10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended: December 31, 2006

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: 1-11852

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)

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

3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)

(615) 269-8175
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 par value per share	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The aggregate market value of the shares of Common Stock (based upon the closing price of these shares on the New York Stock Exchange, Inc. on June 30, 2006) of the Registrant held by non-affiliates on June 30, 2006 was approximately $1,473,859,865.

     As of January 31, 2007, 47,822,516 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s 2006 Annual Report to Shareholders are incorporated into Part II of this Report. Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 are incorporated into Part III of this Report.

TABLE OF CONTENTS

	Page
Item 1. Business		3
Item 1A. Risk Factors		20
Item 1B. Unresolved Staff Comments		23
Item 2. Properties		23
Item 3. Legal Proceedings		23
Item 4. Submission of Matters to a Vote of Securityholders		23
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24
Item 6. Selected Financial Data		25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		25
Item 8. Financial Statements and Supplementary Data		25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		25
Item 9A. Controls and Procedures		25
Item 9B. Other Information		26
Item 10. Directors, Executive Officers and Corporate Governance		26
Item 11. Executive Compensation		28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		28
Item 13. Certain Relationships and Related Transactions, and Director Independence		28
Item 14. Principal Accountant Fees and Services		28
Item 15. Exhibits and Financial Statement Schedules		28
SIGNATURES		33
Ex-10.13 B. Douglas Whitman, II Employment Agreement
Ex-13 Annual Report to Shareholders
Ex-21 Subsidiaries of the Registrant
Ex-23 Consent of BDO Seidman
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32 Section 906 Certification

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PART I

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,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” 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 those set forth below, 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. Shareholders 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.

     Such risks and uncertainties include, among other things, the following risks including those described in more detail under the heading “Risk Factors,” beginning on page 20 of this report:

• Changes in the Company’s dividend policy;

• Closing of the anticipated sales of the Company’s senior living assets;

• The ability of the Company to invest its capital on a timely basis;

• The availability of debt and equity capital;

• Changes in the financial condition or business strategy of the Company’s tenants;

• Business and general economic conditions;

• The federal, state and local regulatory environment;

• The possibility of underinsured or uninsured losses;

• A failure to maintain an effective system of internal control over financial reporting; and

• The ability of the Company to maintain its qualification as a real estate investment trust (“REIT”).

Item 1. Business

Overview

     Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) was incorporated in Maryland in 1993 and is a self-managed and self-administered real estate investment trust, or “REIT,” that integrates owning, acquiring, managing and developing income-producing real estate properties associated with the delivery of healthcare services throughout the United States. Additionally, the Company provides mortgage financing on healthcare facilities.

     The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to net income distributed to its shareholders. See “Federal Income Tax Information” below.

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     As of December 31, 2006, the Company had invested in real estate properties, including investments in unconsolidated limited liability companies (“LLCs”), as shown in the table below (dollars and square feet in thousands):

	Number of
	Investments		Investment Amounts				Square Feet
Owned properties:
Long-term net master leases
Medical office/outpatient facilities		61		352,201	17.38	%		2,302
Assisted living facilities		26		129,802	6.41	%		887
Skilled nursing facilities		29		145,345	7.18	%		974
Inpatient Rehab facilities		9		156,494	7.72	%		643
Independent living facilities		7		64,505	3.18	%		726
Other inpatient facilities		4		75,975	3.75	%		334
		136		924,322	45.62	%		5,866
Financial support agreements
Medical office/outpatient facilities		15		164,646	8.13	%		1,123
		15		164,646	8.13	%		1,123
Multi-tenanted with occupancy leases
Medical office/outpatient facilities		86		828,985	40.91	%		5,910
		86		828,985	40.91	%		5,910
Corporate property		—		14,373	0.71	%		—
		—		14,373	0.71	%		—
Total owned properties		237		1,932,326	95.37	%		12,899
Mortgage loans:
Assisted living facilities		5		46,070	2.27	%
Skilled nursing facilities		1		4,887	.24	%
Independent living facilities		1		6,000	.30	%
Medical office/outpatient facilities		2		16,899	.83	%
		9		73,856	3.64	%
Unconsolidated LLC investment:
Assisted living facilities		1		6,627	.33	%
Medical office/outpatient facilities		2		13,452	.66	%
		3		20,079	0.99	%
Total real estate investments		249	$	2,026,261	100.00	%

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     At December 31, 2006, the Company provided property management services for 103 healthcare-related properties nationwide, totaling approximately 6.8 million square feet. The Company intends to maintain a portfolio of properties that are focused predominantly on the outpatient services and medical office segments of the healthcare industry, which are diversified by tenant, geographic location and facility type.

     As of December 31, 2006, the weighted average remaining lease term pursuant to the long-term master leases, financial support agreements, and multi-tenanted occupancy leases was approximately 6.0 years, with expiration dates ranging from 2007 to 2022.

     As of December 31, 2006, the weighted average remaining maturity of the mortgage notes receivable portfolio was approximately 3.59 years with expiration dates ranging from 2007 to 2031. Interest rates on the mortgage notes receivable at December 31, 2006 ranged from 9.83% to 15.00%. Most of the mortgage notes receivable interest rates are constant. The mortgage notes receivable portfolio decreased, net, approximately $31.9 million, or 30%, from December 31, 2005 to December 31, 2006. This decrease was the result of several mortgage repayments.

Business Strategy

     Healthcare Realty’s strategy is to be an owner and operator of quality medical facilities that produce stable and growing rental income. Consistent with this strategy, the Company seeks to provide a broad spectrum of services needed to own, acquire, manage, finance and develop healthcare properties.

     In avoiding a significant affiliation with any single healthcare provider, management believes that its diversification reduces the Company’s potential exposure to a concentration of credit risk with any one healthcare provider. Only one healthcare provider accounted for 10% or more of the Company’s revenues during the year ended December 31, 2006 (HealthSouth Corporation at 10%).

     As of December 31, 2006, approximately 54% of the Company’s real estate investments consisted of properties leased to unaffiliated lessees pursuant to long-term net master lease agreements or financial support agreements. Approximately 41% were multi-tenanted properties with shorter-term occupancy leases, but without other financial support agreements, with the remaining 5% of investments relating to the Company’s mortgage notes receivable portfolio and its investments in unconsolidated limited liability companies which are invested in real estate properties. The Company’s master leases and financial support agreements are generally designed to ensure the continuity of revenues and coverage of costs and expenses relating to the properties by the tenants and the sponsoring healthcare operators.

     The Company announced on February 26, 2007 its plan to sell its portfolio of senior living assets. At December 31, 2006, the senior living portfolio included 62 real estate properties in which the Company had investments totaling $340.6 million ($269.3 million, net) and 16 mortgage notes and notes receivable in which the Company had investments totaling $71.8 million. The Company is currently in advanced discussions with several buyers regarding these sales. Sales of the properties are expected to close during the first and second quarters of 2007, subject to the terms of definitive agreements customary to these types of transactions. The Company’s real estate portfolio, after selling the senior living asset portfolio, will consist predominantly of medical office and outpatient facility types, which management believes will further reduce the business-risk profile of the Company. Following the sales, the Company will have investments of approximately $1.6 billion in 177 real estate properties and mortgages. Proceeds of the sales are expected to fund repayments of debt on the Company’s Unsecured Credit Facility due 2009 and the payment of a one-time special dividend to its shareholders. See Note 15 to the Company’s Consolidated Financial Statements, incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K, for more details of the senior living portfolio.

     The Company will remain focused on outpatient-related facilities, whose tenants historically have represented, together with their related acute care hospital providers, more than half of the $2 trillion in national healthcare spending each year. However, due to the high valuations of healthcare properties and the increased interest by non-traditional healthcare real estate investors in owning these types of properties, the Company has found it difficult to make accretive acquisitions. While the Company continues to pursue selective acquisition opportunities, it has increased its efforts to develop outpatient medical facilities. By developing, rather than acquiring, those outpatient medical facilities, the Company expects to earn higher returns with greater growth potential. Management also believes that the diversity of tenants in these properties, which include physicians of nearly two-dozen specialties at surgery, imaging, and diagnostic centers, lowers the risk to the Company of unprofitable tenants. While the time required to construct and lease some of these developments can take two to three years, over the long-term, the Company’s ability to efficiently manage and lease these properties is expected to lead to improved results.

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     The development investments that the Company pursues fall into one of two categories: they are either relationship-based, such as the properties developed in conjunction with Baylor Health Care in Dallas; or they are market-driven, where the underlying fundamentals in a particular market make the development of medical office and outpatient facilities, without an existing healthcare system relationship, compelling. The Company’s relationship-based development pipeline currently represents over half of its opportunities. The Company is also taking advantage of its development expertise to pursue market-driven development opportunities. These opportunities – on sites that are most often near acute-care hospitals and in markets with strong population growth – are compelling because of fewer use and leasing restrictions, shorter development timelines, and the prospect for higher investment returns.

     The Company has six development projects underway – three with Baylor Health Care System in Texas, and one each in Colorado, Washington state, and Hawaii – totaling 770,000 square feet and with budgets totaling $177.8 million. The Company expects completion of the Texas and Washington state projects in 2007, the Colorado project (which includes two buildings) in 2008, and the Hawaii project in 2009. Management expects its development pipeline, with selective acquisitions and dispositions in the ordinary course, should result in net new investments of approximately $150 - $200 million annually excluding the impact of the sale of the senior living assets discussed above under the heading “Business Strategy.”

Purchase Options

     Certain of the Company’s leases include purchase option provisions. The provisions vary from lease to lease but generally allow the lessee to purchase the property covered by the lease at the greater of fair market value or an amount equal to the Company’s gross investment. As of December 31, 2006, the Company had a gross investment of approximately $235.5 million in real estate properties that were subject to outstanding, exercisable contractual options to purchase, with various conditions and terms, by the respective operators and lessees that had not been exercised. On a probability-weighted basis, the Company estimates that approximately $39.2 million of the options exercisable at December 31, 2006 may be exercised in the future. During 2007, additional purchase options become exercisable on properties in which the Company has a gross investment of approximately $23.0 million. The Company anticipates, on a probability-weighted basis, that approximately $11.5 million of these additional options may also be exercised in the future. Though other properties may have purchase options exercisable in 2008 and beyond, the Company does not believe it can reasonably estimate the probability of exercise of these purchase options in the future.

Acquisitions, Dispositions and Mortgage Repayments during 2006

2006 Acquisitions

     The Company acquired three properties for $75.8 million, mortgage notes in the amount of $37.8 million (of which $16.9 million was non-cash), and $9.0 million in equity interests in unconsolidated limited liability companies which acquired seven properties during 2006. See Note 4 to the Consolidated Financial Statements, incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K, for more information on these acquisitions.

     Due to the high valuations of healthcare properties and the increased interest by non-traditional healthcare real estate investors in owning these types of properties, the Company expects its acquisitions of existing outpatient properties to be less than $100 million for 2007.

2006 Dispositions

     During 2006, the Company sold properties or received payments on mortgage notes resulting in net cash proceeds of approximately $104.3 million. In these transactions, the Company acquired mortgage notes receivable totaling $15.4 million, received mortgage note prepayment penalty fees of approximately $2.2 million and received a lease termination fee of approximately $0.3 million. See Note 4 to the Consolidated Financial Statements, incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K, for more information on these dispositions.

