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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-11852
 
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  62 — 1507028
(I.R.S. Employer
Identification No.)
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203

(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of October 31, 2010, 64,426,375 shares of the Registrant’s Common Stock were outstanding.
 
 

 


 

HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
September 30, 2010
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 EX-31.1
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 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 


Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
                 
    (Unaudited)        
    September 30,     December 31,  
    2010     2009  
ASSETS
               
 
               
Real estate properties:
               
Land
  $ 148,356     $ 135,495  
Buildings, improvements and lease intangibles
    2,172,818       1,977,264  
Personal property
    17,974       17,509  
Construction in progress
    58,070       95,059  
 
           
 
    2,397,218       2,225,327  
Less accumulated depreciation
    (474,120 )     (433,634 )
 
           
Total real estate properties, net
    1,923,098       1,791,693  
 
               
Cash and cash equivalents
    11,177       5,851  
 
               
Mortgage notes receivable
    27,134       31,008  
 
               
Assets held for sale and discontinued operations, net
    17,592       17,745  
 
               
Other assets, net
    90,862       89,467  
 
           
 
               
Total assets
  $ 2,069,863     $ 1,935,764  
 
           
 
               
LIABILITIES AND EQUITY
               
Liabilities:
               
Notes and bonds payable
  $ 1,138,200     $ 1,046,422  
 
               
Accounts payable and accrued liabilities
    61,400       55,043  
 
               
Liabilities of discontinued operations
    1,229       251  
 
               
Other liabilities
    46,025       43,900  
 
           
 
               
Total liabilities
    1,246,854       1,145,616  
 
               
Commitments and contingencies
               
 
               
Equity:
               
 
               
Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued and outstanding
           
 
               
Common stock, $.01 par value; 150,000,000 shares authorized; 64,149,158 and 60,614,931 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    641       606  
 
               
Additional paid-in capital
    1,602,078       1,520,893  
 
               
Accumulated other comprehensive loss
    (4,628 )     (4,593 )
 
               
Cumulative net income attributable to common stockholders
    795,785       787,965  
 
               
Cumulative dividends
    (1,574,586 )     (1,518,105 )
 
           
 
               
Total stockholders’ equity
    819,290       786,766  
 
               
Noncontrolling interests
    3,719       3,382  
 
           
 
               
Total equity
    823,009       790,148  
 
           
 
               
Total liabilities and equity
  $ 2,069,863     $ 1,935,764  
 
           
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2010 and 2009
(Dollars in thousands, except per share data)
(Unaudited)
                 
    2010     2009  
REVENUES
               
Master lease rent
  $ 14,054     $ 13,833  
Property operating
    47,714       45,024  
Straight-line rent
    626       704  
Mortgage interest
    601       658  
Other operating
    2,128       2,110  
 
           
 
    65,123       62,329  
 
               
EXPENSES
               
General and administrative
    4,243       5,107  
Property operating
    26,671       23,537  
Bad debt, net
    39       (133 )
Depreciation
    17,115       15,499  
Amortization
    1,237       1,236  
 
           
 
    49,305       45,246  
 
               
OTHER INCOME (EXPENSE)
               
Interest expense
    (15,923 )     (9,535 )
Interest and other income, net
    187       292  
 
           
 
    (15,736 )     (9,243 )
 
           
 
               
INCOME FROM CONTINUING OPERATIONS
    82       7,840  
 
               
DISCONTINUED OPERATIONS
               
Income (loss) from discontinued operations
    (121 )     1,115  
Impairments
    (7,361 )      
Gain on sales of real estate properties
    4,092       84  
 
           
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (3,390 )     1,199  
 
           
 
               
NET INCOME (LOSS)
    (3,308 )     9,039  
 
               
Less: Net loss attributable to noncontrolling interests
    60       65  
 
           
 
               
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (3,248 )   $ 9,104  
 
           
 
               
BASIC EARNINGS (LOSS) PER COMMON SHARE:
               
Income from continuing operations
  $ 0.00     $ 0.13  
Discontinued operations
    (0.05 )     0.03  
 
           
Net income (loss) attributable to common stockholders
  $ (0.05 )   $ 0.16  
 
           
 
               
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
               
Income from continuing operations
  $ 0.00     $ 0.13  
Discontinued operations
    (0.05 )     0.02  
 
           
Net income (loss) attributable to common stockholders
  $ (0.05 )   $ 0.15  
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC
    62,369,773       58,174,482  
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED
    63,424,706       59,064,066  
 
           
 
               
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD
  $ 0.300     $ 0.385  
 
           
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2010 and 2009

(Dollars in thousands, except per share data)
(Unaudited)
                 
    2010     2009  
REVENUES
               
Master lease rent
  $ 43,309     $ 41,609  
Property operating
    140,000       132,825  
Straight-line rent
    1,952       1,452  
Mortgage interest
    1,708       2,126  
Other operating
    6,399       8,623  
 
           
 
    193,368       186,635  
 
               
EXPENSES
               
General and administrative
    12,513       17,397  
Property operating
    75,089       69,518  
Bad debt, net
    (438 )     425  
Depreciation
    50,000       45,556  
Amortization
    3,869       4,063  
 
           
 
    141,033       136,959  
 
               
OTHER INCOME (EXPENSE)
               
Loss on extinguishment of debt
    (480 )      
Re-measurement gain of equity interest upon acquisition
          2,701  
Interest expense
    (47,803 )     (29,531 )
Interest and other income, net
    1,800       675  
 
           
 
    (46,483 )     (26,155 )
 
           
 
               
INCOME FROM CONTINUING OPERATIONS
    5,852       23,521  
 
               
DISCONTINUED OPERATIONS
               
Income from discontinued operations
    1,060       3,098  
Impairments
    (7,361 )     (22 )
Gain on sales of real estate properties
    8,313       20,136  
 
           
INCOME FROM DISCONTINUED OPERATIONS
    2,012       23,212  
 
           
 
               
NET INCOME
    7,864       46,733  
 
               
Less: Net income attributable to noncontrolling interests
    (44 )     (12 )
 
           
 
               
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 7,820     $ 46,721  
 
           
 
               
BASIC EARNINGS PER COMMON SHARE:
               
Income from continuing operations
  $ 0.10     $ 0.40  
Discontinued operations
    0.03       0.40  
 
           
Net income attributable to common stockholders
  $ 0.13     $ 0.80  
 
           
 
               
DILUTED EARNINGS PER COMMON SHARE:
               
Income from continuing operations
  $ 0.10     $ 0.40  
Discontinued operations
    0.03       0.39  
 
           
Net income attributable to common stockholders
  $ 0.13     $ 0.79  
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC
    61,232,810       58,150,024  
 
           
 
               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED
    62,269,413       58,950,870  
 
           
 
               
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD
  $ 0.900     $ 1.155  
 
           
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009
(Dollars in thousands)
(Unaudited)
                 
    2010     2009  
OPERATING ACTIVITIES
               
Net income
  $ 7,864     $ 46,733  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    57,484       52,889  
Stock-based compensation
    1,845       3,286  
Straight-line rent receivable
    (1,923 )     (1,348 )
Straight-line rent liability
    309       336  
Gain on sales of real estate properties
    (8,313 )     (20,136 )
Loss on extinguishment of debt
    480        
Re-measurement gain of equity interest upon acquisition
          (2,701 )
Impairments
    7,361       22  
Provision for bad debt, net
    (418 )     429  
State income taxes paid, net of refunds
    (503 )     (662 )
Payment of partial pension settlement
    (342 )     (2,300 )
Changes in operating assets and liabilities:
               
Other assets
    (6,923 )     (1,003 )
Accounts payable and accrued liabilities
    9,861       11,984  
Other liabilities
    2,193       (5,148 )
 
           
Net cash provided by operating activities
    68,975       82,381  
 
               
INVESTING ACTIVITIES
               
Acquisition and development of real estate properties
    (183,653 )     (99,253 )
Funding of mortgages and notes receivable
    (13,921 )     (13,183 )
Investments in unconsolidated joint venture
          (184 )
Proceeds from sales of real estate
    33,321       83,441  
Proceeds from mortgages and notes receivable repayments
    7,385       205  
 
           
Net cash used in investing activities
    (156,868 )     (28,974 )
 
               
FINANCING ACTIVITIES
               
Net borrowings on unsecured credit facilities
    81,000       44,000  
Repayments on notes and bonds payable
    (1,759 )     (22,640 )
Repurchase of notes payable
    (8,556 )      
Quarterly dividends paid
    (56,481 )     (68,530 )
Proceeds from issuance of common stock
    79,467       534  
Common stock redemptions
          (8 )
Capital contributions received from noncontrolling interests
    686       1,771  
Distributions to noncontrolling interest holders
    (399 )     (191 )
Equity issuance costs
    (23 )      
Debt issuance and assumption costs
    (716 )     (7,393 )
 
           
Net cash provided by (used in) financing activities
    93,219       (52,457 )
 
           
 
               
Increase in cash and cash equivalents
    5,326       950  
Cash and cash equivalents, beginning of period
    5,851       4,138  
 
           
Cash and cash equivalents, end of period
  $ 11,177     $ 5,088  
 
           
 
               
Supplemental Cash Flow Information:
               
Interest paid
  $ 40,048     $ 26,953  
Capitalized interest
  $ 7,729     $ 7,260  
Invoices accrued for construction, tenant improvement and other capitalized costs
  $ 11,914     $ 15,891  
Mortgage notes payable assumed upon acquisition (adjusted to fair value)
  $ 19,880     $ 11,716  
Mortgage note payable disposed of upon sale of joint venture interest
  $     $ 5,425  
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 2010
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Business Overview
     Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust (“REIT”) that owns, acquires, manages, finances, and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $2.4 billion in 209 real estate properties and mortgages as of September 30, 2010, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture. The Company’s 202 owned real estate properties, excluding assets classified as held for sale, are comprised of six facility types, located in 28 states, totaling approximately 13.0 million square feet. As of September 30, 2010, the Company provided property management services to approximately 9.0 million square feet nationwide.
Principles of Consolidation
     The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, partnerships, and joint ventures where the Company controls the operating activities. The Company consolidates two joint ventures, with the same joint venture partner, in which it has a controlling interest. Included in the Company’s Condensed Consolidated Balance Sheets at September 30, 2010 was approximately $106.2 million in real estate investments, including construction notes receivable from the noncontrolling interest holder related to these two consolidated joint ventures. The Company reports noncontrolling interests as equity and reports the related net income (loss) attributable to the noncontrolling interests as part of consolidated net income in its Condensed Consolidated Financial Statements. The Company also has an investment in an unconsolidated joint venture that is included in other assets with its related income recognized in other income (expense) on the Company’s Condensed Consolidated Financial Statements.
     The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. All material intercompany transactions and balances have been eliminated in consolidation.
     This interim financial information should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2010 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends and uncertainties.
Use of Estimates in the Condensed Consolidated Financial Statements
     Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Segment Reporting
     The Company owns, acquires, manages, finances, and develops outpatient, healthcare-related properties. The Company is managed as one operating segment, rather than multiple operating segments, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single segment.
Reclassifications
     Certain amounts in the Company’s Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale, and related liabilities, have been

