $ 147.7     $ 60.3  
 
                                                       
 
(1)   Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.
 
(2)   Three mortgage notes totaling $3.7 million at December 31, 2008 were defeased and repaid in full in December 2009.
 
(3)   Payable in monthly installments of principal and interest based on a 27-year amortization with the final payment due at maturity.
 
(4)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.
 
(5)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during 2008 and recorded the note at its fair value, resulting in a $2.7 million discount which is included in the balance above.
 
(6)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during 2008 and recorded the note at its fair value, resulting in a $2.1 million discount which is included in the balance above.
 
(7)   Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during 2008 and recorded the note at its fair value, resulting in a $2.4 million discount which is included in the balance above.
 
(8)   Payable in monthly installments of principal and interest based on a 9-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during 2008 and recorded the note at its fair value, resulting in a $0.2 million discount which is included in the balance above.
 
(9)   Payable in monthly installments of principal and interest based on a 12-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during 2009 and recorded the note at its fair value, resulting in a $1.0 million discount which is included in the balance above.

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(10)   Payable in monthly installments of principal and interest based on a 30-year amortization with a 7-year initial term (maturity 12/01/16) and the option to extend the initial term for two, one-year floating rate extension terms.
 
(11)   The contractual interest rates for the nine outstanding mortgage notes ranged from 5.00% to 7.625% at December 31, 2009.
 
(12)   Number of mortgage notes payable outstanding at December 31, 2009.
 
(13)   MOB-Medical office building; ASC-Ambulatory care/surgery; SOP-Specialty outpatient; OTH-Other.
          The following mortgage notes payable were classified to liabilities held for sale and discontinued operations on the Company’s Consolidated Balance Sheet at December 31, 2008. During 2009, three of the mortgage notes totaling approximately $9.2 million were repaid and one mortgage note totaling $19.5 million was assumed by the buyer upon sale of the related real estate property.
                                                         
                                            Investment in     Contractual  
            Effective             Number             Collateral at     Balance at  
    Original     Interest     Maturity     of Notes             December 31,     December 31,  
(Dollars in millions)   Balance     Rate (4)     Date     Payable     Collateral (5)     2008     2008  
Life Insurance Co. (1)
  $ 23.3       7.765 %     7/26       1     MOB   $ 46.8     $ 19.5  
Commercial Bank (2)
    11.7       7.220 %     5/11       2     3 MOBs     23.0       3.7  
Commercial Bank (3)
    5.5       6.500 %     1/27       1     MOB     10.7       5.5  
 
                                                 
 
                            4             $ 80.5     $ 28.7  
 
                                                 
 
(1)   Payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due at maturity. The mortgage note was assumed by the buyer upon sale of the property in March 2009.
 
(2)   Payable in fully amortizing monthly installments of principal and interest due at maturity. Defeased and repaid in full in December 2009.
 
(3)   Payable in fully amortizing monthly installments of principal and interest due at maturity. The mortgage note was assumed by the buyer upon sale of the property in February 2009.
 
(4)   The contractual interest rates for the four outstanding mortgage notes included in liabilities held for sale and discontinued operations ranged from 6.5% to 8.5% at December 31, 2008.
 
(5)   MOB-Medical office building
     Other Long-Term Debt Information
          Future maturities of the Company’s notes and bonds payable as of December 31, 2009 were as follows:
                                 
            Discount/     Total        
    Principal     Premium     Notes and        
(Dollars in thousands)   Maturities     Amortization (2)     Bonds Payable     %  
2010
  $ 2,386     $ (1,013 )   $ 1,373       0.1 %
2011
    288,843       (1,260 )     287,583       27.5 %
2012 (1)
    52,707       (1,434 )     51,273       4.9 %
2013
    2,889       (1,520 )     1,369       0.1 %
2014
    267,818       (1,499 )     266,319       25.5 %
2015 and thereafter
    441,748       (3,243 )     438,505       41.9 %
 
                       
 
                               
 
  $ 1,056,391     $ (9,969 )   $ 1,046,422       100.0 %
 
                       
 
(1)   Includes $50.0 million outstanding on the Unsecured Credit Facility.
 