Contractual Obligations

     As of December 31, 2006, the Company had long-term contractual obligations of approximately $1.5 billion, consisting primarily of $1.1 billion of long-term debt obligations. For a more detailed description of these contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Obligations,” incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

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Competition

     The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other healthcare-related REITs, real estate partnerships, and financial institutions, among others. The business of acquiring and constructing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures.

     The financial performance of all of the Company’s properties is subject to competition from similar properties. Certain operators of other properties may have capital resources in excess of those of the Company or the operators of the Company’s properties. In addition, the extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using the healthcare facilities or referring patients there, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state payment programs and other laws and regulations may also have a significant effect on the utilization of the properties. Virtually all of the Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time.

Government Regulation

     The healthcare industry continues to face rising costs in the delivery of healthcare services, increased competition for patients, a growing population of uninsured patients and higher bad debt expense, constant evaluation of reimbursement levels by private and governmental payors, and scrutiny by federal and state legislative and administrative authorities, thus presenting the industry and its individual participants with uncertainty. These various changes can affect the economic performance of some or all of its tenants and clients. The Company cannot predict the degree to which these changes may affect the economic performance of the Company, positively or negatively.

     The facilities owned by the Company and the manner in which they are operated are affected by changes in the reimbursement, licensing and certification policies of federal, state and local governments. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. In addition, expansion (including the addition of new beds or services or acquisition of medical equipment) and occasionally the discontinuation of services of healthcare facilities are, in some states, subjected to state regulatory approval through “certificate of need” laws and regulations.

     Although the Company is not a healthcare provider or in a position to influence the referral of patients or ordering of services reimbursable by the federal government, its leases and subleases must be negotiated at arm’s length for fair market value rental rates. To the extent that a healthcare provider leases space from the Company and, in turn, subleases space to physicians or other referral sources at less than fair market value rental rate, the Anti-Kickback Statute (a provision of the Social Security Act addressing illegal remuneration) and the Stark Law (the federal physician self-referral law) could be implicated. The Company’s leases require the lessees to agree to comply with all applicable laws.

     A significant portion of the revenue of healthcare providers is derived from government reimbursement programs, such as the federal Medicare program and the joint federal and state Medicaid program. Although lease payments to the Company are not directly affected by the level of government reimbursement, such changes could have an impact on a tenant’s ability to make lease payments to the Company to the extent that changes in these programs adversely affect healthcare providers.

     The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. While government healthcare spending has increased over time, changes from year to year in reimbursement methodology, rates and other regulatory requirements have resulted in a challenging operating environment for healthcare providers. Considerable uncertainties surround the future growth of payment levels under government reimbursement programs. Reductions in the growth of government payments could have an adverse impact on healthcare providers’ financial condition and, therefore, could adversely affect the ability of providers to make rental payments. However, the Company expects healthcare providers to continue to adjust to new operating challenges, as they have in the past, by increasing operating efficiency and modifying their strategies for profitable operations and growth.

     The Company believes its strategic focus on the medical office and outpatient sector of the healthcare industry limits risk from changes in public healthcare spending and reimbursement because physician practices generally derive a large portion of their revenue from private insurance and out-of-pocket patient expense. The diversity of the Company’s multi-tenant medical office facilities also provides lower reimbursement risk as payor mix varies from physician to physician, depending on location, specialty, patients, and physician preferences.

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     Loss by a facility of its ability to participate in government-sponsored programs because of licensing, certification or accreditation deficiencies or because of program exclusion resulting from violations of law would have material adverse effects on facility revenues.

Legislative Developments

     Each year, legislative proposals are introduced in Congress and in some state legislatures. Regulatory changes are proposed by government agencies that could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Among the matters under consideration are:

     • cost controls on state and federal Medicaid and Medicare reimbursements;

     • healthcare provider cost-containment and quality-control initiatives by public and private payors;

     • refinements to the hospital inpatient prospective payment system;

     • the implementation of heightened restrictions on admissions to inpatient rehabilitation facilities and long-term acute care hospitals;

     • healthcare coverage for the uninsured;

     • lower reimbursement for diagnostic imaging and ambulatory surgery centers;

     • revised methodology for the annual update of the physician fee schedule;

     • increased scrutiny of medical errors;

     • patient and drug safety efforts;

     • Medicare Advantage reforms;

     • pharmaceutical drug pricing under Medicare Part D;

     • tax credits for Health Savings Accounts and the uninsured;

     • re-importation of pharmaceutical drugs;

     • improvements in healthcare information technology; and

     • limits on damages claimed in physician malpractice lawsuits.

     The Company cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, such proposals would have on the Company’s business.

Environmental Matters

     Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and injuries to persons and adjacent property). Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil and criminal fines and penalties upon violators. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances and may be imposed on the owner in connection with the activities of an operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be negatively impacted either through physical contamination or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties.

     Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws, ordinances and regulations, including those relating to the following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned, developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils, petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of hazardous or toxic materials. Operations of nuclear medicine departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the properties were built during the period that asbestos was commonly used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities.

     The Company has had limited environmental site assessments conducted on substantially all of the properties currently owned. These site assessments are limited in scope and provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. The Company is not aware of any environmental condition or liability that management believes would have a material adverse effect on the Company’s financial position, earnings, expenditures or continuing operations. While it is the Company’s policy to seek indemnification relating to environmental liabilities or conditions, even where sale and purchase agreements do contain such provisions there can be no assurances that the seller will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases or financial support agreements do not give the Company control over the operational activities of its lessees or healthcare operators, nor will the Company monitor the lessees or healthcare operators with respect to environmental matters.

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Insurance

     The Company maintains comprehensive liability insurance and property insurance covering its owned and managed properties. The Company’s tenants are required to maintain, at their expense, liability insurance relating to their operations at the leased facilities. In addition, tenants under long-term net master leases are required to carry property insurance covering the Company’s interest in the buildings. The Company has also obtained title insurance with respect to each of the properties it owns, insuring that the Company holds title to each of the properties free and clear of all liens and encumbrances except those approved by the Company.

Employees

     As of December 31, 2006, the Company employed 201 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.

Federal Income Tax Information

     The Company is and intends to remain qualified as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company’s net income will be exempt from federal taxation to the extent that it is distributed as dividends to shareholders. Distributions to the Company’s shareholders generally will be includable in their income; however, dividends distributed that are in excess of current and/or accumulated earnings and profits will be treated for tax purposes as a return of capital to the extent of a shareholder’s basis and will reduce the basis of the shareholder’s shares.

Introduction

     The Company is qualified and intends to remain qualified as a REIT for federal income tax purposes under Sections 856 through 860 of the Code. The following discussion addresses the material tax considerations relevant to the taxation of the Company and summarizes certain federal income tax consequences that may be relevant to certain shareholders. However, the actual tax consequences of holding particular securities issued by the Company may vary in light of a securities holder’s particular facts and circumstances. Certain holders, such as tax-exempt entities, insurance companies and financial institutions, are generally subject to special rules. In addition, the following discussion does not address issues under any foreign, state or local tax laws. The tax treatment of a holder of any of the securities issued by the Company will vary depending upon the terms of the specific securities acquired by such holder, as well as the holder’s particular situation, and this discussion does not attempt to address aspects of federal income taxation relating to holders of particular securities of the Company. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. The Code, rules, regulations, and administrative and judicial interpretations are all subject to change at any time (possibly on a retroactive basis).

     The Company is organized and is operating in conformity with the requirements for qualification and taxation as a REIT and intends to continue operating so as to enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. The Company’s qualification and taxation as a REIT depend upon its ability to meet, through actual annual operating results, the various income, asset, distribution, stock ownership and other tests discussed below. Accordingly, the Company cannot guarantee that the actual results of operations for any one taxable year will satisfy such requirements.

     If the Company were to cease to qualify as a REIT, and the statutory relief provisions were found not to apply, the Company’s income that it distributed to shareholders would be subject to the “double taxation” on earnings (once at the corporate level and again at the shareholder level) that generally results from an investment in the equity securities of a corporation. However, the distributions would then qualify for the reduced dividend rates created by the Jobs and Growth Tax Relief Reconciliation Act of 2003. Failure to maintain qualification as a REIT would force the Company to significantly reduce its distributions and possibly incur substantial indebtedness or liquidate substantial investments in order to pay the resulting corporate taxes. In addition, the Company, once having obtained REIT status and having thereafter lost such status, would not be eligible to reelect REIT status for the four subsequent taxable years, unless its failure to maintain its qualification was due to reasonable cause and not willful neglect and certain other requirements were satisfied. In order to elect again to be taxed as a REIT, just as with its original election, the Company would be required to distribute all of its earnings and profits accumulated in any non-REIT taxable year.

9

Taxation of the Company

     As long as the Company remains qualified to be taxed as a REIT, it generally will not be subject to federal income taxes on that portion of its ordinary income or capital gain that is currently distributed to shareholders.

     However, the Company will be subject to federal income tax as follows:

• The Company will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including undistributed net capital gains.

• Under certain circumstances, the Company may be subject to the “alternative minimum tax” on its items of tax preference, if any.

• If the Company has (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business, or (ii) other non-qualifying income from foreclosure property, it will be subject to tax on such income at the highest regular corporate rate.

• Any net income that the Company has from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business) will be subject to a 100% tax.

• If the Company should fail to satisfy either the 75% or 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a percentage tax calculated by the ratio of REIT taxable income to gross income with certain adjustments multiplied by the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test.

• If the Company fails to distribute during each year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from preceding periods, then the Company will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed.

• In the event of a more than de minimis failure of any of the asset tests, as described below under “Asset Tests,” as long as the failure was due to reasonable cause and not to willful neglect, the Company files a description of each asset that caused such failure with the Internal Revenue Service (“IRS”), and disposes of the assets or otherwise complies with the asset tests within six months after the last day of the quarter in which the Company identifies such failure, the Company will pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which the Company failed to satisfy the asset tests.

• In the event the Company fails to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, and such failure is due to reasonable cause and not to willful neglect, the Company will be required to pay a penalty of $50,000 for each such failure.

• To the extent that the Company recognizes gain from the disposition of an asset with respect to which there existed “built-in gain” upon its acquisition by the Company from a Subchapter C corporation in a carry-over basis transaction and such disposition occurs within a maximum ten-year recognition period beginning on the date on which it was acquired by the Company, the Company will be subject to federal income tax at the highest regular corporate rate on the amount of its “net recognized built-in gain.”

• To the extent that the Company has net income from a taxable REIT subsidiary (“TRS”), the TRS will be subject to federal corporate income tax in much the same manner as other non-REIT Subchapter C corporations, with the exceptions that the deductions for interest expense on debt and rental payments made by the TRS to the Company will be limited and a 100% excise tax may be imposed on transactions between the TRS and the Company or the Company’s tenants that are not conducted on an arm’s length basis. A TRS is a corporation in which a REIT owns stock, directly or indirectly, and for which both the REIT and the corporation have made TRS elections.