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reclassified on the Company’s Condensed Consolidated Balance Sheets, and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented.
Revenue Recognition
General
     The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must be met before a company may recognize revenue, including: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered (i.e., the tenant has taken possession of and controls the physical use of the leased asset); the price has been fixed or is determinable; and collectability is reasonably assured. Income received but not yet earned is deferred until such time it is earned. Deferred revenue is included in other liabilities on the Company’s Condensed Consolidated Balance Sheets.
     The Company derives most of its revenues from its real estate and mortgage notes receivable portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements generally fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in master lease rent, property operating income, or mortgage interest income on the Company’s Condensed Consolidated Statements of Operations, based on the type of contractual agreement.
Rental Income
     Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company’s lease agreements generally include provisions for stated annual increases or increases based on a Consumer Price Index. The Company’s multi-tenant office lease arrangements also generally allow for operating expense recoveries which the Company calculates and bills to its tenants. Rental income from properties under master lease arrangements with tenants is included in master lease rent, and rental income from properties with multi-tenant office lease arrangements is included in property operating income on the Company’s Condensed Consolidated Statements of Operations.
Interest Income
     Mortgage interest income and notes receivable interest income are recognized based on the interest rates and maturity date or amortization period specific to each note. Loan origination fees received are deferred and are recognized to mortgage interest income over the estimated life of the loan.
Property Operating Income
     As of September 30, 2010, the Company had eight real estate properties subject to property operating agreements that obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the sponsor is responsible to the Company for the shortfall under the terms of these agreements. The Company recognizes any shortfall income in other operating income on the Company’s Condensed Consolidated Statements of Operations.
Accumulated Other Comprehensive Loss
     A company must include certain items in comprehensive income (loss), such as foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale securities. The Company’s accumulated other comprehensive loss includes pension liability adjustments, which are generally recognized in the fourth quarter of each year. Also, during the second quarter of 2010, the Company recorded a $35,000 adjustment to record the effect of the settlement with one non-employee director who retired in May 2010.

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Income Taxes
     The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for federal income taxes. The Company must distribute at least 90% per annum of its REIT taxable income to its stockholders and meet other requirements to continue to qualify as a REIT.
     The Company must pay certain state income taxes which are generally included in general and administrative expense on the Company’s Condensed Consolidated Statements of Operations.
     The Company classifies interest and penalties related to uncertain tax positions, if any, in its Condensed Consolidated Financial Statements as a component of general and administrative expense.
Incentive Plans
     The Company has various outstanding employee and non-employee stock-based awards, including restricted stock issued under its incentive plans, and options granted to employees pursuant to its employee stock purchase plan. The Company recognizes compensation expense for these awards based on the grant date fair value of the awards ratably over the requisite service period.
Accounting for Defined Benefit Pension Plans
     The Company has a pension plan under which three employees may receive benefits upon retirement and the completion of five years of service with the Company. The plan is unfunded and benefits will be paid from earnings of the Company. The Company recognizes pension expense on an accrual basis over an estimated service period. The Company calculates pension expense and the corresponding liability annually on the measurement date (December 31) which requires certain assumptions, such as a discount rate and the recognition of actuarial gains and losses.
     The Company also had a pension plan under which the Company’s non-employee directors would receive retirement benefits upon normal retirement (defined to be when the director reached age 65 and had completed at least five years of service or when the director reached age 60 and had completed at least 15 years of service). The Company terminated the pension plan for these directors in November 2009. As a result, in late November 2010, the Company will make lump sum payments, totaling approximately $2.2 million, which represent the non-employee directors’ aggregate accumulated pension benefits payable. A former non-employee director, who retired from the Board in May 2010, received payment upon retirement of approximately $0.3 million.
Operating Leases
     As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company is obligated under operating lease agreements consisting primarily of its corporate office lease and various ground leases related to the Company’s real estate investments where the Company is the lessee.
Discontinued Operations and Assets Held for Sale
     The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Condensed Consolidated Statements of Operations. A company must report discontinued operations when a component of an entity has either been disposed of or is deemed to be held for sale if (i) both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Long-lived assets classified as held for sale on the Company’s Condensed Consolidated Balance Sheets are reported at the lower of their carrying amount or their estimated fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale or anticipated sale of such properties are characterized as impairment losses relating to discontinued operations in the Company’s Condensed Consolidated Statements of Operations. See Note 3 for a detail of the Company’s assets held for sale and discontinued operations.
Land Held for Development
     Land held for development, which is included in construction in progress on the Company’s Condensed Consolidated Balance Sheets, includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. See Note 6 for a detail of the Company’s land held for development.
Fair Value Measurements
     Fair value is defined as the exit price, which is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use

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of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.
     A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
     o Level 1 — quoted prices for identical instruments in active markets;
     o Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
     o Level 3 — fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
     In connection with its acquisitions of real estate assets during 2010, the Company assumed two mortgage notes payable. The valuation of the mortgage notes payable was determined using level two inputs. Levels 2 and 3 were used to fair value the assets classified as held for sale during the third quarter of 2010, which is discussed in more detail in Note 3.
Real Estate Properties
     Real estate properties are recorded at fair value at the acquisition date. The fair value of real estate properties acquired is allocated between land, buildings, tenant improvements, lease and other intangibles, and personal property based upon estimated fair values at the time of acquisition.
     The Company also capitalizes direct construction and development costs, including interest, to all consolidated real estate properties that are under construction and substantive activities are ongoing to prepare the asset for its intended use. The Company considers a building as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred.

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Note 2. Real Estate and Mortgage Notes Receivable Investments
     The Company had investments of approximately $2.4 billion in 209 real estate properties and mortgage notes receivable as of September 30, 2010, excluding assets classified as held for sale and including an investment in one unconsolidated joint venture. The Company’s 202 owned real estate properties, excluding assets classified as held for sale, are located in 28 states and comprise approximately 13.0 million total square feet. The table below details the Company’s investments.
                                         
    Number of   Gross Investment   Square Feet
(Dollars and Square Feet in thousands)   Investments   Amount   %   Footage   %
 
Owned properties:
                                       
Master leases
                                       
Medical office
    11     $ 100,228       4.1 %     548       4.2 %
Physician clinics
    13       106,016       4.4 %     585       4.5 %
Ambulatory care/surgery
    4       27,225       1.1 %     108       0.8 %
Specialty outpatient
    2       4,852       0.2 %     23       0.2 %
Specialty inpatient
    13       234,680       9.6 %     916       7.1 %
Other
    9       35,933       1.5 %     372       2.9 %
     
 
    52       508,934       20.9 %     2,552       19.7 %
 
                                       
Property operating agreements
                                       
Medical office
    8       83,999       3.5 %     624       4.8 %
     
 
    8       83,999       3.5 %     624       4.8 %
 
                                       
Multi-tenanted with occupancy leases
                                       
Medical office
    110       1,388,550       57.2 %     7,791       60.1 %
Medical office — stabilization in progress
    9       249,487       10.3 %     951       7.3 %
Medical office — construction in progress
    3       39,798       1.7 %     405       3.1 %
Physician clinics
    14       45,842       1.9 %     296       2.3 %
Ambulatory care/surgery
    4       35,083       1.4 %     212       1.6 %
Specialty outpatient
    1       2,297       0.1 %     10       0.1 %
Other
    1       10,141       0.4 %     126       1.0 %
     
 
    142       1,771,198       73.0 %     9,791       75.5 %
 
                                       
Land held for development
          18,272       0.8 %            
Corporate property
          14,815       0.6 %            
     
 
          33,087       1.4 %            
     
Total owned properties
    202       2,397,218       98.8 %     12,967       100.0 %
     
 
                                       
Mortgage loans:
                                       
Medical office
    3       4,975       0.2 %            
Physician clinics
    2       16,793       0.7 %            
Specialty inpatient
    1       5,366       0.2 %            
     
 
    6       27,134       1.1 %            
 
                                       
Unconsolidated joint venture:
                                       
Other
    1       1,266       0.1 %            
     
 
    1       1,266       0.1 %            
     
Total real estate investments
    209     $ 2,425,618       100.0 %     12,967       100.0 %
     
Note 3. Acquisitions and Dispositions
Asset Acquisitions
     During the first nine months of 2010, the Company completed the following real estate acquisitions:
    During the first quarter, the Company acquired, through a consolidated joint venture, a 68,534 square foot, on-campus medical office building in Iowa for a purchase price of $13.8 million from the joint venture’s noncontrolling interest holder. The Company had provided $9.9 million in mortgage financing on the building prior to acquisition by the joint venture. Upon acquisition, this mortgage was refinanced with a permanent mortgage note payable to the Company which is eliminated in consolidation.

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    During the third quarter, the Company acquired:
  o   a 73,331 square foot medical office building in Ohio, adjacent to a 287-bed acute-care hospital, for a purchase price of $14.5 million. The Company assumed a $4.2 million mortgage note payable with this acquisition, which has a fixed interest rate of 5.53% and matures in 2018. The building is 100% leased, with lease expirations through 2017;
  o   a 134,032 square foot, on-campus medical office building in Indiana for a purchase price of $23.3 million, including a $0.3 million prepaid ground lease payment. The building is 100% leased, with lease expirations through 2020;
  o   two adjacent medical office buildings in Colorado, aggregating 112,155 square feet, for a purchase price of $30.0 million. In the aggregate, the buildings are 89% leased, with lease expirations through 2020. The Company assumed a mortgage note payable related to one of the buildings totaling $15.7 million ($15.2 million with a $0.5 million fair value adjustment) which bears an effective interest rate of 6.55% and matures in 2013; and
  o   four medical office buildings, adjacent to two separate acute-care hospitals, in Texas for a purchase price of $69.5 million. The portfolio includes 272,671 square feet of on-campus medical office buildings and is approximately 98% leased, with lease expirations through 2022. The Company plans to acquire from the same seller an additional 29,000 square foot building, adjacent to one of the other buildings, during the fourth quarter of 2010 for approximately $6.9 million.
     On November 3, 2010, the Company executed a purchase and sale agreement to acquire an 80,000 square foot, on-campus medical office building in Colorado for approximately $19 million. The building is over 90% leased and the Company expects to acquire the building during the fourth quarter of 2010, subject to the completion of normal and customary due diligence procedures.
     During the first nine months of 2010, the Company funded the following mortgage notes receivable:
    During the first quarter, the Company began funding a loan towards the construction of a $3.2 million medical office building in Iowa by its joint venture partner. The Company had funded $2.3 million of the loan before it was repaid in full by the borrower in the third quarter of 2010.
 