(2)   Includes discount and premium amortization related to the Company’s Senior Notes due 2011, Senior Notes due 2014, and Senior Notes due 2017 and discount amortization related to five mortgage notes payable.
10. Stockholders’ Equity
     Common Stock
          The Company had no preferred shares outstanding and had common shares outstanding for the three years ended December 31, 2009 as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                         
    Year Ended December 31,  
    2009     2008     2007  
Balance, beginning of year
    59,246,284       50,691,331       47,805,448  
Issuance of stock
    1,244,914       8,373,014       2,833,434  
Restricted stock-based awards, net of forfeitures
    123,733       181,939       52,449  
 
                 
Balance, end of year
    60,614,931       59,246,284       50,691,331  
 
                 
     At-The-Market Equity Offering Program
          On December 31, 2008, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 2,600,000 shares of its common stock through an at-the-market equity offering program under which Cantor Fitzgerald acts as agent and/or principal. During 2009, the Company sold 1,201,600 shares of common stock, at prices ranging from $21.62 per share to $22.50 per share, generating approximately $25.7 million in net proceeds. In January 2010, the Company sold an additional 698,700 shares of common stock under the plan for net proceeds totaling approximately $14.9 million. On February 22, 2010, the Company entered into a new sales agreement with Cantor Fitzgerald to sell up to 5,000,000 shares of its common stock through the at-the-market equity offering program. The 5,000,000 shares include 699,700 shares that remain unsold under the prior sales agreement and 4,300,300 new shares. This agreement supersedes the prior sales agreement.
     Equity Offerings
          On September 29, 2008, the Company sold 8,050,000 shares of common stock, par value $0.01 per share, at $25.50 per share in an underwritten public offering pursuant to the Company’s existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $196.0 million.
          On September 28, 2007, the Company sold 2,760,000 shares of common stock, par value $0.01 per share, at $24.85 per share to an investment bank pursuant to the Company’s existing effective registration statement. The transaction generated approximately $68.4 million in net proceeds to the Company.
     Dividends Declared
          During 2009, the Company declared and paid quarterly common stock dividends in the amounts of $0.385 per share.
          On February 2, 2010, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on March 4, 2010 to stockholders of record on February 18, 2010.
     Authorization to Repurchase Common Stock
          In 2006, the Company’s Board of Directors authorized management to repurchase up to 3,000,000 shares of the Company’s common stock. As of December 31, 2009, the Company had not repurchased any shares under this authorization. The Company may elect, from time to time, to repurchase shares either when market conditions are appropriate or as a means to reinvest excess cash flows. Such purchases, if any, may be made either in the open market or through privately negotiated transactions.
     Accumulated Other Comprehensive Loss
          During the year ended December 31, 2009, the Company recorded a $1.9 million reduction to future benefit obligations related to its pension plans, resulting in a decrease to other liabilities, with an offset to accumulated other comprehensive loss which is included in stockholders’ equity on the Company’s Consolidated Balance Sheet. The reduction to the benefit obligation is primarily due to the one-time cash payment of $2.3 million in January 2009 to its chief executive officer resulting from the curtailment and partial settlement of his future pension benefit. For the year ended December 31, 2008, the Company recorded $2.1 million in additional benefit obligations related to its pension plans, resulting in an increase to other liabilities, with an offset to accumulated other comprehensive loss, included in stockholders’ equity, on the Company’s Consolidated Balance Sheet.