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Requirements for Qualification as a REIT

     To qualify as a REIT for a taxable year, the Company must have no earnings and profits accumulated in any non-REIT year. The Company also must elect or have in effect an election to be taxed as a REIT and must meet other requirements, some of which are summarized below, including percentage tests relating to the sources of its gross income, the nature of the Company’s assets and the distribution of its income to shareholders. Such election, if properly made and assuming continuing compliance with the qualification tests described herein, will continue in effect for subsequent years.

Organizational Requirements and Share Ownership Tests

     Section 856(a) of the Code defines a REIT as a corporation, trust or association:

     (1) that is managed by one or more trustees or directors;

     (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

     (3) that would be taxable, but for Sections 856 through 860 of the Code, as a domestic corporation;

     (4) that is neither a financial institution nor an insurance company subject to certain provisions of the Code;

     (5) the beneficial ownership of which is held by 100 or more persons, determined without reference to any rules of attribution (the “share ownership test”);

     (6) that during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) (the “five or fewer test”); and

     (7) that meets certain other tests, described below, regarding the nature of its income and assets.

     Section 856(b) of the Code provides that conditions (1) through (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of fewer than 12 months. The five or fewer test and the share ownership test do not apply to the first taxable year for which an election is made to be treated as a REIT.

     The Company is also required to request annually (within 30 days after the close of its taxable year) from record holders of specified percentages of its shares written information regarding the ownership of such shares. A list of shareholders failing to fully comply with the demand for the written statements is required to be maintained as part of the Company’s records required under the Code. Rather than responding to the Company, the Code allows the shareholder to submit such statement to the IRS with the shareholder’s tax return.

     The Company has issued shares to a sufficient number of people to allow it to satisfy the share ownership test and the five or fewer test. In addition, to assist in complying with the five or fewer test, the Company’s Articles of Incorporation contain provisions restricting share transfers where the transferee (other than specified individuals involved in the formation of the Company, members of their families and certain affiliates, and certain other exceptions) would, after such transfer, own (a) more than 9.9% either in number or value of the outstanding Common Stock of the Company or (b) more than 9.9% either in number or value of any outstanding preferred stock of the Company. Pension plans and certain other tax-exempt entities have different restrictions on ownership. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of either the outstanding Common Stock or any preferred stock of the Company, the stock in excess of this 9.9% in value is deemed to be held in trust for transfer at a price that does not exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In addition, under these circumstances, the Company also has the right to redeem such stock.

     For purposes of determining whether the five or fewer test (but not the share ownership test) is met, any stock held by a qualified trust (generally, pension plans, profit-sharing plans and other employee retirement trusts) is, generally, treated as held directly by the trust’s beneficiaries in proportion to their actuarial interests in the trust and not as held by the trust.

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Income Tests

     In order to maintain qualification as a REIT, two gross income requirements must be satisfied annually.

• First, at least 75% of the Company’s gross income (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) must be derived from “rents from real property;” “interest on obligations secured by mortgages on real property or on interests in real property;” gain (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) from the sale or other disposition of, and certain other gross income related to, real property (including interests in real property and in mortgages on real property); and income received or accrued within one year of the Company’s receipt of, and attributable to the temporary investment of, “new capital” (any amount received in exchange for stock other than through a dividend reinvestment plan or in a public offering of debt obligations having maturities of at least five years).

• Second, at least 95% of the Company’s gross income (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) must be derived from dividends; interest; “rents from real property;” gain (excluding gross income from certain sales of property held as inventory or primarily for sale in the ordinary course of business) from the sale or other disposition of, and certain other gross income related to, real property (including interests in real property and in mortgages on real property); and gain from the sale or other disposition of stock and securities.

     The Company may temporarily invest its working capital in short-term investments. Although the Company will use its best efforts to ensure that income generated by these investments will be of a type that satisfies the 75% and 95% gross income tests, there can be no assurance in this regard (see the discussion above of the “new capital” rule under the 75% gross income test).

     For an amount received or accrued to qualify for purposes of an applicable gross income test as “rents from real property” or “interest on obligations secured by mortgages on real property or on interests in real property,” the determination of such amount must not depend in whole or in part on the income or profits derived by any person from such property (except that such amount may be based on a fixed percentage or percentages of receipts or sales). In addition, for an amount received or accrued to qualify as “rents from real property,” such amount may not be received or accrued directly or indirectly from a person in which the Company owns directly or indirectly 10% or more of, in the case of a corporation, the total voting power of all voting stock or the total value of all stock, and, in the case of an unincorporated entity, the assets or net profits of such entity (except for certain amounts received or accrued from a TRS in connection with property substantially rented to persons other than a TRS of the Company and other 10%-or-more owned persons). The Company leases and intends to lease property only under circumstances such that substantially all, if not all, rents from such property qualify as “rents from real property.” Although it is possible that a tenant could sublease space to a sublessee in which the Company is deemed to own directly or indirectly 10% or more of the tenant, the Company believes that as a result of the provisions of the Company’s Articles of Incorporation that limit ownership to 9.9%, such occurrence would be unlikely. Application of the 10% ownership rule is, however, dependent upon complex attribution rules provided in the Code and circumstances beyond the control of the Company. Ownership, directly or by attribution, by an unaffiliated third party of more than 10% of the Company’s stock and more than 10% of the stock of any tenant or subtenant would result in a violation of the rule.

     In addition, the Company must not manage its properties or furnish or render services to the tenants of its properties, except through an independent contractor from whom the Company derives no income or through a TRS unless (i) the Company is performing services that are usually or customarily furnished or rendered in connection with the rental of space for occupancy only and the services are of the sort that a tax-exempt organization could perform without being considered in receipt of unrelated business taxable income or (ii) the income earned by the Company for other services furnished or rendered by the Company to tenants of a property or for the management or operation of the property does not exceed a de minimis threshold generally equal to 1% of the income from such property. The Company self-manages some of its properties, but does not believe it provides services to tenants that are outside the exception.

     If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as “rents from real property.” Generally, this 15% test is applied separately to each lease. The portion of rental income treated as attributable to personal property is determined according to the ratio of the fair market value of the personal property to the total fair market value of the property that is rented. The determination of what fixtures and other property constitute personal property for federal tax purposes is difficult and imprecise. The Company does not have 15% by value of any of its properties classified as personal property. If, however, rent

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payments do not qualify, for reasons discussed above, as rents from real property for purposes of Section 856 of the Code, it will be more difficult for the Company to meet the 95% and 75% gross income tests and continue to qualify as a REIT.

     The Company is and expects to continue performing third-party management and development services. If the gross income to the Company from this or any other activity producing disqualified income for purposes of the 95% or 75% gross income tests approaches a level that could potentially cause the Company to fail to satisfy these tests, the Company intends to take such corrective action as may be necessary to avoid failing to satisfy the 95% or 75% gross income tests.

     The Company may enter into hedging transactions with respect to one or more of its assets or liabilities. The Company’s hedging activities may include entering into interest rate swaps, caps and floors, options to purchase such items, and futures and forward contracts. Income and gain from “hedging transactions” will be excluded from gross income for purposes of the 95% gross income test (but not the 75% gross income test). A “hedging transaction” includes any transaction entered into in the normal course of the Company’s trade or business primarily to manage the risk of interest rate, price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets. The Company will be required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated or entered into. The Company intends to structure any hedging or similar transactions so as not to jeopardize its status as a REIT.

     If the Company were to fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions would generally be available if (i) the Company’s failure to meet such test or tests was due to reasonable cause and not to willful neglect and (ii) following its identification of its failure to meet these tests, the Company files a description of each item of income that fails to meet these tests in a schedule in accordance with Treasury Regulations. It is not possible, however, to know whether the Company would be entitled to the benefit of these relief provisions since the application of the relief provisions is dependent on future facts and circumstances. If these provisions were to apply, the Company would be subjected to tax equal to a percentage tax calculated by the ratio of REIT taxable income to gross income with certain adjustments multiplied by the gross income attributable to the greater of the amount by which the Company failed either of the 75% or the 95% gross income tests.

Asset Tests

     At the close of each quarter of its taxable year, the Company must also satisfy four tests relating to the nature of its assets.

• At least 75% of the value of the Company’s total assets must consist of real estate assets (including interests in real property and interests in mortgages on real property as well as its allocable share of real estate assets held by joint ventures or partnerships in which the Company participates), cash, cash items and government securities.

• Not more than 25% of the Company’s total assets may be represented by securities other than those includable in the 75% asset class.

• Not more than 20% of the Company’s total assets may be represented by securities of one or more TRS.

• Of the investments included in the 25% asset class, except for TRS, (i) the value of any one issuer’s securities owned by the Company may not exceed 5% of the value of the Company’s total assets, (ii) the Company may not own more than 10% of any one issuer’s outstanding voting securities and (iii) the Company may not hold securities having a value of more than 10% of the total value of the outstanding securities of any one issuer. Securities issued by affiliated qualified REIT subsidiaries (“QRS”), which are corporations wholly owned by the Company, either directly or indirectly, that are not TRS, are not subject to the 25% of total assets limit, the 5% of total assets limit or the 10% of a single issuer’s voting securities limit or the 10% of a single issuer’s value limit. Additionally, “straight debt” and certain other exceptions are not “securities” for purposes of the 10% of a single issuer’s value test. The existence of QRS are ignored, and the assets, income, gain, loss and other attributes of the QRS are treated as being owned or generated by the Company, for federal income tax purposes. The Company currently has 46 subsidiaries and other affiliates that it employs in the conduct of its business.

     If the Company meets the asset tests described above at the close of any quarter, it will not lose its status as a REIT because of a change in value of its assets unless the discrepancy exists immediately after the acquisition of any security or other property that is wholly or partly the result of an acquisition during such quarter. Where a failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days

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after the close of such quarter. The Company maintains adequate records of the value of its assets to maintain compliance with the asset tests and to take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter. Nevertheless, if the Company were unable to cure within the 30-day cure period, the Company may cure a violation of the 5% asset test or the 10% asset test so long as the value of the asset causing such violation does not exceed the lesser of 1% of the Company’s assets at the end of the relevant quarter or $10 million and the Company disposes of the asset causing the failure or otherwise complies with the asset tests within six months after the last day of the quarter in which the failure to satisfy the asset test is discovered. For violations due to reasonable cause and not due to willful neglect that are larger than this amount, the Company is permitted to avoid disqualification as a REIT after the 30-day cure period by (i) disposing of an amount of assets sufficient to meet the asset tests, (ii) paying a tax equal to the greater of $50,000 or the highest corporate tax rate times the taxable income generated by the non-qualifying asset and (iii) disclosing certain information to the IRS.

Distribution Requirement

     In order to qualify as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount equal to or greater than the excess of (a) the sum of (i) 90% of the Company’s “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and the Company’s net capital gain) and (ii) 90% of the net income (after tax on such income), if any, from foreclosure property, over (b) the sum of certain non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). These requirements may be waived by the IRS if the Company establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax described below. To the extent that the Company does not distribute all of its net long-term capital gain and all of its “real estate investment trust taxable income,” it will be subject to tax thereon. In addition, the Company will be subject to a 4% excise tax to the extent it fails within a calendar year to make “required distributions” to its shareholders of 85% of its ordinary income and 95% of its capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for such preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of the taxable income of the Company for the taxable year (without regard to the deduction for dividends paid) and all amounts from earlier years that are not treated as having been distributed under the provision. Dividends declared in the last quarter of the year and paid during the following January will be treated as having been paid and received on December 31 of such earlier year. The Company’s distributions for 2006 were adequate to satisfy its distribution requirement.