    During the third quarter, the Company:
  o   began funding a $40.0 million loan for the construction of a 48-bed general acute-care hospital in South Dakota by its joint venture partner. At September 30, 2010, the Company had funded approximately $5.9 million of the loan. The Company received an origination fee of $0.6 million in conjunction with this loan that will be amortized to mortgage interest income over the term of the loan. As of September 30, 2010, the Company had recognized $0.1 million of the loan origination in mortgage interest income on the Company’s Condensed Consolidated Statements of Operations. Should the health system elect to lease rather than acquire the property upon completion, one of the Company’s consolidated joint ventures will acquire the hospital at cost;
  o   began funding a $12.4 million loan for the construction of a medical office building in Texas. As of September 30, 2010, the Company had funded $0.6 million of the loan. The Company has the option to acquire the medical office building from the developer twelve months after the building is completed in mid-2011; and
  o   entered into two mortgage notes receivable totaling $18.4 million with its joint venture partner to fund construction of two medical office buildings in Iowa as part of the development of a six-facility outpatient campus. As of September 30, 2010, the Company had funded $4.4 million on the notes and expects to fund the remaining $14.0 million through 2012. The Company, through one of its consolidated joint ventures, will have an option to purchase the two buildings at a fair market value price upon completion and full occupancy. Concurrently upon funding the two mortgage notes, an existing mortgage note receivable totaling $4.3 million was repaid by the joint venture partner. The other four buildings on the campus have been completed.
     The following table summarizes the Company’s year-to-date acquisitions and financings through September 30, 2010.

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                            Mortgage   Mortgage            
            Cash           Note   Notes Payable           Square
(dollars in millions)   Date Acquired   Consideration   Real Estate   Financing   Assumed   Other   Footage
 
Real estate acquisitions (1)
                                                       
Iowa
    03/26/2010     $ 2.9     $ 14.7     $ (9.9 )   $     $ (1.9 )     68,534  
Ohio
    08/13/2010       10.3       14.5             (4.2 )           73,331  
Indiana
    08/27/2010       23.6       23.3                   0.3       134,032  
Colorado (2)
    08/31/2010       14.8       31.0             (15.7 )     (0.5 )     112,155  
Texas
    09/23/2010       69.0       69.5                   (0.5 )     272,671  
             
 
            120.6       153.0       (9.9 )     (19.9 )     (2.6 )     660,723  
 
                                                       
Mortgage note financing
                                                       
Iowa (3)
    01/26/2010       2.3             2.3                    
Texas
    07/01/2010       0.6             0.6                    
South Dakota
    07/26/2010       5.3             5.3                    
Iowa
    08/30/2010       4.4             4.4                    
             
 
            12.6             12.6                    
             
 
          $ 133.2     $ 153.0     $ 2.7     $ (19.9 )   $ (2.6 )     660,723  
             
 
(1)   The Company expensed $0.6 million and $0.7 million, respectively, in transaction costs during the three and nine months ended September 30, 2010 related to these acquisitions.
 
(2)   The mortgage note payable assumed in the Colorado acquisition includes a fair value adjustment of $0.5 million.
 
(3)   This mortgage note was repaid during the third quarter of 2010.
Asset Dispositions and Potential Dispositions
     During the first quarter of 2010, the Company disposed of five properties in Virginia that were previously classified as held for sale and in which the Company had an aggregate net investment of approximately $16.0 million. The Company received approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The Company recognized a gain on sale of approximately $2.7 million, net of straight-line rent receivables written-off.
     During the second quarter of 2010, the Company sold a 14,563 square foot specialty outpatient facility in Florida in which the Company had an aggregate net investment of approximately $2.4 million. The Company received approximately $4.0 million in net cash proceeds and recognized a gain on sale of approximately $1.5 million, net of straight-line rent receivables written-off.
     During the third quarter of 2010, the Company sold a 25,000 square foot ambulatory surgery center in Florida in which the Company had an aggregate net investment of approximately $5.0 million. The Company received approximately $9.7 million in net cash proceeds and recognized a gain on sale of approximately $4.1 million, net of straight-line rent receivables written-off.
     On October 27, 2010, the Company received notice from a tenant of its intent to purchase six skilled nursing facilities in Michigan and Indiana from the Company pursuant to purchase options contained in its leases with the Company. The Company’s aggregate net investment in the properties was approximately $8.2 million at September 30, 2010, and revenues recognized for the three and nine months ended September 30, 2010 was approximately $0.7 million and $2.0 million, respectively. The Company expects the transaction to close during the third quarter of 2011 with an aggregate purchase price of approximately $17.3 million, resulting in a net gain of approximately $9.1 million.
Discontinued Operations and Assets Held for Sale
     During the third quarter of 2010, the Company sold one property in Florida, as discussed in the preceding paragraph, and reclassified six properties located in five states to held for sale. In the aggregate, the Company’s gross investment in the six properties was approximately $28.1 million ($16.3 million, net) at September 30, 2010 with an aggregate square footage of approximately 214,000 feet. In conjunction with management’s decision to sell, the Company tested each of the six properties for impairment and determined that impairment charges totaling $7.4 million, or $0.12 per

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basic and diluted common share, were warranted. A company must record an impairment charge on a property held for sale if its carrying value exceeds its estimated fair value less costs to sell. Fair value amounts used to calculate impairment were based on sale prices in executed purchase and sale agreements on two properties, estimated sales prices with potential buyers on two properties, and on broker estimates of fair value on two properties. In October 2010, one of the six properties classified as held for sale, an 11,963 square foot specialty outpatient facility, was sold for $1.1 million.
     The tables below detail the assets, liabilities, and results of operations included in discontinued operations on the Company’s Condensed Consolidated Statements of Operations and in assets and liabilities of discontinued operations on the Company’s Condensed Consolidated Balance Sheets. At September 30, 2010 and December 31, 2009, the Company had seven and six properties, respectively, classified as held for sale. Five of the properties held for sale at December 31, 2009 were sold in January 2010 and one remains classified as held for sale.
                 
    September 30,     December 31,  
(Dollars in thousands)   2010     2009  
 
Balance Sheet data (as of the period ended):
               
Land
  $ 8,025     $ 3,374  
Buildings, improvements and lease intangibles
    21,466       22,178  
Personal property
    214        
 
           
 
    29,705       25,552  
Accumulated depreciation
    (12,475 )     (8,697 )
 
           
Assets held for sale, net
    17,230       16,855  
 
               
Other assets, net (including receivables)
    362       890  
 
           
Assets of discontinued operations, net
    362       890  
 
           
 
               
Assets held for sale and discontinued operations, net
  $ 17,592     $ 17,745  
 
           
 
               
Accounts payable and accrued liabilities
  $ 368     $  
Other liabilities
    861       251  
 
           
Liabilities of discontinued operations
  $ 1,229     $ 251  
 
           

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    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(Dollars in thousands, except per share data)   2010     2009     2010     2009  
 
Statements of Operations data (for the period ended):
                               
Revenues
                               
Master lease rent
  $ 162     $ 1,139     $ 1,594     $ 4,841  
Property operating
    584       614       1,794       2,412  
Straight-line rent
    (21 )     (28 )     (29 )     (104 )
Other operating
          1       1       218  
 
                       
 
    725       1,726       3,360       7,367  
 
                               
Expenses
                               
General and administrative
    2             8       6  
Property operating
    590       461       1,713       2,117  
Bad debt, net
          (24 )     20       (16 )
Depreciation
    252       407       782       1,810  
 
                       
 
    844       844       2,523       3,917  
 
                               
Other Income (Expense)
                               
Interest expense
          (52 )           (636 )
Interest and other income, net
    (2 )     285       223       284  
 
                       
 
    (2 )     233       223       (352 )
 
                       
 
                               
Discontinued Operations
                               
Income (loss) from discontinued operations
    (121 )     1,115       1,060       3,098  
Impairments
    (7,361 )           (7,361 )     (22 )
Gain on sales of real estate properties
    4,092       84       8,313       20,136  
 
                       
 
                               
Income (Loss) from Discontinued Operations
  $ (3,390 )   $ 1,199     $ 2,012     $ 23,212  
 
                       
 
                               
Income (Loss) from Discontinued Operations per common share — basic
  $ (0.05 )   $ 0.03     $ 0.03     $ 0.40  
 
                       
 
                               
Income (Loss) from Discontinued Operations per common share — diluted
  $ (0.05 )   $ 0.02     $ 0.03     $ 0.39  
 
                       
Note 4. Notes and Bonds Payable
     The table below details the Company’s notes and bonds payable as of September 30, 2010 and December 31, 2009.
                                 
    Sept. 30,   Dec. 31,   Maturity   Contractual   Principal   Interest
(Dollars in thousands)   2010   2009   Dates   Interest Rates   Payments   Payments
 
Unsecured Credit Facility due 2012
  $ 131,000     $ 50,000     9/12   LIBOR + 2.80%   At maturity   Quarterly
Senior Notes due 2011, including premium
    278,376       286,655     5/11   8.125%   At maturity   Semi-Annual
Senior Notes due 2014, net of discount
    264,192       264,090     4/14   5.125%   At maturity   Semi-Annual
Senior Notes due 2017, net of discount
    298,160       297,988     1/17   6.500%   At maturity   Semi-Annual
Mortgage notes payable, net of discounts and including premium
    166,472       147,689     4/13-10/30   5.000%-7.625%   Monthly   Monthly
                       
 
  $ 1,138,200     $ 1,046,422                  
                       
     The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At September 30, 2010, the Company was in compliance with the financial covenant provisions under its various debt instruments.
Unsecured Credit Facility due 2012
     On September 30, 2009, the Company entered into an amended and restated $550.0 million unsecured credit facility (the “Unsecured Credit Facility”) that matures on September 30, 2012 with a syndicate of 16 lenders. Amounts outstanding under the Unsecured Credit Facility bear interest at a rate equal to (x) LIBOR or the base rate (defined as the

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highest of (i) the Federal Funds Rate plus 0.5%; (ii) the Bank of America prime rate and (iii) LIBOR) plus (y) a margin ranging from 2.15% to 3.20% (currently 2.80%) for LIBOR-based loans and 0.90% to 1.95% for base rate loans (currently 1.55%), based upon the Company’s unsecured debt ratings. In addition, the Company pays a facility fee per annum on the aggregate amount of commitments. The facility fee is 0.40% per annum, unless the Company’s credit rating falls below a BBB-/Baa3, at which point the facility fee would be 0.50%. At September 30, 2010, the Company had $131.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 3.06% and had borrowing capacity remaining, under its financial covenants, of approximately $419.0 million.
Senior Notes due 2011
     In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125% per annum, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. The notes were originally issued at a discount of approximately $1.5 million, which yielded an 8.202% interest rate per annum upon issuance. The original discount is combined with the premium resulting from the termination of interest rate swaps in 2006 that were entered into to offset changes in the fair value of $125.0 million of the notes. The net premium is combined with the principal balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets and is being amortized against interest expense over the remaining term of the notes. Also, during 2010, the Company repurchased $8.1 million and previously had repurchased $13.7 million of the Senior Notes due 2011, amortizing a pro-rata portion of the premium upon such repurchases. The Company recognized an expense of approximately $0.5 million related to its 2010 repurchases, which will be offset by interest savings over the remaining term of the Senior Notes due 2011. At September 30, 2010, the Senior Notes due 2011 yielded an effective interest rate of 7.896%. The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Condensed Consolidated Balance Sheets.
                 