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11. Benefit Plans
     Executive Retirement Plan
          The Company has an Executive Retirement Plan, under which certain officers designated by the Compensation Committee of the Board of Directors may receive upon normal retirement (defined to be when the officer reaches age 65 and has completed five years of service with the Company) an amount equal to 60% of the officer’s final average earnings (defined as the average of the executive’s highest three years’ earnings) plus 6% of final average earnings times years of service after age 60 (but not more than five years), less 100% of certain other retirement benefits received by the officer to be paid either in lump sum or in monthly installments over a period not to exceed the greater of the life of the retired officer or his surviving spouse.
          In December 2008, the Company froze the maximum annual benefits payable under the plan at $896,000 as a cost savings measure. This revision resulted in a curtailment of benefits under the retirement plan for the Company’s chief executive officer. In consideration of the curtailment and as partial settlement of benefits under the retirement plan, the Company paid a one-time cash payment of $2.3 million to its chief executive officer in January 2009. Also, in connection with the partial settlement, the chief executive officer agreed to receive his remaining retirement benefits under the plan in installment payments upon retirement, rather than in a lump sum. Of the two remaining officers in the plan, one has elected to receive their benefits in monthly installments and one has elected a lump sum payment upon retirement.
          At December 31, 2009, only the Company’s chief executive officer was eligible to retire under the plan. Assuming he retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $29.9 million which would be paid in annual installments of approximately $0.9 million, increasing annually based on CPI. The Company also has one other officer to whom it is currently making benefit payments of approximately $84,000 per year that retired under the plan.
          In November 2008, an officer and participant in the Executive Retirement Plan voluntarily resigned from employment. The officer was eligible to receive a lump-sum distribution of earned benefits under this plan of approximately $4.5 million. The Company granted the officer an equivalent number of shares of common stock in satisfaction of this pension benefit, resulting in a curtailment and partial settlement of the plan. The Company also recognized $1.1 million in additional compensation expense, a component of general and administrative expense, related to the settlement of the officer’s pension benefit. See Note 12.
     Retirement Plan for Outside Directors
          The Company had a retirement plan for outside directors under which a director may receive upon normal retirement (defined to be when the director reaches age 65 and has completed at least five years of service or when the director reaches age 60 and has completed at least 15 years of service) payment annually, for a period equal to the number of years of service as a director but not to exceed 15 years, an amount equal to the director’s annual retainer and meeting fee compensation (for 2009 this amount ranged from $32,000 to $44,000) immediately preceding retirement from the Board. In November 2009, the Company terminated the Outside Director Plan. As a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or earlier upon retirement, to the eight directors currently participating in the plan.
     Retirement Plan Information
          Net periodic benefit cost for both the Executive Retirement Plan and the Retirement Plan for Outside Directors (the “Plans”) for the three years in the period ended December 31, 2009 is comprised of the following:
                         
(Dollars in thousands)   2009     2008     2007  
Service cost
  $ 286     $ 1,288     $ 1,022  
Interest cost
    926       1,190       943  
Effect of settlement
    1,005       1,143        
Amortization of net gain/loss
    669       758       442  
 
                 
 
  $ 2,886     $ 4,379     $ 2,407  
Net loss (gain) recognized in other comprehensive income
    (1,868 )     2,115       311  
 
                 
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
  $ 1,018     $ 6,494     $ 2,718  
 
                 
          The Company estimates that approximately $0.7 million of the net loss recognized in accumulated other comprehensive loss will be amortized to expense in 2010.

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          The Plans are unfunded, and benefits will be paid from earnings of the Company. The following table sets forth the benefit obligations as of December 31, 2009 and 2008.
                 
(Dollars in thousands)   2009     2008  
Benefit obligation at beginning of year
  $ 17,488     $ 15,642  
Service cost
    286       1,288  
Interest cost
    926       1,190  
Benefits paid
    (2,384 )     (4,648 )
Curtailment gain
    (14 )     (342 )
Settlement loss
    1,005       1,461  
Actuarial gain/loss, net
    (1,185 )     2,897  
 
           
Benefit obligation at end of year
  $ 16,122     $ 17,488  
 
           
          Amounts recognized in the balance sheets are as follows:
                 