     It is possible that the Company, from time to time, may have insufficient cash or other liquid assets to meet the 90% distribution requirement due to timing differences between the actual receipt of income and the actual payment of deductible expenses or dividends on the one hand and the inclusion of such income and deduction of such expenses or dividends in arriving at “real estate investment trust taxable income” on the other hand. The problem of not having adequate cash to make required distributions could also occur as a result of the repayment in cash of principal amounts due on the Company’s outstanding debt, particularly in the case of “balloon” repayments or as a result of capital losses on short-term investments of working capital. Therefore, the Company might find it necessary to arrange for short-term, or possibly long-term, borrowing or new equity financing. If the Company were unable to arrange such borrowing or financing as might be necessary to provide funds for required distributions, its REIT status could be jeopardized.

     Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to shareholders in a later year, which may be included in the Company’s deduction for dividends paid for the earlier year. The Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company might in certain circumstances remain liable for the 4% excise tax described above.

Federal Income Tax Treatment of Leases

     The availability to the Company of, among other things, depreciation deductions with respect to the facilities owned and leased by the Company depends upon the treatment of the Company as the owner of the facilities and the classification of the leases of the facilities as true leases, rather than as sales or financing arrangements, for federal income tax purposes. The Company has not requested nor has it received an opinion that it will be treated as the owner of the portion of the facilities constituting real property and that the leases will be treated as true leases of such real property for federal income tax purposes.

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Other Issues

     With respect to property acquired from and leased back to the same or an affiliated party, the IRS could assert that the Company realized prepaid rental income in the year of purchase to the extent that the value of the leased property exceeds the purchase price paid by the Company for that property. In litigated cases involving sale-leasebacks which have considered this issue, courts have concluded that buyers have realized prepaid rent where both parties acknowledged that the purported purchase price for the property was substantially less than fair market value and the purported rents were substantially less than the fair market rentals. Because of the lack of clear precedent and the inherently factual nature of the inquiry, the Company cannot give complete assurance that the IRS could not successfully assert the existence of prepaid rental income in such circumstances. The value of property and the fair market rent for properties involved in sale-leasebacks are inherently factual matters and always subject to challenge.

     Additionally, it should be noted that Section 467 of the Code (concerning leases with increasing rents) may apply to those leases of the Company that provide for rents that increase from one period to the next. Section 467 provides that in the case of a so-called “disqualified leaseback agreement,” rental income must be accrued at a constant rate. If such constant rent accrual is required, the Company would recognize rental income in excess of cash rents and, as a result, may fail to have adequate funds available to meet the 90% dividend distribution requirement. “Disqualified leaseback agreements” include leaseback transactions where a principal purpose of providing increasing rent under the agreement is the avoidance of federal income tax. Since the Section 467 regulations provide that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts, additional rent provisions of leases containing such clauses should not result in these leases being disqualified leaseback agreements. In addition, the Section 467 regulations provide that leases providing for fluctuations in rents by no more than a reasonable percentage, which is 15% for long-term real property leases, from the average rent payable over the term of the lease will be deemed to not be motivated by tax avoidance. The Company does not believe it has rent subject to the disqualified leaseback provisions of Section 467.

     Subject to a safe harbor exception for annual sales of up to seven properties (or properties with a basis of up to 10% of the REIT’s assets) that have been held for at least four years, gain from sales of property held for sale to customers in the ordinary course of business is subject to a 100% tax. The simultaneous exercise of options to acquire leased property that may be granted to certain tenants or other events could result in sales of properties by the Company that exceed this safe harbor. However, the Company believes that in such event, it will not have held such properties for sale to customers in the ordinary course of business.

Depreciation of Properties

     For federal income tax purposes, the Company’s real property is being depreciated over 31.5, 39 or 40 years using the straight-line method of depreciation and its personal property over various periods utilizing accelerated and straight-line methods of depreciation.

Failure to Qualify as a REIT

     If the Company were to fail to qualify for federal income tax purposes as a REIT in any taxable year, and the relief provisions were found not to apply, the Company would be subject to tax on its taxable income at regular corporate rates (plus any applicable alternative minimum tax). Distributions to shareholders in any year in which the Company failed to qualify would not be deductible by the Company nor would they be required to be made. In such event, to the extent of current and/or accumulated earnings and profits, all distributions to shareholders would be taxable as qualified dividend income, including, presumably, subject to the 15% maximum rate on dividends created by the Jobs and Growth Tax Relief Reconciliation Act of 2003, and, subject to certain limitations in the Code, eligible for the 70% dividends received deduction for corporations that are REIT shareholders. Unless entitled to relief under specific statutory provisions, the Company would also be disqualified from taxation as a REIT for the following four taxable years. It is not possible to state whether in all circumstances the Company would be entitled to statutory relief from such disqualification. Failure to qualify for even one year could result in the Company’s incurring substantial indebtedness (to the extent borrowings were feasible) or liquidating substantial investments in order to pay the resulting taxes.

Taxation of Tax-Exempt Shareholders

     The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a tax-exempt employees’ pension trust do not constitute “unrelated business taxable income,” even though the REIT may have financed certain of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and are subject to revocation or modification by the IRS,

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based upon the revenue ruling and the analysis therein, distributions made by the Company to a U.S. shareholder that is a tax-exempt entity (such as an individual retirement account (“IRA”) or a 401(k) plan) should not constitute unrelated business taxable income unless such tax-exempt U.S. shareholder has financed the acquisition of its shares with “acquisition indebtedness” within the meaning of the Code, or the shares are otherwise used in an unrelated trade or business conducted by such U.S. shareholder.

     Special rules apply to certain tax-exempt pension funds (including 401(k) plans but excluding IRAs or government pension plans) that own more than 10% (measured by value) of a “pension-held REIT.” Such a pension fund may be required to treat a certain percentage of all dividends received from the REIT during the year as unrelated business taxable income. The percentage is equal to the ratio of the REIT’s gross income (less direct expenses related thereto) derived from the conduct of unrelated trades or businesses determined as if the REIT were a tax-exempt pension fund (including income from activities financed with “acquisition indebtedness”), to the REIT’s gross income (less direct expenses related thereto) from all sources. The special rules will not require a pension fund to recharacterize a portion of its dividends as unrelated business taxable income unless the percentage computed is at least 5%.

     A REIT will be treated as a “pension-held REIT” if the REIT is predominantly held by tax-exempt pension funds and if the REIT would otherwise fail to satisfy the five or fewer test discussed above. A REIT is predominantly held by tax-exempt pension funds if at least one tax-exempt pension fund holds more than 25% (measured by value) of the REIT’s stock or beneficial interests, or if one or more tax-exempt pension funds (each of which owns more than 10% (measured by value) of the REIT’s stock or beneficial interests) own in the aggregate more than 50% (measured by value) of the REIT’s stock or beneficial interests. The Company believes that it will not be treated as a pension-held REIT. However, because the shares of the Company will be publicly traded, no assurance can be given that the Company is not or will not become a pension-held REIT.

Taxation of Non-U.S. Shareholders

     The rules governing United States federal income taxation of any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created in the United States or under the laws of the United States or of any state thereof, (iii) an estate whose income is includable in income for U.S. federal income tax purposes regardless of its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust (“Non-U.S. Shareholders”) are highly complex, and the following discussion is intended only as a summary of such rules. Prospective Non-U.S. Shareholders should consult with their own tax advisors to determine the impact of United States federal, state, and local income tax laws on an investment in stock of the Company, including any reporting requirements.

     In general, Non-U.S. Shareholders are subject to regular United States income tax with respect to their investment in stock of the Company in the same manner as a U.S. shareholder if such investment is “effectively connected” with the Non-U.S. Shareholder’s conduct of a trade or business in the United States. A corporate Non-U.S. Shareholder that receives income with respect to its investment in stock of the Company that is (or is treated as) effectively connected with the conduct of a trade or business in the United States also may be subject to the 30% branch profits tax imposed by the Code, which is payable in addition to regular United States corporate income tax. The following discussion addresses only the United States taxation of Non-U.S. Shareholders whose investment in stock of the Company is not effectively connected with the conduct of a trade or business in the United States.

Ordinary Dividends

     Distributions made by the Company that are not attributable to gain from the sale or exchange by the Company of United States real property interests (“USRPI”) and that are not designated by the Company as capital gain dividends will be treated as ordinary income dividends to the extent made out of current or accumulated earnings and profits of the Company. Generally, such ordinary income dividends will be subject to United States withholding tax at the rate of 30% on the gross amount of the dividend paid unless reduced or eliminated by an applicable United States income tax treaty. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S. Shareholder has filed an IRS Form W-8BEN with the Company, certifying the Non-U.S. Shareholder’s entitlement to treaty benefits.

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Non-Dividend Distributions

     Distributions made by the Company in excess of its current and accumulated earnings and profits to a Non-U.S. Shareholder who holds 5% or less of the stock of the Company (after application of certain ownership rules) will not be subject to U.S. income or withholding tax. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of the Company’s current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to a dividend distribution. However, the Non-U.S. Shareholder may seek a refund from the IRS of any amount withheld if it is subsequently determined that such distribution was, in fact, in excess of the Company’s then current and accumulated earnings and profits.

Capital Gain Dividends

     As long as the Company continues to qualify as a REIT, distributions made by the Company after December 31, 2005, that are attributable to gain from the sale or exchange by the Company of any USRPI will not be treated as effectively connected with the conduct of a trade or business in the United States. Instead, such distributions will be treated as REIT dividends that are not capital gains and will not be subject to the branch profits tax as long as the Non-U.S. Shareholder does not hold greater than 5% of the stock of the Company at any time during the one-year period ending on the date of the distribution. Non-U.S. Shareholders who hold more than 5% of the stock of the Company will be treated as if such gains were effectively connected with the conduct of a trade or business in the United States and generally subject to the same capital gains rates applicable to U.S. Shareholders. In addition, corporate Non-U.S. Shareholders may also be subject to the 30% branch profits tax and to withholding at the rate of 35% of the gross distribution.

Disposition of Stock of the Company

     Generally, gain recognized by a Non-U.S. Shareholder upon the sale or exchange of stock of the Company will not be subject to United States taxation unless such stock constitutes a USRPI within the meaning of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). The stock of the Company will not constitute a USRPI so long as the Company is a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT in which at all times during a specified testing period less than 50% in value of its stock or beneficial interests are held directly or indirectly by Non-U.S. Shareholders. The Company believes that it will be a “domestically controlled REIT,” and therefore that the sale of stock of the Company will generally not be subject to taxation under FIRPTA. However, because the stock of the Company is publicly traded, no assurance can be given that the Company is or will continue to be a “domestically controlled REIT.”