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Senior Notes due 2011 face value
  $ 278,221     $ 286,300  
Unamortized net gain (net of discount)
    155       355  
     
Senior Notes due 2011 carrying amount
  $ 278,376     $ 286,655  
     
Senior Notes due 2014
     In 2004, the Company publicly issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125% per annum, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.5 million, yielding an effective interest rate of 5.19% per annum. In previous years, the Company had repurchased approximately $35.3 million of the Senior Notes due 2014, amortizing a pro-rata portion of the discount upon such repurchases. At September 30, 2010, the Senior Notes due 2014 yielded an effective interest rate of 5.190%. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets.
                 
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Senior Notes due 2014 face value
  $ 264,737     $ 264,737  
Unaccreted discount
    (545 )     (647 )
       
Senior Notes due 2014 carrying amount
  $ 264,192     $ 264,090  
     
Senior Notes due 2017
     On December 4, 2009, the Company publicly issued $300.0 million of unsecured senior notes due 2017 (the “Senior Notes due 2017”). The Senior Notes due 2017 bear interest at 6.50% per annum, payable semi-annually on January 17 and July 17, and are due on January 17, 2017, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.0 million, yielding an effective interest rate of 6.618% per annum. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Condensed Consolidated Balance Sheets.

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    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Senior Notes due 2017 face value
  $ 300,000     $ 300,000  
Unaccreted discount
    (1,840 )     (2,012 )
       
Senior Notes due 2017 carrying amount
  $ 298,160     $ 297,988  
     
Mortgage Notes Payable
     The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Condensed Consolidated Balance Sheets.
                 
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Mortgage Notes payable principal balance
  $ 173,013     $ 155,355  
Unaccreted discount, net
    (6,541 )     (7,666 )
       
Mortgage Notes payable carrying amount
  $ 166,472     $ 147,689  
     
     The following table further details the Company’s mortgage notes payable, with related collateral, at September 30, 2010.
                                                                 
                                            Investment in    
            Effective           Number           Collateral at   Balance at
    Original   Interest   Maturity   of Notes at           September 30,   Sep. 30,   Dec. 31,
(Dollars in millions)   Balance   Rate (12)   Date   Sept. 30, 2010   Collateral (13)   2010   2010   2009
 
Life Insurance Co. (1)
  $ 4.7       7.765 %     1/17       1     MOB   $ 11.4     $ 2.3     $ 2.5  
Commercial Bank (2)
    1.8       5.550 %     10/30       1     OTH     7.9       1.7       1.7  
Life Insurance Co. (3)
    15.1       5.490 %     1/16       1     MOB     32.5       13.6       13.9  
Commercial Bank (4)
    17.4       6.480 %     5/15       1     MOB     19.9       14.5       14.4  
Commercial Bank (5)
    12.0       6.110 %     7/15       1     2 MOBs     19.5       9.7       9.7  
Commercial Bank (6)
    15.2       7.650 %     7/20       1     MOB     20.1       12.8       12.8  
Life Insurance Co. (7)
    1.5       6.810 %     7/16       1     SOP     2.2       1.2       1.2  
Commercial Bank (8)
    12.9       6.430 %     2/21       1     MOB     20.6       11.5       11.6  
Investment Fund (9)
    80.0       7.250 %     12/16       1     15 MOBs     153.8       79.4       79.9  
Life Insurance Co. (10)
    7.0       5.530 %     1/18       1     MOB     14.5       4.1        
Investment Co. (11)
    15.9       6.550 %     4/13       1     MOB     23.3       15.7        
                                                -
 
                            11             $ 325.7     $ 166.5     $ 147.7  
                                                 
 
(1)   Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.
 
(2)   Payable in monthly installments of principal and interest based on a 27-year amortization with the final payment due at maturity.
 
(3)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.
 
(4)   Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity. The Company 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.
 
(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 $2.1 million discount which is included in the balance above.
 
(6)   Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment due at maturity. The Company 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.
 
(7)   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.
 
(8)   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 during 2009 and recorded the note at its fair value, resulting in a $1.0 million discount which is included in the balance above.
 
(9)   Payable in monthly installments of principal and interest based on a 30-year amortization with a 7-year initial term (maturity 12/01/16) and the option to extend the initial term for two, one-year floating rate extension terms.
 
(10)   Payable in monthly installments of principal and interest based on a 15-year amortization with the final payment due at maturity. The Company acquired this mortgage note in an acquisition during the third quarter 2010.
 
(11)   Payable in monthly installments of principal and interest based on a 30-year amortization with the option to extend for three-years at a fixed rate of 6.75%. The Company acquired this mortgage note in an acquisition during the third quarter 2010 and recorded the note at its fair value, resulting in a $0.5 million premium which is included in the balance above.

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(12)   The contractual interest rates ranged from 5.00% to 7.625% at September 30, 2010.
 
(13)   MOB-Medical office building; SOP-Specialty outpatient; OTH-Other.
Long-Term Debt Maturities
     Future maturities of the Company’s notes and bonds payable as of September 30, 2010 were:
                                 
                    Total    
    Principal   Net Accretion/   Notes and    
(Dollars in thousands)   Maturities   Amortization (2)   Bonds Payable   %
 
2010 (remaining)
  $ 757     $ (212 )   $ 545       0.1 %
2011
    281,434       (1,089 )     280,345       24.6 %
2012 (1)
    134,415       (1,253 )     133,162       11.7 %
2013
    18,203       (1,451 )     16,752       1.5 %
2014
    268,374       (1,497 )     266,877       23.4 %
2015 and thereafter
    443,788       (3,269 )     440,519       38.7 %
           
 
  $ 1,146,971     $ (8,771 )   $ 1,138,200       100.0 %
     
 
(1)   Includes $131.0 million outstanding on the Unsecured Credit Facility.
 
(2)   Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2011, Senior Notes due 2014, Senior Notes due 2017 and six mortgage notes payable.
Note 5. Other Assets
     Other assets consist primarily of straight-line rent receivables, prepaids, intangible assets, and receivables. Items included in other assets on the Company’s Condensed Consolidated Balance Sheets are detailed in the table below.
                 
    September 30,   December 31,
(Dollars in millions)   2010   2009
 
Straight-line rent receivables
  $ 26.5     $ 25.2  
Prepaid assets
    27.7       24.7  
Above-market intangible assets, net
    12.4       12.0  
Deferred financing costs, net
    9.5       12.1  
Accounts receivable
    4.7       9.0  
Notes receivable
    3.9       3.3  
Goodwill
    3.5       3.5  
Investment in joint venture — cost method
    1.3       1.3  
Customer relationship intangible assets, net
    1.2       1.2  
Allowance for uncollectible accounts
    (1.2 )     (3.7 )
Other
    1.4       0.9  
       
 
  $ 90.9     $ 89.5  
       
Equity investment in joint ventures
     At September 30, 2010, the Company had an investment in one unconsolidated joint venture, which the Company accounts for under the cost method since the Company does not exert significant influence. The joint venture, which invests in real estate properties, is included in other assets on the Company’s Condensed Consolidated Balance Sheets, and the related distributions received are included in interest and other income, net on the Company’s Condensed Consolidated Statements of Operations.
     The table below details the Company’s investment in its unconsolidated joint ventures.

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    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Net joint venture investments, beginning of period
  $ 1,266     $ 1,231     $ 1,266     $ 2,784  
Equity in losses recognized during the period
                      (2 )
Acquisition of remaining equity interest in a joint venture
                      (1,700 )
Additional investment in a joint venture
          35             184  
     
Net joint venture investments, end of period
  $ 1,266     $ 1,266     $ 1,266     $ 1,266  
     
Note 6. Commitments and Contingencies
Construction in Progress
     As of September 30, 2010, the Company had three medical office buildings under construction with estimated completion dates in the third quarter 2011. The table below details the Company’s construction in progress and land held for development as of September 30, 2010. The information included in the table below represents management’s estimates and expectations at September 30, 2010 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.
                                                         
    Estimated   Property                   CIP at   Estimated   Estimated
    Completion   Type           Approximate   Sept. 30,   Remaining   Total
State   Date   (1)   Properties   Square Feet   2010   Funding   Investment
 
(Dollars in thousands)
                                                       
Under construction:
                                                       
Washington
    3Q 2011     MOB     1       206,000     $ 35,027     $ 57,173     $ 92,200  
Colorado (2)
    3Q 2011     MOB     2       199,000       4,771       50,129       54,900  
 
                                                       
Land held for development:
                                                       
Texas
                                    10,155                  
Texas
                                    8,117                  
                     
 
                    3       405,000     $ 58,070     $ 107,302     $ 147,100  
                     
 
(1)   MOB-Medical office building.
 
(2)   Project with the Company’s joint venture partner. The Company is the managing member with a 98.75% ownership interest and consolidates the joint venture. The developer holds the remaining 1.25% of noncontrolling interest in the joint venture.
Other Construction
     In addition to the projects currently under construction, the Company has remaining funding commitments totaling $59.9 million as of September 30, 2010 on four construction loans. The Company expects these commitments will be funded through 2012.
     The Company also had first-generation tenant improvement budgeted amounts remaining as of September 30, 2010 of approximately $33.7 million related to properties that were previously developed by the Company.