(Dollars in thousands)   2009     2008  
Net liabilities included in accrued liabilities
  $ (11,529 )   $ (11,027 )
Amounts recognized in accumulated other comprehensive loss
    (4,593 )     (6,461 )
          The Company assumed a 6.0% discount rate related to the Executive Retirement Plan and the Retirement Plan for Outside Directors and assumed a 2.7% compensation increase related to the Executive Retirement Plan as of and for each of the three years ended December 31, 2009 to measure the year-end benefit obligations and the earnings effects for the subsequent year related to the retirement plans.
          At December 31, 2009, one employee was eligible to retire under the Executive Retirement Plan. If this individual retired at normal retirement age and received full retirement benefits based upon the terms of the Executive Retirement Plan, future benefits payable are estimated to be approximately $29.9 million as of December 31, 2009. In November 2009, the Company terminated the Retirement Plan for outside Directors. As a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or earlier upon retirement, to the non-employee directors that participated in the plan.
12. Stock and Other Incentive Plans
     2007 Employees Stock Incentive Plan
          The 2007 Employees Stock Incentive Plan (the “Incentive Plan”) authorizes the Company to issue 2,390,272 shares of common stock to its employees and directors. The Incentive Plan will continue until terminated by the Company’s Board of Directors. As of December 31, 2009, 2008 and 2007, the Company had issued, net of forfeitures, a total of 921,612, 822,706 and 29,332 shares, respectively, under the Incentive Plan for compensation-related awards to employees and directors, with a total of 1,468,660, 1,567,566 and 2,360,940 authorized shares, respectively, remaining which had not been issued. Under the Incentive Plan’s predecessor plans, the Company issued 7,151 shares in 2007 and 329,404 shares were forfeited during 2008. Restricted shares issued under the Incentive Plan are generally subject to fixed vesting periods varying from three to 10 years beginning on the date of issue. If an employee voluntarily terminates employment with the Company before the end of the vesting period, the shares are forfeited, at no cost to the Company. Once the shares have been issued, the employee has the right to receive dividends and the right to vote the shares. Compensation expense recognized during the years ended December 31, 2009, 2008 and 2007 from the amortization of the value of restricted shares issued to employees was $2.9 million, $3.7 million and $4.1 million, respectively.
          In the fourth quarters of 2009 and 2008, the Company released performance-based awards to 30 and 31, respectively, of its officers under the Incentive Plan totaling approximately $0.9 million and $3.3 million, respectively, which were granted in the form of restricted shares totaling approximately 39,500 shares and 130,400 shares, respectively. The shares have vesting periods ranging from three to eight years with a weighted average vesting period in 2009 and 2008 of approximately six years. The Company expects the issuance of the 39,500 restricted shares in 2009 will increase amortization expense in 2010 by approximately $0.1 million.
          In November 2008, an officer of the Company voluntarily resigned from employment. As a result of his resignation, the officer forfeited 329,404 in unvested restricted shares, resulting in the reversal of $1.7 million (net) in compensation expense previously recognized pertaining to these unvested shares. The officer was also a participant in the Executive Retirement Plan and was eligible to receive a lump-sum distribution of earned benefits under this plan of approximately $4.5 million. The Company granted the officer 616,500 in unrestricted common shares under the Incentive Plan, which were valued at $15.90 per share on the date of grant, in satisfaction of the lump-sum pension benefit earned under the Executive Retirement Plan of approximately $4.5 million and an additional award.

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          The Incentive Plan also authorizes the Company’s Compensation Committee of its Board of Directors to grant restricted stock units or other performance units to eligible employees. Such awards, if issued, will also be subject to restrictions and other conditions as determined appropriate by the Compensation Committee. Grantees of restricted stock units will not have stockholder voting rights and will not receive dividend payments. The award of performance units does not create any stockholder rights. Upon satisfaction of certain performance targets as determined by the Compensation Committee, payment of the performance units may be made in cash, shares of common stock, or a combination of cash and common stock, at the option of the Compensation Committee. As of December 31, 2009, the Company had not granted any restricted stock units or other performance awards under the Incentive Plan.
     Non-Employee Directors’ Stock Plan
          The 1995 Restricted Stock Plan for Non-Employee Directors (the “1995 Directors’ Plan”) authorizes the Company to issue 100,000 shares to its directors. The directors’ stock issued generally has a three-year vesting period and is subject to forfeiture prior to such date upon termination of the director’s service, at no cost to the Company. As of December 31, 2009, the Company had issued all shares authorized under the plan and had issued 75,173 and 59,173 shares, respectively as of December 31, 2008 and 2007, pursuant to the 1995 Directors’ Plan. As of December 31, 2008 and 2007, a total of 24,827 and 40,827 authorized shares, respectively, had not been issued. Upon issuance of all authorized Shares under the 1995 Directors’ Plan, a portion of the directors’ 2009 restricted stock grant was issued under the Incentive Plan, Beginning in 2010, all shares granted to the directors will be issued under the Incentive Plan. For 2009, 2008 and 2007, compensation expense resulting from the amortization of the value of these shares was $0.5 million, $0.5 million, and $0.4 million, respectively.
          A summary of the activity under the Incentive Plan, and its predecessor plan, and the 1995 Directors’ Plan and related information for the three years in the period ended December 31, 2009 follows:
                         