     Under recently enacted “wash sale” rules applicable to certain dispositions of interests in “domestically controlled REITs,” a Non-U.S. Shareholder could be subject to taxation under FIRPTA on the disposition of stock of the Company if certain conditions are met. If the Company is a “domestically controlled REIT,” a Non-U.S. Shareholder will be treated as having disposed of USRPI, if such Non-U.S. Shareholder disposes of an interest in the Company in an “applicable wash sale transaction.” An “applicable wash sale transaction” is any transaction in which a Non-U.S. Shareholder avoids receiving a distribution from a REIT by (i) disposing of an interest in a “domestically controlled REIT” during the 30 day period preceding a distribution, any portion of which distribution would have been treated as gain from the sale of a USRPI if it had been received by the Non-U.S. Shareholder and (ii) acquiring, or entering into a contract or option to acquire, a substantially identical interest in the REIT during the 61 day period beginning the first day of the 30 day period preceding the distribution. The wash sale rule does not apply to a Non-U.S. Shareholder who actually receives the distribution from the Company or, so long as the Company is publicly traded, to any Non-U.S. Shareholder holding greater than 5% of the outstanding stock of the Company at any time during the one year period ending on the date of the distribution.

     If the Company did not constitute a “domestically controlled REIT,” gain arising from the sale or exchange by a Non-U.S. Shareholder of stock of the Company would be subject to United States taxation under FIRPTA as a sale of a USRPI unless (i) the stock of the Company is “regularly traded” (as defined in the applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder’s interest (after application of certain constructive ownership rules) in the Company is 5% or less at all times during the five years preceding the sale or exchange. If gain on the sale or exchange of the stock of the Company were subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular United States income tax with respect to such gain in the same manner as a U.S. Shareholder (subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the 30% branch profits tax in the case of foreign corporations), and the purchaser of the stock of the Company (including the Company) would be required to withhold and remit to the IRS 10% of the purchase price. Additionally, in such case, distributions on the stock of the Company to the extent they represent a return of capital or capital gain from the sale of the stock of the Company, rather than dividends, would be subject to a 10% withholding tax.

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     Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Shareholder in two cases:

• if the Non-U.S. Shareholder’s investment in the stock of the Company is effectively connected with a U.S. trade or business conducted by such Non-U.S. Shareholder, the Non-U.S. Shareholder will be subject to the same treatment as a U.S. shareholder with respect to such gain, or

• if the Non-U.S. Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Information Reporting Requirements and Backup Withholding Tax

     The Company will report to its U.S. shareholders and to the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any, with respect thereto. Under the backup withholding rules, a U.S. shareholder may be subject to backup withholding, currently at a rate of 28% on dividends paid unless such U.S. shareholder

• is a corporation or falls within certain other exempt categories and, when required, can demonstrate this fact, or

• provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A U.S. shareholder who does not provide the Company with his correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the U.S. shareholder’s federal income tax liability. In addition, the Company may be required to withhold a portion of any capital gain distributions made to U.S. shareholders who fail to certify their non-foreign status to the Company.

     Additional issues may arise pertaining to information reporting and backup withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders should consult their tax advisors with respect to any such information reporting and backup withholding requirements.

State and Local Taxes

     The Company and its shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its shareholders may not conform to the federal income tax consequences discussed above. Consequently, prospective holders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the stock of the Company.

Real Estate Investment Trust Tax Proposals

     Investors must recognize that the present federal income tax treatment of the Company may be modified by future legislative, judicial or administrative actions or decisions at any time, which may be retroactive in effect, and, as a result, any such action or decision may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the Treasury Department, resulting in statutory changes as well as promulgation of new, or revisions to existing, regulations and revised interpretations of established concepts. No prediction can be made as to the likelihood of the passage of any new tax legislation or other provisions either directly or indirectly affecting the Company or its shareholders.

Other Legislation

     The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual tax rate for long-term capital gains generally from 20% to 15% (for sales occurring after May 6, 2003 through December 31, 2008) and for dividends generally from 38.6% to 15% (for tax years from 2003 through 2008). These provisions have been extended through the 2010 tax year. Without future congressional action, the maximum tax rate on long-term capital gains will return to 20% in 2011, and the maximum rate on dividends will move to 39.6% in 2011. Because a REIT is not generally subject to federal income tax on the portion of its REIT taxable income or capital gains distributed to its shareholders, distributions of dividends by a REIT are generally not eligible for the

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new 15% tax rate on dividends. As a result, the Company’s ordinary REIT dividends will continue to be taxed at the higher tax rates (currently, a maximum of 35%) applicable to ordinary income.

ERISA Considerations

     The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a holder of stock of the Company. This discussion does not propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the extent not preempted, state law that may be relevant to particular employee benefit plan shareholders (including plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, and governmental plans and church plans that are exempt from ERISA and Section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances.

     A fiduciary making the decision to invest in stock of the Company on behalf of a prospective purchaser which is an ERISA plan, a tax-qualified retirement plan, an IRA or other employee benefit plan is advised to consult its own legal advisor regarding the specific considerations arising under ERISA, Section 4975 of the Code, and (to the extent not preempted) state law with respect to the purchase, ownership or sale of stock by such plan or IRA.

Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs

     Each fiduciary of an employee benefit plan subject to Title I of ERISA (an “ERISA Plan”) should carefully consider whether an investment in stock of the Company is consistent with its fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i) an ERISA Plan’s investments to be prudent and in the best interests of the ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan’s investments to be diversified in order to reduce the risk of large losses, unless it is clearly prudent not to do so, (iii) an ERISA Plan’s investments to be authorized under ERISA and the terms of the governing documents of the ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into transactions prohibited under Section 406 of ERISA. In determining whether an investment in stock of the Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan’s portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow and funding requirements of the ERISA Plan and the liquidity and current return of the ERISA Plan’s portfolio. A fiduciary should also take into account the nature of the Company’s business, the length of the Company’s operating history and other matters described below under “Risk Factors.”

     The fiduciary of an IRA or of an employee benefit plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a “Non-ERISA Plan”) should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents, not prohibited under Section 4975 of the Code and permitted under applicable state law.

Status of the Company under ERISA

     A prohibited transaction may occur if the assets of the Company are deemed to be assets of the investing Plans and “parties in interest” or “disqualified persons” as defined in ERISA and Section 4975 of the Code, respectively, deal with such assets. In certain circumstances where a Plan holds an interest in an entity, the assets of the entity are deemed to be Plan assets (the “look-through rule”). Under such circumstances, any person that exercises authority or control with respect to the management or disposition of such assets is a Plan fiduciary. Plan assets are not defined in ERISA or the Code, but the United States Department of Labor issued regulations in 1987 (the “Regulations”) that outline the circumstances under which a Plan’s interest in an entity will be subject to the look-through rule.

     The Regulations apply only to the purchase by a Plan of an “equity interest” in an entity, such as common stock or common shares of beneficial interest of a REIT. However, the Regulations provide an exception to the look-through rule for equity interests that are “publicly-offered securities.”

     Under the Regulations, a “publicly-offered security” is a security that is (i) freely transferable, (ii) part of a class of securities that is widely-held and (iii) either (a) part of a class of securities that is registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or (b) sold to a Plan as part of an offering of securities to the public pursuant to an

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effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such longer period allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. Whether a security is considered “freely transferable” depends on the facts and circumstances of each case. Generally, if the security is part of an offering in which the minimum investment is $10,000 or less, any restriction on or prohibition against any transfer or assignment of such security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not of itself prevent the security from being considered freely transferable. A class of securities is considered “widely-held” if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another.

     The Company believes that the stock of the Company will meet the criteria of the publicly-offered securities exception to the look-through rule in that the stock of the Company is freely transferable, the minimum investment is less than $10,000 and the only restrictions upon its transfer are those required under federal income tax laws to maintain the Company’s status as a REIT. Second, stock of the Company is held by 100 or more investors and at least 100 or more of these investors are independent of the Company and of one another. Third, the stock of the Company has been and will be part of offerings of securities to the public pursuant to an effective registration statement under the Securities Act and will be registered under the Exchange Act within 120 days after the end of the fiscal year of the Company during which an offering of such securities to the public occurs. Accordingly, the Company believes that if a Plan purchases stock of the Company, the Company’s assets should not be deemed to be Plan assets and, therefore, that any person who exercises authority or control with respect to the Company’s assets should not be treated as a Plan fiduciary for purposes of the prohibited transaction rules of ERISA and Section 4975 of the Code.

Available Information

     The Company makes available to the public free of charge through its internet website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission. The Company’s internet website address is www.healthcarerealty.com.

     The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov.

Corporate Governance Principles

     The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any shareholder who requests a copy.

Committee Charters

     The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee and Executive Committee. The Board of Directors has adopted written charters for each committee except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any shareholder who requests a copy.

Executive Officers

     Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this Annual Report on Form 10-K and is incorporated herein by reference.

Item 1A. Risk Factors

     The following are some of the risks and uncertainties that could cause the Company’s actual financial condition, results of operations, business and prospects to differ materially from those contemplated by the forward-looking statements contained in this

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report or the Company’s other filings with the SEC. If any of the following risks actually occurred, the Company’s business, financial condition and operating results could suffer, and the trading price of its Common Stock could decline.

The market price of the Company’s stock may be affected adversely by changes in the Company’s dividend policy.

     The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow and to make accretive new investments. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s stock. Subsequent to the anticipated sales of the Company’s senior living portfolio, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales.

The anticipated sales of the Company’s senior living portfolio have not yet closed and are subject to events outside the control of the Company.

     The sales of the Company’s senior living portfolio are subject to negotiation with third parties and other business risks associated with the ownership of real property, such as casualty loss. If these transactions do not close for any reason, the strategic results that the Company hopes to achieve, including the payment of a one-time special dividend, will not be realized. There can be no assurance that the sales will occur within the timeframe that the Company expects or at all.

At times, the Company may have cash that it is unable to invest in suitable properties, which could adversely affect the Company’s future revenues and its ability to maintain or increase dividends to shareholders; there is considerable competition in the Company’s market for attractive investments.

     From time to time, the Company will have cash available from various sources, including (1) the proceeds of sales of shares of its securities, (2) principal payments on its mortgage investments, and (3) the sale of its properties, including non-elective dispositions under the terms of master leases or similar financial support arrangements. The Company must invest these proceeds, on a timely basis and at comparable yields, in other healthcare investments or in qualified short-term investments. The Company competes for real estate investments with a broad variety of potential investors. This competition for investments may negatively affect the Company’s ability to make timely investments on acceptable terms. While funds are unused for property investments, they are invested in short-term obligations which have been at historically low yields. Accordingly, delays in utilizing excess cash to acquire properties will negatively impact revenues and perhaps the Company’s ability to maintain or increase its distributions to shareholders.

At times, the Company may have limited access to capital, which would slow the Company’s growth.

     A REIT is required to make dividend distributions and retains less of its capital for growth. As a result, a REIT is required to grow through the steady investment of new capital in real estate assets. Presently, the Company has sufficient capital availability. However, there will be times when the Company will have limited access to capital from the equity and/or debt markets. During such periods, virtually all of the Company’s available capital will be required to meet existing commitments and to reduce existing debt. The Company may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time it requires additional capital to acquire healthcare properties on a competitive basis or to meet its obligations.

Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments.