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Legal Proceedings
     The Company and two affiliates, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., are defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs, in the Circuit Court of Davidson County, Tennessee. The plaintiffs allege that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and seek a refund of such overpayments. Plaintiffs have not specified their damages in the complaint, but based on written discovery responses, the Company estimates the plaintiffs are seeking up to $2.0 million, plus pre- and post-judgment interest. The two leases were terminated by agreement with the plaintiffs in 2003. The Company denies that it is liable to the plaintiffs for any refund of rent paid and will continue to defend the case vigorously. A trial is scheduled for April 2011.
     The Company is, from time to time, involved in litigation arising out of the ordinary course of business or which is expected to be covered by insurance. The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Note 7. Stockholders’ Equity
     The following table provides a reconciliation of equity attributable to the Company and to noncontrolling interests:
                                                                 
                    Accumulated                        
            Additional   Other   Cumulative           Total   Non    
(Dollars in thousands,   Common   Paid-In   Comprehensive   Net   Cumulative   Stockholders’   controlling   Total
except per share data)   Stock   Capital   Loss   Income   Dividends   Equity   Interests   Equity
 
Balance at Dec. 31, 2009
  $ 606     $ 1,520,893     $ (4,593 )   $ 787,965     $ (1,518,105 )   $ 786,766     $ 3,382     $ 790,148  
Issuance of common stock
    34       79,341                         79,375             79,375  
Stock-based compensation
    1       1,844                         1,845             1,845  
Net income
                      7,820             7,820       44       7,864  
Other comprehensive loss
                (35 )                 (35 )           (35 )
 
                                                               
Comprehensive income
                                                            7,829  
Dividends to common stockholders ($0.90 per share)
                            (56,481 )     (56,481 )           (56,481 )
Distributions to noncontrolling interests
                                        (393 )     (393 )
Proceeds from noncontrolling interests
                                        686       686  
     
Balance at Sept. 30, 2010
  $ 641     $ 1,602,078     $ (4,628 )   $ 795,785     $ (1,574,586 )   $ 819,290     $ 3,719     $ 823,009  
                   
Common Stock
     The following table provides a reconciliation of the beginning and ending common stock outstanding for the nine months ended September 30, 2010 and year ended December 31, 2009:
                 
    Nine Months        
    Ended     Year Ended  
    September 30,     December 31,  
    2010     2009  
Balance, beginning of period
    60,614,931       59,246,284  
Issuance of common stock
    3,432,624       1,244,914  
Restricted stock-based awards, net of forfeitures
    101,603       123,733  
 
           
Balance, end of period
    64,149,158       60,614,931  
 
           

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At-The-Market Equity Offering Program
     The Company has in place an at-the-market equity offering program with an investment bank under which the Company sells shares of its common stock from time to time. At September 30, 2010, the Company had approximately 2.3 million shares available for issuance under the program.
     During the nine months ended September 30, 2010, the Company sold 3,411,200 shares of common stock through its at-the-market equity offering program, generating approximately $79.0 million in net proceeds. Subsequent to September 30, 2010, the Company sold an additional 302,000 shares of common stock, generating approximately $7.2 million in net proceeds.
     The proceeds from these sales are generally used to fund the Company’s development activities and are used to repay balances outstanding under the Unsecured Credit Facility.
Common Stock Dividends
     During the first nine months of 2010, the Company declared and paid in each quarter a common stock dividend in the amount of $0.30 per share.
     On November 2, 2010, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on December 2, 2010 to stockholders of record on November 18, 2010.
Earnings (Loss) Per Share
     The table below sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(Dollars in thousands, except per share data)   2010     2009     2010     2009  
       
Weighted average Common Shares outstanding
                               
Weighted average Common Shares outstanding
    63,681,224       59,357,280       62,540,743       59,326,743  
Unvested restricted stock
    (1,311,451 )     (1,182,798 )     (1,307,933 )     (1,176,719 )
 
                       
Weighted average Common Shares Outstanding — Basic
    62,369,773       58,174,482       61,232,810       58,150,024  
 
                       
 
                               
Weighted average Common Shares — Basic
    62,369,773       58,174,482       61,232,810       58,150,024  
Dilutive effect of restricted stock
    993,051       836,013       970,737       741,099  
Dilutive effect of employee stock purchase plan
    61,882       53,571       65,866       59,747  
 
                       
Weighted average Common Shares Outstanding — Diluted
    63,424,706       59,064,066       62,269,413       58,950,870  
 
                       
 
                               
Net income
                               
Income from continuing operations
  $ 82     $ 7,840     $ 5,852     $ 23,521  
Noncontrolling interests’ share in (earnings) loss
    60       65       (44 )     (12 )
 
                       
Income from continuing operations attributable to common shareholders
    142       7,905       5,808       23,509  
Discontinued operations
    (3,390 )     1,199       2,012       23,212  
 
                       
Net income (loss) attributable to common stockholders
  $ (3,248 )   $ 9,104     $ 7,820     $ 46,721  
 
                       
 
                               
Basic Earnings (Loss) Per Common Share
                               
Income from continuing operations
  $ 0.00     $ 0.13     $ 0.10     $ 0.40  
Discontinued operations
    (0.05 )     0.03       0.03       0.40  
 
                       
Net income (loss) attributable to common stockholders
  $ (0.05 )   $ 0.16     $ 0.13     $ 0.80  
 
                       
 
                               
Diluted Earnings (Loss) Per Common Share
                               
Income from continuing operations
  $ 0.00     $ 0.13     $ 0.10     $ 0.40  
Discontinued operations
    (0.05 )     0.02       0.03       0.39  
 
                       
Net income (loss) attributable to common stockholders
  $ (0.05 )   $ 0.15     $ 0.13     $ 0.79  
 
                       

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Incentive Plans
     The Company has various stock-based incentive plans for its employees and directors. Awards under these plans include restricted stock issued to employees and the Company’s directors and options granted to employees pursuant to its employee stock purchase plan.
     A summary of the activity under the incentive plans for the three and nine months ended September 30, 2010 and 2009 is included in the table below.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
Stock-based awards, beginning of period
    1,311,451       1,179,009       1,224,779       1,111,728  
Granted
                107,620       85,090  
Vested
          (1,727 )     (20,948 )     (19,536 )
     
Stock-based awards, end of period
    1,311,451       1,177,282       1,311,451       1,177,282  
     
     Under the Company’s employee stock purchase plan, in January of each year each eligible employee is given an option to purchase up to $25,000 of Common Stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the employee stock purchase plan expire if not exercised 27 months after each such option’s date of grant.
     A summary of the activity under the employee stock purchase plan for the three and nine months ended September 30, 2010 and 2009 is included in the table below.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
Outstanding and exercisable, beginning of period
    430,231       370,754       335,608       250,868  
Granted
                256,080       219,184  
Exercised
    (1,724 )     (1,199 )     (7,166 )     (6,586 )
Forfeited
    (25,013 )     (18,505 )     (44,492 )     (29,807 )
Expired
                (136,536 )     (82,609 )
     
Outstanding and exercisable, end of period
    403,494       351,050       403,494       351,050  
     
Note 8. Defined Benefit Pension Plans
     The Company has a retirement plan (the “Executive Retirement Plan”) under which three of the Company’s founding officers may receive certain benefits upon retirement. The plan is unfunded and benefits will be paid from cash flows of the Company. The maximum annual benefits payable under the Executive Retirement Plan have been frozen at $896,000, subject to cost-of-living adjustments, which resulted in a curtailment of benefits for the Company’s chief executive officer. In consideration of the curtailment and as partial settlement of benefits, the Company made a one-time cash payment of $2.3 million to its chief executive officer in January 2009. As of September 30, 2010, only the Company’s chief executive officer was eligible to retire under the Executive Retirement Plan.
     The Company’s retirement plan for its non-employee directors was terminated in November 2009. As a result, in late November 2010, the Company will make lump sum payments, totaling approximately $2.2 million, which represent the non-employee directors’ aggregate accumulated pension benefits payable. A former non-employee director, who retired from the Board in May 2010, received payment upon retirement of approximately $0.3 million.
     Net periodic benefit cost recorded related to the Company’s pension plans for the three and nine months ended September 30, 2010 and 2009 is detailed in the following table.

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    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Service costs
  $ 13     $ 77     $ 39     $ 231  
Interest costs
    253       234       724       701  
Effect of settlement
                (35 )     1,017  
Amortization of net gain/loss
    159       171       491       514  
     
Total recognized in net periodic benefit cost
  $ 425     $ 482     $ 1,219     $ 2,463  
     
Note 9. Other Operating Income
     Other operating income on the Company’s Condensed Consolidated Statements of Operations generally includes guaranty revenue recognized under its property operating agreements, interest income on notes receivable, and other items as detailed in the table below.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Property operating agreement guaranty revenue
  $ 1,823     $ 1,827     $ 5,533     $ 6,637  
Interest income on notes receivable
    222       178       600       423  
Management fee income
    35       45       126       127  
Replacement rent
          16       7       1,282  
Other
    48       44       133       154  
     
 
  $ 2,128     $ 2,110     $ 6,399     $ 8,623  
     
Note 10. Taxable Income
Taxable Income
     The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its annual taxable income to its stockholders.
     As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes has been made in the accompanying Condensed Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income.
     Earnings and profits, the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary from net income because of different depreciation recovery periods and methods, and other items.
     The following table reconciles the Company’s consolidated net income to taxable income for the three and nine months ended September 30, 2010 and 2009.

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    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Net income (loss) attributable to common stockholders
  $ (3,248 )   $ 9,104     $ 7,820     $ 46,721  
Reconciling items to taxable income:
                               
Depreciation and amortization
    4,898       4,115       15,038       13,618  
Gain on disposition of depreciable assets
    1       3,168       7,085       12,251  
Straight-line rent
    (502 )     (564 )     (1,614 )     (1,012 )
Receivable allowances
    (2,806 )     (81 )     (3,400 )     603  
Stock-based compensation
    1,502       2,238       2,861       7,899  
Other
    8,093       (5,488 )     7,031       (8,867 )
     
 
                               
Taxable income (1)
  $ 7,938     $ 12,492     $ 34,821     $ 71,213  
     
 
                               
Dividends paid
  $ 19,111     $ 22,852     $ 56,481     $ 68,530  
     
 
(1)   Before REIT dividend paid deduction.
State Income Taxes
     State income tax expense and state income tax payments for the three and nine months ended September 30, 2010 and 2009 are detailed in the table below.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
State income tax expense:
                               
Texas gross margin tax
  $ 146     $ 204     $ 374     $ 425  
Other
    (1 )     (83 )     95       (12 )
     
 
                               
Total state income tax expense
  $ 145     $ 121     $ 469     $ 413  
     
 
                               
State income tax payments, net of refunds
  $ 12     $ 93     $ 503     $ 662  
     
     The Texas gross margin tax is a tax on gross receipts from operations in Texas. It is the Company’s understanding that the Securities and Exchange Commission views this tax as an income tax. As such, the Company has disclosed the gross margin tax in the table above.
Note 11. Fair Value of Financial Instruments
     The carrying amounts of cash and cash equivalents, receivables and payables are reasonable estimates of their fair value as of September 30, 2010 and December 31, 2009 due to their short-term nature. The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements. The fair value of mortgage notes and notes receivable is estimated either based on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company recently or notes receivable entered into by the Company recently. The table below details the fair value and carrying values for notes and bonds payable, mortgage notes receivable and notes receivable at September 30, 2010 and December 31, 2009.
                                 