    2009     2008     2007  
Stock-based awards, beginning of year
    1,111,728       1,289,646       1,261,613  
Granted
    124,587       812,654       65,706  
Vested
    (11,536 )     (657,888 )     (35,974 )
Forfeited
          (332,684 )     (1,699 )
 
                 
Stock-based awards, end of year
    1,224,779       1,111,728       1,289,646  
 
                 
 
                       
Weighted-average grant date fair value of:
                       
Stock-based awards, beginning of year
  $ 25.71     $ 25.12     $ 24.85  
Stock-based awards granted during the year
  $ 21.01     $ 18.18     $ 34.99  
Stock-based awards vested during the year
  $ 32.80     $ 16.54     $ 33.17  
Stock-based awards forfeited during the year
  $     $ 24.06     $ 34.89  
Stock-based awards, end of year
  $ 25.16     $ 25.71     $ 25.12  
Grant date fair value of shares granted during the year
  $ 2,617,678     $ 14,773,448     $ 2,298,787  
          The vesting periods for the restricted shares granted during 2009 ranged from three to eight years with a weighted-average amortization period remaining at December 31, 2009 of approximately 5.8 years.
          During 2009, 2008 and 2007, the Company withheld 854, 10,935 and 9,413 shares, respectively, of common stock from its officers to pay estimated withholding taxes related to restricted stock that vested. During 2007, the Company also purchased 1,445 shares of common stock for cash from two officers whose shares vested. The shares were immediately retired.
     401(k) Plan
          The Company maintains a 401(k) plan that allows eligible employees to defer salary, subject to certain limitations imposed by the Code. The Company provides a matching contribution of up to 3% of each eligible employee’s salary, subject to certain limitations. The Company’s matching contributions were approximately $0.3 million for each of the three years ended December 31, 2009.
     Dividend Reinvestment Plan
          The Company is authorized to issue 1,000,000 shares of common stock to stockholders under the Dividend Reinvestment Plan. As of December 31, 2009, the Company had 448,253 shares issued under the plan of which 33,511 shares were issued in 2009, 24,970 shares were issued in 2008 and 63,600 were issued in 2007.

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     Employee Stock Purchase Plan
          In January 2000, the Company adopted the Employee Stock Purchase Plan, pursuant to which the Company is authorized to issue shares of common stock. As of December 31, 2009, 2008 and 2007, the Company had a total of 413,414, 507,958 and 590,171 shares authorized under the Employee Stock Purchase Plan, respectively, which had not been issued or optioned. Under the Employee Stock Purchase Plan, each eligible employee in January of each year is able to purchase up to $25,000 of common stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option (the “Exercise Date”). The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee Stock Purchase Plan expire if not exercised 27 months after each such option’s date of grant. Cash received from employees upon exercising options under the Employee Stock Purchase Plan for the years ended December 31, 2009, 2008 and 2007 was $0.2 million, $0.2 million and $0.3 million, respectively.
          A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period ended December 31, 2009 is as follows:
                         
    2009     2008     2007  
Outstanding, beginning of year
    250,868       179,603       171,481  
Granted
    219,184       194,832       128,928  
Exercised
    (9,803 )     (10,948 )     (9,947 )
Forfeited
    (42,032 )     (38,325 )     (43,948 )
Expired
    (82,609 )     (74,294 )     (66,911 )
 
                 
Outstanding and exercisable, end of year
    335,608       250,868       179,603