     The healthcare service industry is currently experiencing:

• Changing trends in the method of delivery of healthcare services;

• Increased expense for uninsured patients;

• Increased liability insurance expense;

• Continuing pressure by private and governmental payors to contain costs and reimbursements; and

• Increased scrutiny and formal investigations by federal and state authorities.

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     These changes can adversely affect the economic performance of some or all of the tenants and sponsors who provide financial support to the Company’s investments and, in turn, negatively affect the lease revenues and the value of the Company’s property investments.

The Company’s revenues depend on the ability of its tenants and sponsors to generate sufficient income from their operations to make loan and rent payments to the Company.

     The Company’s revenues are subject to the financial strength of its tenants and sponsors. The Company has no operational control over the business of these tenants and sponsors who face a wide range of competitive and regulatory pressures and constraints. Such pressures and constraints could materially impair these tenants and sponsors and prevent them from making their loan and rent payments to the Company which may have a negative effect on the Company’s revenues.

If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates the facility, the Company would have to obtain another provider for the affected facility.

     If the Company loses a tenant or sponsor and is unable to attract another healthcare provider on a timely basis and on acceptable terms the Company’s revenues could suffer. In addition, many of the Company’s properties are special-purpose facilities that may not be easily adaptable to uses unrelated to healthcare. Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.

The Company may experience uninsured or underinsured losses related to casualty or liability.

     The Company generally requires its tenants to maintain comprehensive liability and property insurance that covers the Company as well as the tenants. The Company also carries comprehensive liability insurance and property insurance covering its owned and managed properties. Some types of losses, however, either may be uninsurable or too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the property. In such an event, the Company might nevertheless remain obligated for any mortgage debt or other financial obligation related to the property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future.

The Company owns facilities that are operated by companies that have experienced regulatory and legal problems.

     The Company’s tenants and sponsors are subject to a complex system of federal and state regulations relating to the delivery of healthcare services. If a tenant or sponsor experiences regulatory or legal problems, the Company could be at risk for amounts owed to it by the tenant under leases or financial support agreements.

If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately or timely report its financial results.

     Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that the Company’s receipts and expenditures of its assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected. Any failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to report financial results accurately and timely or to detect and prevent fraud.

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Failure to maintain its status as a REIT, even in one taxable year, could cause the Company to reduce its dividends dramatically.

     The Company intends to qualify at all times as a REIT under the Code. If in any taxable year the Company does not qualify as a REIT, it would be taxed as a corporation. As a result, the Company could not deduct its distributions to the shareholders in computing its taxable income. Depending upon the circumstances, a REIT that loses its qualification in one year may not be eligible to re-qualify during the four succeeding years. Further, certain transactions or other events could lead to the Company being taxed at rates ranging from four to 100 percent on certain income or gains.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     In addition to the properties described under Item 1, “Business” and in Schedule III of Item 15 hereto, the Company leases its headquarters office space.

     The Company’s headquarters, located in offices at 3310 West End Avenue in Nashville, Tennessee, are leased from an unrelated third party. The Company’s current lease agreement, which commenced on November 1, 2003, covers approximately 30,934 square feet of rented space and expires on October 31, 2010, with two five-year renewal options. Annual base rent was approximately $596,820 in 2006 and increases approximately 3.25% annually thereafter.

Item 3. Legal Proceedings

     On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The allegations in the suit relate to activities which occurred before the Company acquired Capstone in 1998. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the Capstone officers and directors remained in his or her position following the Company’s acquisition of Capstone. The complaint seeks an accounting and disgorgement of monies obtained by the allegedly wrongful conduct and other unspecified compensatory and punitive damages. There is currently a stay on discovery in the case. The plaintiff and certain defendants in the case reached an agreement to settle a portion of the claim presented in the case and such settlement was approved by the court in January 2007. This settlement did not include the Company or several other defendants. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.

     In May, 2006, Methodist Health System Foundation, Inc. (“the Foundation”) filed suit against a wholly-owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana. The Foundation is the sponsor under financial support agreements which support the Company’s ownership and operation of two medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an affiliate of Universal Health Services, Inc. in 2003. The Foundation’s assets and income are not primarily dependent upon the operations of Methodist Hospital, which has remained closed since Hurricane Katrina struck in August 2005. The Foundation’s suit alleges that Hurricane Katrina and its aftermath should relieve the Foundation of its obligations under the financial support agreements. The agreements do not contain any express provision allowing for termination upon a casualty event. The Company believes the Foundation’s claims are not meritorious and will vigorously defend the enforceability of the financial support agreements.

     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 financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

     No matter was submitted to a vote of shareholders during the fourth quarter of 2006.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Shares of the Company’s Common Stock are traded on The New York Stock Exchange under the symbol “HR.” As of December 31, 2006, there were approximately 1,564 shareholders of record. The following table sets forth the high and low sales prices per share of Common Stock and the distributions declared and paid per share of Common Stock during the periods indicated.

					Distributions
					Declared and Paid per
	High		Low		Share
2006
First Quarter	$	38.80	$	32.96	$	0.660
Second Quarter		38.90		31.25		0.660
Third Quarter		38.79		31.90		0.660
Fourth Quarter (Payable on March 2, 2007)		42.83		37.30		0.660
2005
First Quarter	$	41.03	$	35.25	$	0.650
Second Quarter		39.91		35.83		0.655
Third Quarter		41.36		37.36		0.660
Fourth Quarter		40.19		31.01		0.660

     Future distributions will be declared and paid at the discretion of the Board of Directors and will depend upon cash generated by operating activities, borrowings under the Unsecured Credit Facility due 2009, proceeds from mortgage notes receivable repayments, and proceeds from sales of real estate investments or capital market financings. Subsequent to the anticipated sales of the Company’s senior living portfolio, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales. Management expects that the dividend will be reset for the second quarter of 2007 in an amount of approximately $1.54 per common share, per annum, subject to the determination by the Board of Directors.

     Additionally, management expects that the Company would pay a one-time special dividend to shareholders of approximately $4.75 per common share out of the proceeds from the sales of the senior living assets. The payment of this one-time special dividend is dependent on the closing of the sales transactions as currently contemplated. If any of the sales transactions do not close or do not close timely for any reason, the Company may be unable to pay the one-time special dividend or may have to reduce the amount of the dividend.

     The dividends paid during 2006 exceeded cash flows from operations. Such amounts in excess of cash flows from operations were funded by the Company’s Unsecured Credit Facility due 2009. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

Equity Compensation Plan Information

     The following table provides information as of December 31, 2006 about the Company’s Common Stock that may be issued upon grants of restricted stock and the exercise of options, warrants and rights under all of the Company’s existing compensation plans including the 2003 Employees Restricted Stock Incentive Plan, the 2000 Employee Stock Purchase Plan, the 1994 Dividend Reinvestment Plan, and the 1995 Restricted Stock Plan for Non-Employee Directors.

					Number of Securities
					Remaining Available for
	Number of Securities to		Weighted-Average		Future Issuance Under Equity
	Be Issued upon Exercise of		Exercise Price of		Compensation Plans
	Outstanding Options,		Outstanding Options,		(Excluding Securities Reflected
Plan Category	Warrants and Rights(1)		Warrants and Rights(1)		in the First Column) (2)
Equity compensation plans approved by security holders		171,481		—		1,338,895
Equity compensation plans not approved by security holders		0		—		2,001,060
Total		171,481		—		3,339,955

(1) The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The

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	2000 Employee Stock Purchase Plan provides that shares of Common Stock may be purchased at a per share price equal to 85% of the fair market value of the Common Stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.
(2)	Includes securities available for future issuance under the 2003 Employees Restricted Stock Incentive Plan.

     All of the Company’s equity compensation plans were approved by the shareholders, except the 2003 Employees Restricted Stock Incentive Plan, which provides for awards of restricted shares of the Company’s Common Stock to full-time salaried employees of the Company or its subsidiaries and affiliates on such terms and conditions, and subject to such restrictions, as the Compensation Committee may determine. Such conditions may be based on continuing employment or achievement of pre-established financial objectives or both. The 2003 Employees Restricted Stock Incentive Plan covers a fixed number of shares and terminates on December 1, 2012. Subject to the risk of forfeiture and transfer restrictions, eligible employees shall have all rights as shareholders with respect to the shares issued pursuant to the plan, including the right to vote and receive dividends or other distributions on such shares. For employees under employment agreements, upon certain merger, change in control, or liquidation events involving the Company, all shares covered by outstanding awards under the plan will immediately vest, unless provisions are made in connection with such transaction for the continuance of the plan. Moreover, all shares covered by outstanding awards to employees under employment agreements will immediately vest if a participant’s employment with the Company is terminated without cause or, in the case of the Company’s executive officers, upon that officer’s retirement.

Item 6. Selected Financial Data

     The Company’s selected financial data, set forth in its 2006 Annual Report to Shareholders under the caption “Selected Financial Information,” is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The Company’s information relating to management’s discussion and analysis of financial condition and results of operations set forth in the Company’s 2006 Annual Report to Shareholders under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     See “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in the Company’s 2006 Annual Report to Shareholders, which is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 8. Financial Statements and Supplementary Data

     The Company’s financial statements and the related notes, together with the reports of BDO Seidman, LLP thereon, set forth in the Company’s 2006 Annual Report to Shareholders, are incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

Item 9A. Controls and Procedures

     Disclosure Controls and Procedures:

     The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed is accumulated and

25

communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure.

     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 Annual Report on Form 10-K. Based on such 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 are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

     Changes in the Company’s Internal Control over Financial Reporting:

     None.

     Management’s Annual Report on Internal Control Over Financial Reporting:

     Management’s Annual Report on Internal Control Over Financial Reporting, set forth in the Company’s 2006 Annual Report to Shareholders, is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 9B. Other Information

     Departure of Senior Executive Officer

     The Company’s Senior Vice President and Chief Operating Officer, J. D. Carter Steele, will retire from the Company effective March 1, 2007.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

     Directors

     Information with respect to directors, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Election of Directors,” is incorporated herein by reference.

     Executive Officers

     The executive officers of the Company are:

Name	Age		Position
David R. Emery		62	Chairman of the Board & Chief Executive Officer
Scott W. Holmes		52	Senior Vice President & Chief Financial Officer
J. D. Carter Steele		58	Senior Vice President & Chief Operating Officer
John M. Bryant, Jr.		40	Senior Vice President & General Counsel
B. Douglas Whitman, II		38	Senior Vice President of Real Estate Investments

     Mr. Emery formed the Company and has held his current positions since May 1992. Prior to 1992, Mr. Emery was engaged in the development and management of commercial real estate in Nashville, Tennessee. Mr. Emery has been active in the real estate industry for more than 35 years.

26

     Mr. Holmes is a licensed CPA and has served as the Chief Financial Officer since January 1, 2003 and was the Senior Vice President — Financial Reporting (principal accounting officer) from October 1998 until January 1, 2003. Prior to joining the Company, Mr. Holmes was Vice President — Finance and Data Services at Trigon HealthCare, Inc., an insurance company located in Virginia. Mr. Holmes was with Ernst & Young LLP for more than 13 years and has considerable audit and financial reporting experience relating to public companies.