    September 30, 2010   December 31, 2009
    Carrying   Fair   Carrying   Fair
(Dollars in millions)   value   value   value   value
 
Notes and bonds payable
  $ 1,138.2     $ 1,221.3     $ 1,046.4     $ 1,088.6  
Mortgage notes receivable
  $ 27.1     $ 27.3     $ 31.0     $ 30.8  
Notes receivable, net of allowances
  $ 3.9     $ 3.9     $ 3.3     $ 3.3  

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Disclosure Regarding Forward-Looking Statements
     This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 that could significantly affect the Company’s current plans and expectations and future financial condition and results.
     The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
     For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2009.
Business Overview
     The Company is a self-managed and self-administered REIT that owns, acquires, manages, finances and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. Management believes that by providing a complete spectrum of real estate services, the Company can differentiate its competitive market position, expand its asset base and increase revenues over time.
     The Company’s revenues are primarily derived from rentals on its healthcare real estate properties. The Company incurs operating and administrative expenses, including compensation, office rent and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio and acquiring additional properties. The Company also incurs interest expense on its various debt instruments and depreciation and amortization expense on its real estate portfolio.
     The Company’s real estate portfolio is diversified by facility type, geography, tenant and payor mix which helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice and reimbursement patterns.
Executive Overview
     The Company has seen improvement in investment opportunities across the country. Hospitals appear to be implementing previously shelved plans for expansion, albeit at a measured pace, and the Company is working on several on-campus development opportunities related to such expansions. In addition, the Company acquired or funded $165.6 million in real estate properties and mortgage notes during the third quarter of 2010 and is seeing numerous other acquisition opportunities, some of which are hospital sales of medical office buildings and others involving third-parties or developers monetizing their holdings.
     Income from continuing operations, net income (loss) attributable to common stockholders, funds from operations and cash flows have been negatively impacted this year compared to the prior year mainly as a result of two factors:
    Interest expense increased significantly in 2010 as a result of refinancings during 2009.
    In the third quarter of 2010, the Company sold one property and decided to sell six other properties. Based on its decision to sell, the Company recorded non-cash impairment charges totaling $7.4 million.
     At September 30, 2010, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 47.0% and its borrowings outstanding under the Unsecured Credit Facility totaled $131.0 million with a capacity remaining under its financial covenants of approximately $419.0 million.

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Trends and Matters Impacting Operating Results
     Management monitors factors and trends important to the Company and the REIT industry in order to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, below are some of the factors and trends that management believes may impact future operations of the Company.
Interest Expense
     During 2009, the Company amended and restated its Unsecured Credit Facility and then, subsequently, in the fourth quarter of 2009 repaid most of the outstanding balance on the Unsecured Credit Facility with proceeds from the issuance of $300.0 million of Senior Notes due 2017 and $80.0 million of mortgage debt due December 2016. The variable rate of the Unsecured Credit Facility increased to 2.80% over LIBOR with a 0.40% facility fee from 0.90% over LIBOR with a 0.20% facility fee (rate at September 30, 2010 was 3.06%). Also contributing to the higher interest expense are the Senior Notes due 2017 that bear interest at a fixed rate of 6.50% per annum and the mortgage debt due December 2016 that bears interest at a fixed rate of 7.25%. As such, the additional interest expense incurred negatively impacts the Company’s net income (loss) attributable to common stockholders, funds from operations, and cash flows.
Acquisitions
     During the first nine months of 2010, the Company acquired $153.0 million in real estate properties and funded $12.6 million in mortgage notes receivable. The lease revenue and interest income from these acquisitions and notes are expected to positively impact the Company’s net income (loss) from continuing operations and cash flows in future periods.
Dispositions and Impairments
     During the first nine months of 2010, the Company disposed of seven properties in Virginia and Florida for approximately $32.9 million in net proceeds and $0.8 million in lease termination fees. The Company had a net investment in the properties of approximately $23.4 million and recognized gains on sale of approximately $8.3 million, net of closing costs and the write-off of straight-line rent receivables.
     The Company also decided to sell six other properties during the third quarter of 2010 and classified them as held for sale. Based on management’s decision to sell, the Company recorded impairment charges on the six properties totaling $7.4 million.
Development Activity
     At September 30, 2010, the Company had funded $39.8 million related to the construction of three medical office buildings underway with budgets totaling approximately $147.1 million. The Company expects completion of the core and shell of the projects during the third quarter of 2011.
     In addition to the projects currently under construction, the Company has remaining funding commitments totaling $59.9 million as of September 30, 2010 on four construction loans. The Company expects these commitments will be funded through 2012.
Expiring Leases
     Master leases on seven of the Company’s properties expired in 2010. One of the master leases was extended until February 2012. The Company has assumed all sub-tenant leases in the remaining buildings and is managing the operations of those buildings.
     During 2010, the Company has 331 leases in its multi-tenanted buildings expiring, each occupying an average of approximately 3,088 square feet. As of September 30, 2010, 270 of the 331 leases had expired. Approximately 79% of the tenants with expired leases have renewed, have expressed an intention to renew, or continue to occupy their leased space. Management expects that a majority of the leases remaining that had not expired at September 30, 2010 will be renewed.
     During the third quarter of 2010, occupancy in the Company’s stabilized portfolio decreased slightly to 87% as a result of master lease expirations. The Company plans to release these assets as multi-tenanted medical office facilities. Occupancy throughout the remainder of the portfolio remained stable during the quarter.
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

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and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” Impairment charges may not be added back to net income in calculating FFO, which has the effect of decreasing FFO in the period recorded.
     Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. Management uses FFO and FFO per share to compare and evaluate its own operating results from period to period, and to monitor the operating results of the Company’s peers in the REIT industry. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.
     FFO for the three and nine months ended September 30, 2010 was impacted unfavorably compared to prior periods due to several items. The more significant items were:
    increased interest expense for the three and nine months ended September 30, 2010 compared to the same periods in 2009 of approximately $6.7 million, or $0.11 per diluted common share, and $19.2 million, or $0.31 per diluted common share, respectively, due to the 2009 debt refinancings;
    impairment charges recorded during the third quarter of 2010 totaling $7.4 million or $0.12 per diluted common share on the six properties classified to held for sale; and
    a re-measurement gain of $2.7 million, or $0.05 per diluted common share, recognized during the nine months ended September 30, 2009 in connection with the acquisition of the remaining interests in a joint venture.
     The table below reconciles FFO to net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2010 and 2009:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Dollars in thousands, except per share data)   2010   2009   2010   2009
 
Net Income (Loss) Attributable to Common Stockholders
  $ (3,248 )   $ 9,104     $ 7,820     $ 46,721  
 
                               
Gain on sales of real estate properties
    (4,092 )     (84 )     (8,313 )     (20,136 )
Real estate depreciation and amortization
    18,075       16,801       52,843       50,387  
     
Total adjustments
    13,983       16,717       44,530       30,251  
     
 
                               
Funds from Operations
  $ 10,735     $ 25,821     $ 52,350     $ 76,972  
     
 
                               
Funds from Operations per Common Share — Basic
  $ 0.17     $ 0.44     $ 0.85     $ 1.32  
     
Funds from Operations per Common Share — Diluted
  $ 0.17     $ 0.44     $ 0.84     $ 1.31  
     
 
                               
Weighted Average Common Shares Outstanding — Basic
    62,369,773       58,174,482       61,232,810       58,150,024  
     
Weighted Average Common Shares Outstanding — Diluted
    63,424,706       59,064,066       62,269,413       58,950,870  
     

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Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
     Income from continuing operations for the three months ended September 30, 2010 was $0.1 million, compared to $7.8 million for the same period in 2009. Net loss attributable to common stockholders for the three months ended September 30, 2010 was $3.2 million, or $0.05 per basic and diluted common share, compared to net income attributable to common stockholders of $9.1 million, or $0.16 per basic common share ($0.15 per diluted common share), for the same period in 2009.
                                 
    Three Months Ended    
    September 30,   Change
(Dollars in thousands, except per share data)   2010   2009   $   %
 
REVENUES
                               
Master lease rent
  $ 14,054     $ 13,833     $ 221       1.6 %
Property operating
    47,714       45,024       2,690       6.0 %
Straight-line rent
    626       704       (78 )     -11.1 %
Mortgage interest
    601       658       (57 )     -8.7 %
Other operating
    2,128       2,110       18       0.9 %
     
 
    65,123       62,329       2,794       4.5 %
 
                               
EXPENSES
                               
General and administrative
    4,243       5,107       (864 )     -16.9 %
Property operating
    26,671       23,537       3,134       13.3 %
Bad debt, net
    39       (133 )     172       -129.3 %
Depreciation
    17,115       15,499       1,616       10.4 %
Amortization
    1,237       1,236       1       0.1 %
     
 
    49,305       45,246       4,059       9.0 %
 
                               
OTHER INCOME (EXPENSE)
                               
Interest expense
    (15,923 )     (9,535 )     (6,388 )     -67.0 %
Interest and other income, net
    187       292       (105 )     -36.0 %
     
 
    (15,736 )     (9,243 )     (6,493 )     70.2 %
     
 
                               
INCOME FROM CONTINUING OPERATIONS
    82       7,840       (7,758 )     -99.0 %
 
                               
DISCONTINUED OPERATIONS
                               
Income (loss) from discontinued operations
    (121 )     1,115       (1,236 )     -110.9 %
Impairments
    (7,361 )           (7,361 )      
Gain on sales of real estate properties
    4,092       84       4,008       4,771.4 %
     
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (3,390 )     1,199       (4,589 )     -382.7 %
     
 
                               
NET INCOME (LOSS)
    (3,308 )     9,039       (12,347 )     -136.6 %
 
                               
Less: Net loss attributable to noncontrolling interests
    60       65       (5 )     -7.7 %
     
 
                               
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (3,248 )   $ 9,104     $ (12,352 )     -135.7 %
     
 
                               
EARNINGS (LOSS) PER COMMON SHARE
                               
Net income (loss) attributable to common stockholders — Basic
  $ (0.05 )   $ 0.16     $ (0.21 )     -131.3 %
     
Net income (loss) attributable to common stockholders — Diluted
  $ (0.05 )   $ 0.15     $ (0.20 )     -133.3 %
     
     Total revenues from continuing operations for the three months ended September 30, 2010 increased $2.8 million, or 4.5%, compared to the same period in 2009, mainly for the reasons discussed below:
      Master lease rental income increased $0.2 million, or 1.6%. Master lease rental income increased approximately $0.5 million as a result of the Company’s 2009 acquisitions. The Company also recognized master lease income of $0.4 million related to a new master lease agreement executed during 2009 on a property whose income was previously reported in property operating income, with the remaining $0.2 million increase related mainly to annual contractual rent increases. These increases to master lease rent were partially offset by a reduction of approximately $0.8 million related to properties whose master leases had expired and the Company began recognizing the underlying tenant rents in property operating income.
      Property operating income increased $2.7 million, or 6.0%, due mainly to the recognition of additional revenue of approximately $2.8 million from the Company’s 2009 and 2010 real estate acquisitions and approximately $0.3 million from properties that were previously under construction that commenced operations during 2009. Also, the Company began recognizing the underlying tenant rental income on properties whose master leases had expired, resulting in an approximate

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$0.3 million in additional property operating income in the third quarter of 2010 compared to the same period in 2009. These increases in property operating income were partially offset by a $0.6 million decrease to property operating income related to a property whose gross revenues were previously reported in property operating income, but are now reported in master lease income upon execution of a new master lease agreement with the tenant.
     Total expenses for the three months ended September 30, 2010 increased $4.1 million, or 9.0%, compared to the same period in 2009, mainly for the reasons discussed below:
      General and administrative expenses decreased $0.9 million, or 16.9%, due mainly to a $0.5 million reduction in expense related to pension and deferred compensation and a $0.5 million reduction related to certain general and administrative expenses from recent acquisitions that were classified to property operating expense.
      Property operating expense increased $3.1 million, or 13.3%, due mainly to the recognition of additional expenses of approximately $1.1 million from the Company’s 2009 and 2010 real estate acquisitions and $0.5 million from properties that were previously under construction that commenced operations during 2009. Property operating expense also increased approximately $0.3 million for properties whose master leases expired, and the Company began incurring the underlying operating expenses of the buildings. Further, utilities increased approximately $0.4 million, property taxes increased approximately $0.4 million, payroll increased approximately $0.2 million and certain general and administrative expenses increased relating to recent real estate acquisitions totaling $0.4 million that were classified to property operating expenses. These increases were partially offset by a $0.2 million decrease from the execution of a master lease agreement in the fourth quarter of 2009 on a property whose expenses were previously reported in property operating expense.
      Depreciation expense increased $1.6 million, or 10.4%, due mainly to approximately $0.6 million in additional depreciation recognized related to the Company’s 2009 and 2010 real estate acquisitions and $0.6 million related to properties previously under construction that commenced operations during 2009. The remaining $0.4 million increase was due mainly to additional depreciation expense recognized related to various building and tenant improvement expenditures.
     Other income (expense) for the three months ended September 30, 2010 changed unfavorably by $6.5 million, or 70.2%, compared to the same period in 2009 due mainly to an increase in interest expense of approximately $5.0 million relating to the issuance of the Senior Notes due 2017 and $1.5 million relating to the mortgage debt incurred in December 2009.
     Loss from discontinued operations totaled $3.4 million and income from discontinued operations totaled $1.2 million, respectively, for the three months ended September 30, 2010 and 2009, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale or disposed of as of September 30, 2010.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
     Income from continuing operations for the nine months ended September 30, 2010 was $5.9 million, compared to $23.5 million for the same period in 2009. Net income attributable to common stockholders for the nine months ended September 30, 2010 was $7.8 million, or $0.13 per basic and diluted common share, compared to $46.7 million, or $0.80 per basic common share ($0.79 per diluted common share), for the same period in 2009.

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    Nine Months Ended    
    September 30,   Change
(Dollars in thousands, except per share data)   2010   2009   $   %
 
REVENUES
                               
Master lease rent
  $ 43,309     $ 41,609     $ 1,700       4.1 %
Property operating
    140,000       132,825       7,175       5.4 %
Straight-line rent
    1,952       1,452       500       34.4 %
Mortgage interest
    1,708       2,126       (418 )     -19.7 %
Other operating
    6,399       8,623       (2,224 )     -25.8 %
           
 
    193,368       186,635       6,733       3.6 %
 
                               
EXPENSES
                               
General and administrative
    12,513       17,397       (4,884 )     -28.1 %
Property operating
    75,089       69,518       5,571       8.0 %
Bad debt, net
    (438 )     425       (863 )     -203.1 %
Depreciation
    50,000       45,556       4,444       9.8 %
Amortization
    3,869       4,063       (194 )     -4.8 %
           
 
    141,033       136,959       4,074       3.0 %
 
                               
OTHER INCOME (EXPENSE)
                               
Loss on extinguishment of debt
    (480 )           (480 )      
Re-measurement gain of equity interest upon acquisition
          2,701       (2,701 )     -100.0 %
Interest expense
    (47,803 )     (29,531 )     (18,272 )     61.9 %
Interest and other income, net
    1,800       675       1,125       166.7 %
           
 
    (46,483 )     (26,155 )     (20,328 )     77.7 %
           
 
                               
INCOME FROM CONTINUING OPERATIONS
    5,852       23,521       (17,669 )     -75.1 %
 
                               
DISCONTINUED OPERATIONS
                               
Income from discontinued operations
    1,060       3,098       (2,038 )     -65.8 %
Impairments
    (7,361 )     (22 )     (7,339 )     33,359.1 %
Gain on sales of real estate properties
    8,313       20,136       (11,823 )     -58.7 %
           
INCOME FROM DISCONTINUED OPERATIONS
    2,012       23,212       (21,200 )     -91.3 %
     
 
                               
NET INCOME
    7,864       46,733       (38,869 )     -83.2 %
 
                               
Less: Net income attributable to noncontrolling interests
    (44 )     (12 )     (32 )     266.7 %
     
 
                               
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ 7,820     $ 46,721     $ (38,901 )     -83.3 %
     
 
                               
EARNINGS PER COMMON SHARE
                               
Net income attributable to common stockholders — Basic
  $ 0.13     $ 0.80     $ (0.67 )     -83.8 %
     
 
                               
Net income attributable to common stockholders — Diluted
  $ 0.13     $ 0.79     $ (0.66 )     -83.5 %
     

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     Total revenues from continuing operations for the nine months ended September 30, 2010 increased $6.7 million, or 3.6%, compared to the same period in 2009, mainly for the reasons discussed below:
      Master lease income increased $1.7 million, or 4.1%. Master lease rental income increased approximately $2.2 million as a result of the Company’s 2009 real estate acquisitions. The Company also recognized master lease income of $1.3 million related to a new master lease agreement executed during 2009 on a property whose income was previously reported in property operating income. These increases were offset partially by a decrease in master lease income of approximately $2.0 million from properties whose master leases had expired and the Company began recognizing the underlying tenant rents in property operating income.
      Property operating income increased $7.2 million, or 5.4%, due mainly to the recognition of additional revenue of approximately $6.0 million from the Company’s 2009 and 2010 real estate acquisitions and approximately $0.5 million from properties that were previously under construction that commenced operations in 2009. Also, the Company began recognizing the underlying tenant rental income on properties whose master leases had expired, resulting in approximately $1.0 million in additional property operating income in 2010 compared to 2009, with the remaining increase of approximately $1.5 million mainly resulting from new leasing activity and annual rent increases. These increases in property operating income were partially offset by a $1.8 million decrease from a property whose gross revenues were previously reported in property operating income, but are now reported in master lease income upon consummation of a master lease agreement with the tenant.
      Straight-line rent increased $0.5 million, or 34.4%, due mainly to the straight-line rent recognized on leases subject to straight-lining from properties acquired in 2009 and 2010 totaling approximately $0.4 million, as well as additional straight-line rent recognized on leases with contractual rent increases totaling approximately $0.2 million.
      Mortgage interest decreased $0.4 million, or 19.7%, due mainly to the refinancing of a mortgage note upon acquisition of the secured property by the Company’s consolidated joint venture.
      Other operating income decreased $2.2 million, or 25.8%, due mainly to a decrease in property operating guaranty income of approximately $0.9 million mainly from the expiration of five property operating agreements. Also, the nine months ended September 30, 2009 included $1.3 million of replacement rent pursuant to an agreement with an operator that expired on June 30, 2009.
     Total expenses for the nine months ended September 30, 2010 increased $4.1 million, or 3.0%, compared to the same period in 2009, mainly for the reasons discussed below:
      General and administrative expenses decreased $4.9 million, or 28.1%. Approximately $2.5 million of the decrease resulted from a change in the named executive officer benefit arrangements upon retirement. Also, deferred compensation expense decreased by approximately $1.3 million due to certain of the Company’s chief executive officer’s awards becoming fully amortized. Further, certain general and administrative expenses incurred mainly related to recent acquisitions of real estate properties totaling approximately $1.3 million were classified to the operating expenses of those properties.
      Property operating expense increased $5.6 million, or 8.0%, due mainly to additional expenses of approximately $2.3 million from the Company’s 2009 and 2010 real estate acquisitions. Also, properties previously under construction that commenced operations during 2009 resulted in approximately $1.7 million in additional property operating expenses in 2010 compared to 2009. Property operating expense also increased approximately $1.1 million from properties whose master leases expired, and the Company began incurring the underlying operating expenses of the buildings. Further, certain general and administrative expenses incurred mainly related to recent real estate acquisitions and conversions totaling approximately $1.2 million were classified to property operating expense. These amounts were partially offset by a reduction in legal fees of approximately $0.4 million and a reduction in utilities and maintenance and repair of $0.4 million.
      Bad debt expense decreased $0.9 million due mainly to collections received in 2010 for a receivable that was previously reserved of approximately $0.4 million and reversal of a tenant receivable and related reserve of approximately $0.5 million.
      Depreciation expense increased $4.4 million, or 9.8%, due mainly to approximately $1.6 million in additional depreciation recognized from the Company’s 2009 and 2010 real estate acquisitions and $1.4 million related to properties

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previously under construction that commenced operations during 2009. The remaining $1.4 million increase was mainly due to additional depreciation expense recognized related to various building and tenant improvement expenditures.
     Other income (expense) for the nine months ended September 30, 2010 changed unfavorably by $20.3 million, or 77.7%, compared to the same period in 2009, mainly for the reasons discussed below:
      The Company recognized a $0.5 million loss on the early extinguishment of debt relating to the repurchases of the Senior Notes due 2011 during 2010.
      The Company recognized a $2.7 million gain 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 in 2009.
      Interest expense increased $18.3 million, or 61.9%. Interest expense increased approximately $15.0 million due to the issuance of the Senior Notes due 2017 and approximately $4.4 million due to the mortgage debt entered into in December 2009. These increases were offset partially by a decrease in interest expense of approximately $0.3 million resulting mainly from a lower principal balance and interest rate on the Unsecured Credit Facility due 2012 and an increase in capitalized interest of approximately $0.5 million.
      Included in interest and other income, net are proceeds of approximately $1.1 million received during 2010 relating to the settlement of disputes with former tenants.
     Income from discontinued operations totaled $2.0 million and $23.2 million, respectively, for the nine months ended September 30, 2010 and 2009, which includes the results of operations, impairments, and gains on sale related to assets classified as held for sale or disposed of as of September 30, 2010.
Liquidity and Capital Resources
     The Company derives most of its revenues from its real estate property portfolio based on contractual arrangements with its tenants and sponsors. The Company may, from time to time, also generate funds from capital market financings, sales of real estate properties or mortgages, borrowings under the Unsecured Credit Facility, or from other private debt or equity offerings. For the nine months ended September 30, 2010, the Company generated approximately $69.0 million in cash from operations and used approximately $63.6 million, net in total cash in investing and financing activities, including dividend payments, as detailed in the Company’s Condensed Consolidated Statements of Cash Flows. At September 30, 2010, the Company also had remaining borrowing capacity on its Unsecured Credit Facility of approximately $419.0 million.
Contractual Obligations
     The Company monitors its contractual obligations to ensure funds are available to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of September 30, 2010, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended. The Company’s material contractual obligations for the remainder of 2010 through 2011 are included in the table below. At September 30, 2010, the Company had no long-term capital lease or purchase obligations.