     Mr. Steele has served as the Chief Operating Officer since January 1, 2003 and has held senior management positions relating to asset administration of the Company since May 1997. He serves as a point of contact for all issues related to real estate investments, due diligence advisory services and property management. Mr. Steele has over 20 years experience in structuring and executing real estate transactions. Mr. Steele is a former partner with the commercial real estate brokerage firm McWilliams & Steele in Nashville, Tennessee. Mr. Steele will retire as the Company’s Chief Operating Officer effective as of March 1, 2007.

     Mr. Bryant became the Company’s Senior Vice President and General Counsel on November 1, 2003. From April 22, 2002 until November 1, 2003, Mr. Bryant was Vice President and Assistant General Counsel. Prior to joining the Company, Mr. Bryant was a shareholder with the law firm of Baker Donelson Bearman & Caldwell in Nashville, Tennessee.

     Mr. Whitman joined the Company in 1998, and, as the Company’s Senior Vice President of Real Estate Investments, he is responsible for overseeing the acquisition and development of outpatient medical facilities. Prior to joining the Company, Mr. Whitman worked for the University of Michigan Health System and HCA Inc.

     Code of Ethics

     The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions, as well as all directors, officers and employees of the Company. The Code of Ethics is posted on the Company’s website (www.healthcarerealty.com) and is available in print free of charge to any shareholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Investor Relations: Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on the Company’s website.

     Section 16(a) Compliance

     Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference.

     Shareholder Recommendation of Director Candidates

     There have been no material changes with respect to the Company’s policy relating to shareholder recommendations of director candidates. Such information is set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Shareholder Recommendation or Nomination of Director Candidates,” is incorporated herein by reference.

     Audit Committee

     Information relating to the Company’s Audit Committee, its members and the audit committee’s financial expert is set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Committee Membership,” is incorporated herein by reference.

27

Item 11. Executive Compensation

     Information relating to executive compensation, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Information relating to the security ownership of management and certain beneficial owners, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.

     Information relating to securities authorized for issuance under the Company’s equity compensation plans, set forth in Item 5 of this Annual Report on Form 10-K under the caption “Equity Compensation Plan Information,” is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

     Information relating to certain relationships and related transactions, and director independence, set forth respectively, in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the captions “Certain Relationships and Related Transactions,” and “Independence of Directors,” as applicable, are incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

     Information relating to the fees paid to the Company’s accountants, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 15, 2007 under the caption “Selection of Auditors – Audit and Non-Audit Fees,” is incorporated herein by reference.

Item 15. Exhibits and Financial Statement Schedules

     (a) Index to Historical Financial Statements, Financial Statement Schedules and Exhibits

     (1) Financial Statements:

     The following financial statements of Healthcare Realty Trust Incorporated are incorporated herein by reference to Item 8 of this Annual Report on Form 10-K.

• Consolidated Balance Sheets — December 31, 2006 and 2005.

• Consolidated Statements of Income for the years ended December 31, 2006, December 31, 2005 and December 31, 2004.

• Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, December 31, 2005 and December 31, 2004.

• Consolidated Statements of Cash Flows for the years ended December 31, 2006, December 31, 2005 and December 31, 2004.

• Notes to Consolidated Financial Statements.

     (2) Financial Statement Schedules:

Schedule II — Valuation and Qualifying Accounts at December 31, 2006	S-1
Schedule III — Real Estate and Accumulated Depreciation at December 31, 2006	S-2
Schedule IV — Mortgage Loans on Real Estate at December 31, 2006	S-3

28

     All other schedules are omitted because they are not applicable or not required or because the information is included in the consolidated financial statements or notes thereto.

29

(3) Exhibits:

Exhibit
Number		Description of Exhibits
3.1	—	Second Articles of Amendment and Restatement of the Registrant.(1)
3.2	—	Amended and Restated Bylaws of the Registrant.(4)
4.1	—	Specimen stock certificate.(1)
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).(6)
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).(6)
4.4	—	Form of 8.125% Senior Note Due 2011.(6)
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).(11)
4.6	—	Form of 5.125% Senior Note Due 2014.(11)
10.1	—	1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(3)
10.2	—	Amended and Restated Executive Retirement Plan.(7)
10.3	—	Retirement Plan for Outside Directors.(1)
10.4	—	2000 Employee Stock Purchase Plan.(5)
10.5	—	Dividend Reinvestment Plan.(2)
10.6	—	2003 Employees Restricted Stock Incentive Plan.(7)
10.7	—	Amendment No. 1 to 2003 Employees Restricted Stock Incentive Plan.(10)
10.8	—	Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated.(12)
10.9	—	Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated.(9)
10.10	—	Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated.(8)
10.11	—	Employment Agreement by and between J.D. Carter Steele and Healthcare Realty Trust Incorporated.(8)
10.12	—	Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named therein.(13)
10.13	—	Employment Agreement by and between B. Douglas Whitman, II and Healthcare Realty Trust Incorporated (filed herewith).
11	—	Statement re computation of per share earnings (contained in Note 11 to the Notes to the Consolidated Financial Statements for the year ended December 31, 2006 filed herewith as Exhibit 12).
13	—	Annual Report to Shareholders for the year ended December 31, 2006 (filed herewith).
21	—	Subsidiaries of the Registrant (filed herewith).
23	—	Consent of BDO Seidman, LLP, independent auditors (filed herewith).
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).

30

Exhibit
Number		Description of Exhibits
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).
32	—	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed 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 Registration Statement on Form S-11 (Registration No. 33-72860) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
(3)	Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1995 and hereby incorporated by reference.
(4)	Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 1999 and hereby incorporated by reference.
(5)	Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1999 and hereby incorporated by reference.
(6)	Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.
(7)	Filed as an exhibit to the Company’s Form 10-Q for the quarter ended March 31, 2002 and hereby incorporated by reference.
(8)	Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2002 and hereby incorporated by reference.
(9)	Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2003 and hereby incorporated by reference.
(10)	Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2003 and hereby incorporated by reference.
(11)	Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
(12)	Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2004 and hereby incorporated by reference.
(13)	Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.

Executive Compensation Plans and Arrangements

     The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on Form 10-K:

1.	1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated (filed as Exhibit 10.1)
2.	Executive Retirement Plan, as amended (filed as Exhibit 10.2)
3.	Retirement Plan for Outside Directors (filed as Exhibit 10.3)
4.	2000 Employee Stock Purchase Plan (filed as Exhibit 10.4)
5.	2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.6)
6.	Amendment No. 1 to 2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.7)

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7.	Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated (filed as Exhibit 10.8)
8.	Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated (filed as Exhibit 10.9)
9.	Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated (filed as Exhibit 10.10)
10.	Employment Agreement by and between J. D. Carter Steele and Healthcare Realty Trust Incorporated (filed as Exhibit 10.11)
11.	Employment Agreement by and between B. Douglas Whitman, II and Healthcare Realty Trust Incorporated (filed as Exhibit 10.13).

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on February 28, 2007.

HEALTHCARE REALTY TRUST INCORPORATED
By:	/s/ David R. Emery
David R. Emery
Chairman of the Board and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the date indicated.

Signature	Title	Date
/s/ David R. Emery David R. Emery	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	February 28, 2007
/s/ Scott W. Holmes Scott W. Holmes	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	February 28, 2007
/s/ David L. Travis David L. Travis	Vice President and Chief Accounting Officer (Principal Accounting Officer)	February 28, 2007
/s/ Errol L. Biggs, Ph.D. Errol L. Biggs, Ph.D.	Director	February 28, 2007
/s/ Charles Raymond Fernandez, M.D. Charles Raymond Fernandez, M.D.	Director	February 28, 2007
/s/ Batey M. Gresham, Jr. Batey M. Gresham, Jr.	Director	February 28, 2007
/s/ Marliese E. Mooney Marliese E. Mooney	Director	February 28, 2007
/s/ Edwin B. Morris, III Edwin B. Morris, III	Director	February 28, 2007
/s/ John Knox Singleton John Knox Singleton	Director	February 28, 2007
/s/ Bruce D. Sullivan Bruce D. Sullivan	Director	February 28, 2007
/s/ Dan S. Wilford Dan S. Wilford	Director	February 28, 2007

33

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee

     The audits referred to in our report dated March 1, 2007 relating to the consolidated financial statements of Healthcare Realty Trust Incorporated, which is contained in Item 8 of this Annual Report on Form 10-K included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits.

     In our opinion such financial statement schedules present fairly, in all material respects, the information set forth therein.

Memphis, Tennessee
March 1, 2007 /s/ BDO Seidman, LLP   BDO Seidman, LLP

34

Schedule II — Valuation and Qualifying Accounts at December 31, 2006
(Dollars in thousands)

				Additions
		Balance at		Charged to			Charged to
		Beginning of		costs and			other				Balance at
	Description	Period		expenses			accounts(2)		Deductions(1)		End of Period
2006	Accounts and notes receivable allowance	$	1,998	$	1,256		$	0	$	732	$	2,522
	Preferred stock investment reserve		1,000		0			0		0		1,000
			2,998		1,256			0		732		3,522
2005	Accounts and notes receivable allowance		2,016		1,308			0		1,326		1,998
	Preferred stock investment reserve		1,000		0			0		0		1,000
			3,016		1,308			0		1,326		2,998
2004	Accounts and notes receivable allowance		1,864		(212	)		618		254		2,016
	Preferred stock investment reserve		1,000		0			0		0		1,000
		$	2,864	$	(212	)	$	618	$	254	$	3,016

(1)	Write-off of related receivable accounts.
(2)	Reserve on accounts receivable in a foreclosure in 2004.

35

Schedule III — Real Estate and Accumulated Depreciation at December 31, 2006
(Dollars in thousands)

				Land						Buildings, Improvements, and CIP
						Costs Capitalized						Costs Capitalized								(1)
	Number of			Initial		Subsequent to				Initial		Subsequent to				Personal		(3)		Accumulated				Date
	Properties		State	Investment		Acquisition		Total		Investment		Acquisition		Total		Property		Total Assets		Depreciation		Encumbrances		Acquired	Date Constructed
Medical Office /Outpatient Facilities		162	AL, AR, AZ, CA, CO, DC, FL, GA, HI, IL, IN, KS, LA, MA, MD, MI, MO, MS, NV, PA, TN, TX, VA, WY	$	103,748	$	2,515	$	106,263	$	1,135,477	$	102,446	$	1,237,923	$	1,646	$	1,345,832	$	252,977	$	51,056	1993-2006	1974 — 2005 6 Under Const. (2)
Assisted Living Facilities		26	AL, FL, GA, MO, MS, NC, OH, PA, TN, TX, VA		6,192		0		6,192		118,505		2,415		120,920		2,690		129,802		28,565		0	1998-2005	1972-2000
Independent Living Facilities		7	TN, TX		2,969		7		2,976		58,101		2,405		60,506		1,023		64,505		12,238		0	1998-2005	1987-1998
Inpatient Rehabilitation Facilities		9	AL, FL, PA, TX		2,330		0		2,330		154,164		0		154,164		0		156,494		36,650		0	1998-1998	1983-1991
Other Inpatient Facilities		4	CA, IN, MI, TX		5,832		150		5,982		69,993		0		69,993		0		75,975		8,543		0	1994-2006	1983-2005
Skilled Nursing Facilities		29	IN, MI, MO, OK, PA, SC, TN, VA		5,550		365		5,915		133,138		3,317		136,455		2,975		145,345		30,241		9,005	1993-2005
Total Real Estate		237			126,621		3,037		129,658		1,669,378		110,583		1,779,961		8,334		1,917,953		369,214		60,061
Corporate Property					—		—		—		—		—		—		14,373		14,373		4,492	—
Total Property		237		$	126,621	$	3,037	$	129,658	$	1,669,378	$	110,583	$	1,779,961	$	22,707	$	1,932,326	$	373,706	$	60,061

(1)	Depreciation is provided for on a straight-line basis on buildings and improvements over 3.3, 7.0, 15.0, 20.0, 31.5 or 39.0 years, lease intangibles over 13 to 106 months, personal property over 3.0 or 7.0 years, and land improvements over 15.0 years.
(2)	Development at 12/31/06.
(3)	Total assets at 12/31/06 have an estimated aggregate total cost of approximately $1.8 billion for Federal Income Tax Purposes.
(4)	Includes assets held for sale at 12/31/05 of $26.1 million and accumulated depreciation of $4.7 million and at 12/31/04 of $74.9 million and accumulated depreciation of $13.6 million.