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(Dollars in thousands)   2010   2011   Total
 
Long-term debt obligations, including interest (1)
  $ 21,368     $ 335,887     $ 357,255  
Operating lease commitments (2)
    1,063       5,214       6,277  
Construction in progress (3)
    17,842       61,237       79,079  
Tenant improvements (4)
                 
Construction loan obligation (5)
    8,313       41,829       50,142  
Pension obligations (6)
    2,240             2,240  
Purchase obligation (7)
    2,147             2,147  
     
Total contractual obligations
  $ 52,973     $ 444,167     $ 497,140  
         
 
(1)   Includes estimated interest due on total debt other than on the Unsecured Credit Facility. The Company’s Senior Notes due 2011, in which the Company had approximately $278.2 million outstanding at September 30, 2010, are due on May 1, 2011. Note 4 to the Company’s Condensed Consolidated Financial Statements provides more detail on the Company’s notes and bonds payable.
 
(2)   Includes primarily two corporate office leases and ground leases related to various properties for which the Company is currently making payments.
 
(3)   Includes cash flow projections for the remainder of 2010 and 2011 related to the construction of three buildings. The table above does not include budgeted amounts designated for tenant improvements which the Company is not obligated to fund until tenant leases are executed.
 
(4)   The Company has various remaining first-generation tenant improvements budgeted as of September 30, 2010 totaling approximately $33.7 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)   The Company’s remaining funding commitment as of September 30, 2010 on four construction loans. The Company expects these commitments will be funded through 2012.
 
(6)   In November 2009, the Company terminated its Retirement Plan for Outside Directors and will pay to each director in the plan a lump sum payment totaling each director’s accumulated pension benefit. In May 2010, a former non-employee director retired and received approximately $0.3 million in pension benefits. The accumulated pension benefits for the remaining non-employee directors will be paid in late November 2010, aggregating approximately $2.2 million which is reflected in the table above. Also, at December 31, 2009, the last measurement date, one employee, the Company’s chief executive officer, was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $29.9 million as of December 31, 2009. However, because the Company’s chief executive officer has no present intention to retire, the Company has not projected when the retirement benefits would be paid to the officer in this table. At September 30, 2010, the Company had recorded a $17.0 million liability, included in other liabilities, related to its pension plan obligations.
 
(7)   The Company expects to complete the acquisition of a 29,000 square foot building in Texas during the fourth quarter of 2010 for a purchase price of approximately $6.9 million, including the assumption of debt of $4.4 million. The Company expects to pay cash consideration of approximately $2.1 million for the acquisition, net of $0.3 million previously deposited in escrow.
     As of September 30, 2010, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 47.0%, and its earnings (from continuing operations) covered fixed charges at a ratio of 0.97 to 1.00 for the nine months ended September 30, 2010. At September 30, 2010, the Company had $131.0 million outstanding under the Unsecured Credit Facility, with a weighted average interest rate of approximately 3.06%, and had borrowing capacity remaining, under its financial covenants, of approximately $419.0 million.
     The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At September 30, 2010, the Company was in compliance with the financial covenant provisions under its various debt instruments.
Interest Expense
     Interest expense for the Company has increased significantly in 2010. In the third quarter of 2009, the Company amended and restated its Unsecured Credit Facility and then in the fourth quarter of 2009 repaid most of the outstanding balance on the Unsecured Credit Facility with proceeds from the issuance of $300.0 million of Senior Notes due 2017 and $80.0 million of mortgage debt due December 2016. The variable rate of the Unsecured Credit Facility increased to 2.80% over LIBOR with a 0.40% facility fee from 0.90% over LIBOR with a 0.20% facility fee (rate at September 30, 2010 was 3.06%). Also contributing to the higher interest expense are the Senior Notes due 2017 that bears interest at a fixed rate of 6.50% per annum and the mortgage debt due December 2016 that bears interest at a fixed rate of 7.25%.
     The Company’s 8.125% Senior Notes due 2011 mature on May 1, 2011. The Company expects to repay the Senior Notes due 2011 from the issuance of new debt or equity or from available amounts under the Company’s Unsecured Credit Facility, at a lower cost of capital.

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Security Deposits and Letters of Credit
     As of September 30, 2010, the Company had approximately $6.9 million in letters of credit, security deposits, debt service reserves or capital replacement reserves for the benefit of the Company in the event the obligated lessee or operator fails to make payments under the terms of their respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.
Potential Acquisition
     On November 3, 2010, the Company executed a purchase and sale agreement to acquire an 80,000 square foot, on-campus medical office building in Colorado for approximately $19 million. The building is over 90% leased and the Company expects to acquire the building during the fourth quarter of 2010, subject to the completion of normal and customary due diligence procedures.
Other Development Activity
     In addition to the projects currently under construction, the Company has remaining funding commitments totaling $59.9 million as of September 30, 2010 on four construction loans. The Company expects these commitments will be funded through 2012.
At-The-Market Equity Offering Program
     The Company has in place an at-the-market equity offering program with an investment bank under which the Company sells shares of its common stock from time to time. At September 30, 2010, the Company had approximately 2.3 million shares available for issuance under the program.
     During the nine months ended September 30, 2010, the Company sold 3,411,200 shares of common stock through its at-the-market equity offering program, generating approximately $79.0 million in net proceeds. Subsequent to September 30, 2010, the Company sold an additional 302,000 shares of common stock, generating approximately $7.2 million in net proceeds.
     The proceeds from these sales are generally used to fund the Company’s development activities and are used to repay balances outstanding under the Unsecured Credit Facility.
Dividends
     The Company has paid and expects to continue to pay quarterly dividends of $0.30 per common share during 2010. On November 2, 2010, the Company’s Board of Directors declared a common stock cash dividend for the three months ended September 30, 2010 of $0.30 per share, payable on December 2, 2010. As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.
Liquidity
     Net cash provided by operating activities was $69.0 million and $82.4 million for the nine months ended September 30, 2010 and 2009, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors. The Company’s leases, which provide its main source of income and cash flow, are generally fixed in nature, have terms of approximately one to 20 years and have annual rate increases based generally on consumer price indices.
     The Company plans to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, with cash flows from operations, borrowings under the Unsecured Credit Facility, proceeds from sales of real estate investments, proceeds from debt borrowings, or additional capital market financings. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will continue to be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
Impact of Inflation
     Inflation has not significantly affected the Company’s earnings due to the moderate inflation rate in recent years and the fact that most of the Company’s leases and property operating agreements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing the Company’s risk of the adverse effects of inflation.

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In addition, inflation has the effect of increasing gross revenue the Company is to receive under the terms of certain leases and property operating agreements. Leases and property operating agreements vary in the remaining terms of obligations, further reducing the Company’s risk of any adverse effects of inflation. Interest payable under the Unsecured Credit Facility is calculated at a variable rate; therefore, the amount of interest payable under the Unsecured Credit Facility is influenced by changes in short-term rates, which tend to be sensitive to inflation. During periods where interest rate increases outpace inflation, the Company’s operating results should be negatively impacted. Conversely, when increases in inflation outpace increases in interest rates, the Company’s operating results should be positively impacted.
Off-Balance Sheet Arrangements
     The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
     The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes and other notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three months ended September 30, 2010, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Item 4.   Controls and Procedures.
     Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.
     Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1.   Legal Proceedings.
     The Company and two affiliates, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., are defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs, in the Circuit Court of Davidson County, Tennessee. The plaintiffs allege that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and seek a refund of such overpayments. Plaintiffs have not specified their damages in the complaint, but based on written discovery responses, the Company estimates the plaintiffs are seeking up to $2.0 million, plus pre- and post-judgment interest. The two leases were terminated by agreement with the plaintiffs in 2003. The Company denies that it is liable to the plaintiffs for any refund of rent paid and will continue to defend the case vigorously. A trial is scheduled for April 2011.
     The Company is, from time to time, involved in litigation arising out of the ordinary course of business or which is expected to be covered by insurance. The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Item 1A.   Risk Factors.
     In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K, are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition, operating results or cash flows.

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Item 6.   Exhibits.
     
Exhibit 3.1
  Second Articles of Amendment and Restatement of the Company (1)
 
   
Exhibit 3.2
  Amended and Restated Bylaws of the Company, as amended (2)
 
   
Exhibit 4.1
  Specimen Stock Certificate (1)
 
   
Exhibit 4.2
  Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
 
   
Exhibit 4.3
  First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
 
   
Exhibit 4.4
  Form of 8.125% Senior Note Due 2011 (3)
 
   
Exhibit 4.5
  Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly Wachovia Bank, National Association, as Trustee) (4)
 
   
Exhibit 4.6
  Form of 5.125% Senior Note Due 2014 (4)
 
   
Exhibit 4.7
  Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (5)
 
   
Exhibit 4.8
  Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.7 thereto) (5)
 
   
Exhibit 11
  Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
 
   
Exhibit 31.1
  Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
   
Exhibit 31.2
  Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
   
Exhibit 32
  Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
   
Exhibit 101.INS
  XBRL Instance Document (furnished herewith)
 
   
Exhibit 101.SCH
  XBRL Taxonomy Extension Schema Document (furnished herewith)
 
   
Exhibit 101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
 
   
Exhibit 101.LAB
  XBRL Taxonomy Extension Labels Linkbase Document (furnished herewith)
 
   
Exhibit 101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
 
(1)   Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
 
(2)   Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
 
(3)   Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.
 
(4)   Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
 
(5)   Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  HEALTHCARE REALTY TRUST INCORPORATED
 
 
  By:   /s/ SCOTT W. HOLMES    
    Scott W. Holmes   
    Executive Vice President and Chief Financial Officer   
Date: November 8, 2010

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Exhibit Index
     
Exhibit   Description
 
Exhibit 3.1
  Second Articles of Amendment and Restatement of the Company (1)
 
   
Exhibit 3.2
  Amended and Restated Bylaws of the Company, as amended (2)
 
   
Exhibit 4.1
  Specimen Stock Certificate (1)
 
   
Exhibit 4.2
  Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
 
   
Exhibit 4.3
  First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)
 
   
Exhibit 4.4
  Form of 8.125% Senior Note Due 2011 (3)
 
   
Exhibit 4.5
  Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly Wachovia Bank, National Association, as Trustee) (4)
 
   
Exhibit 4.6
  Form of 5.125% Senior Note Due 2014 (4)
 
   
Exhibit 4.7
  Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (5)
 
   
Exhibit 4.8
  Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.7 thereto) (5)
 
   
Exhibit 11
  Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
 
   
Exhibit 31.1
  Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
   
Exhibit 31.2
  Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
   
Exhibit 32
  Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
   
Exhibit 101.INS
  XBRL Instance Document (furnished herewith)
 
   
Exhibit 101.SCH
  XBRL Taxonomy Extension Schema Document (furnished herewith)
 
   
Exhibit 101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
 
   
Exhibit 101.LAB
  XBRL Taxonomy Extension Labels Linkbase Document (furnished herewith)
 
   
Exhibit 101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
 
(1)   Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
 
(2)   Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
 
(3)   Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.
 
(4)   Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
 
(5)   Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.

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