36

Schedule III — Real Estate and Accumulated Depreciation at December 31, 2006
(continued)

(5) Reconciliation of Total Property and Accumulated Depreciation for the twelve months ended December 31, 2006, 2005, and 2004:

	Year to Date Ending 12/31/06						Year to Date Ending 12/31/05 (4)						Year to Date Ending 12/31/04 (4)
				Accumulated						Accumulated						Accumulated
	Total Property			Depreciation			Total Property			Depreciation			Total Property			Depreciation
Beginning Balance	$	1,859,149		$	320,487		$	1,908,195		$	284,155		$	1,563,859		$	232,536
Additions during the period:
Real Estate		96,231			62,676			82,851			59,352			352,150			54,520
Corporate Property		300			576			997			1,244			1,268			548
Construction in Progress		31,805			—			6,311			—			5,709			—
Retirements/dispositions:
Real Estate		(55,106	)		(9,980	)		(139,187	)		(24,247	)		(14,631	)		(3,335	)
Corporate Property		(53	)		(53	)		(18	)		(17	)		(160	)		(114	)
Ending Balance	$	1,932,326		$	373,706		$	1,859,149		$	320,487		$	1,908,195		$	284,155

37

Schedule IV — Mortgage Loans on Real Estate
As of December 31, 2006
(dollars in thousands)

						Periodic			Original
	Interest			Maturity		Payment			Face		Carrying
Description	Rate			Date		Terms			Amount		Amount (1)		Balloon
Assisted living facility located in California		9.83	%		12/1/2005		(4	)		5,300		4,632		4,632	(5)
Assisted living facility located in Arizona		12.05	%		1/1/2007		(4	)		4,805		4,462		4,462	(5)
Group of assisted living facilities located in various states		10.00	%		6/30/2008		(1	)		10,800		10,800		10,800	(6)
Group of assisted living facilities in various states		10.00	%		3/3/2008		(1	)		21,426		21,426		21,426	(8)
Group of independent living facilities located in Indiana		12.00	%		5/7/2009		(9	)		6,000		6,000		6,000	(10)
Group of assisted living facilities in Georgia		12.50	%		10/31/2008		(12	)		4,750		4,750		4,750	(13)
Ancillary hospital facility located in California		8.30	%		5/12/2016		(7	)		14,920		14,920		14,920	(14)
Group of skilled nursing facilities and one assisted living facility located in Michigan		15.00	%		6/29/2009		(1	)		3,927		4,887		4,887	(11)
Ancillary hospital facility located in Texas		8.50	%		9/1/2031		(2	)		1,986		1,979		—	(3)
Total Mortgage Notes Receivable											$	73,856

Notes:

(1)	Interest only until maturity. Then principal is payable in full.
(2)	Paid in monthly installments of principal and interest. Fully amortized over 300 months.
(3)	Prepayment may be made at anytime after July 5, 2010.
(4)	Paid in monthly installments of principal and interest. Principal payable in full at maturity date. Amortized over 300 months.
(5)	Yield Maintenance Amount is defined generally as a percentage of the Principal amount being prepaid x [(Present value of the principal and interest payments remaining to maturity at a discount rate) — (Principal amount outstanding at the time of prepayment)].
(6)	Prepayment may be made at any time after January 1, 2007 with at least nine months prior written notice.
(7)	Interest only payments until May 2011, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(8)	Prepayment may not be made without prior written consent.
(9)	Interest only until December 2007, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(10)	Prepayment may be made at anytime after August 8, 2007.
(11)	Prepayment may be made at anytime after June 30, 2008. The Company funded an additional $960 on the note during 2006.
(12)	Interest only until February 2007, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(13)	Prepayment may be made at anytime after January 31, 2007.
(14)	Prepayment may be made at anytime after May 12, 2008.

38

Schedule IV — Mortgage Loans on Real Estate
As of December 31, 2006
(continued)

	Years Ended December 31,
	2006			2005			2004
Balance at beginning of period	$	105,795		$	40,321		$	91,835
Additions during period:
New or acquired mortgages		37,787			71,976			1,260
		37,787			71,976			1,260
Deductions during period:
Scheduled principal payments		(347	)		(2,180	)		(562	)
Mortgage repayments		(69,124	)		(4,073	)		(46,397	)
Foreclosures and assignments		—			—			(6,242	)
Amortization		(255	)		(249	)		427
		(69,726	)		(6,502	)		(52,774	)
Balance at end of period	$	73,856		$	105,795		$	40,321

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EX-10.13

EXHIBIT 10.13

Healthcare Realty Trust
Incorporated

Employment Agreement

     This Employment Agreement (the “Agreement”) is made and entered into as of January 1, 2007 (“Effective Date”) by and between Healthcare Realty Trust Incorporated, a Maryland corporation (“Corporation”), and B. Douglas Whitman (“Officer”).

Recital

     Corporation desires to employ Officer as its Senior Vice President — Real Estate Investments and Officer is willing to accept such employment by Corporation, on the terms and subject to the conditions set forth in this Agreement.

Agreement

     The Parties Agree As Follows:

     1. Duties. During the term of this Agreement, Officer agrees to be employed by and to serve Corporation as its Senior Vice President — Real Estate Investments and Corporation agrees to employ and retain Officer in such capacity. Officer’s duties shall be to manage and supervise Corporation’s real estate investment department in furtherance of the overall financial success of the Corporation. Officer shall devote such of his business time, energy, and skill to the affairs of Corporation as shall be necessary to perform his duties under this Agreement. Officer shall report to Corporation’s Board of Directors and/or Chief Executive Officer and at all times during the term of this Agreement shall have powers and duties at least commensurate with his position as Senior Vice President — Real Estate Investments. Officer’s principal place of business with respect to his services to Corporation shall be within 35 miles of Nashville, Tennessee.

     2. Term of Employment.

          2.1 Definitions. For purposes of this Agreement the following terms shall have the following meanings:

     (a) “Termination For Cause” shall mean termination by Corporation of Officer’s employment by Corporation by reason of Officer’s dishonesty towards, fraud upon, or deliberate injury or attempted injury to, Corporation or by reason of Officer’s breach of this Agreement. Corporation shall have the burden of establishing that any termination of Officer’s employment by Corporation is a Termination For Cause.

     (b) “Termination Other Than For Cause” shall mean any termination by Corporation of Officer’s employment by Corporation (other than a Termination For Cause) and shall include a Constructive Termination of Officer’s

employment, effective upon notice from Officer to Corporation of such Constructive Termination.

     (c) “Voluntary Termination” shall mean termination by Officer of Officer’s employment by Corporation other than (i) a Constructive Termination as described in subsection 2.1(g), (ii) “Termination Upon a Change in Control” as described in Section 2.1(d), (iii) termination by reason of Officer’s death or disability as described in Sections 2.5 and 2.6, and (iv) termination by reason of retirement by Officer upon attainment of Retirement Eligibility.

     (d) “Termination Upon a Change in Control” shall mean a termination by Officer of Officer’s employment with Corporation within 24 months following a “Change in Control.”

     (e) “Change in Control” shall mean (i) the time that Corporation first determines that any person and all other persons who constitute a group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (“Exchange Act”)) have acquired direct or indirect beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 20 percent or more of Corporation’s outstanding securities, unless a majority of the “Continuing Directors” approves the acquisition not later than ten business days after Corporation makes that determination, or (ii) the first day on which a majority of the members of Corporation’s Board of Directors are not “Continuing Directors.”

     (f) “Continuing Directors” shall mean, as of any date of determination, any member of the Board of Directors of Corporation who (i) was a member of that Board of Directors on January l, 2007, (ii) has been a member of that Board of Directors for the two years immediately preceding such date of determination, or (iii) was nominated for election or elected to the Board of Directors with the affirmative vote of the greater of (x) a majority of Continuing Directors who were members of the Board at the time of such nomination or election or (y) at least four Continuing Directors.

     (g) “Constructive Termination” shall mean (i) any material breach of this Agreement by Corporation, (ii) any substantial reduction in the authority or responsibility of Officer or other substantial reduction in the terms and conditions of Officer’s employment under circumstances which would not justify a Termination For Cause and which are not the result of a breach by Officer of this Agreement, (iii) any act(s) by Corporation which are designed to or have the effect of rendering Officer’s working conditions so intolerable or demeaning on a recurring basis that a reasonable person would resign such employment, or (iv) relocation of Officer to a location that is more than 35 miles from the location of Corporation’s headquarters on the date this Agreement is executed.

     (h) “Deferred Compensation” or “deferred compensation” shall mean any individual or group plan, program, agreement or other arrangement, whether or not a “plan” for purposes of the Employee Retirement Income Security Act of 1974 (“ERISA”) and whether or not a retirement plan or supplemental executive retirement plan or additional retirement plan, but which in any event involves an agreement by Corporation to make payment(s) to Officer at a future date as compensation for current services to Corporation. The term Deferred Compensation or deferred compensation shall include, but not be limited to, benefits described in any Incentive Plan, and any

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implementation thereof or incentive award thereunder, each as it now exists or may hereafter be amended.

     (i) “Incentive Plans” shall mean Corporation’s 2003 Employees Restricted Stock Incentive Plan, and any successor plans.

     (j) “Retirement Eligibility” shall mean Employee’s attainment of 60 years of age and ten years of continuous employment with Corporation.

          2.2 Basic Term. The term of employment of Officer by Corporation shall be from January 1, 2007 through December 31, 2007, unless terminated earlier pursuant to this Section 2. Commencing in 2008, on the first day of January of each year, the first sentence of this Section 2.2 shall be amended by deleting each year then appearing therein and inserting in each place the next subsequent year.

          2.3 Termination For Cause. Termination For Cause may be effected by Corporation at any time during the term of this Agreement and shall be effected by written notification to Officer. Upon Termination For Cause, Officer immediately shall be paid all accrued salary, bonus compensation, if any, to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans, accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, but Officer shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation.

          2.4 Termination Other Than For Cause. Notwithstanding anything else in this Agreement, Corporation may effect a Termination Other Than For Cause at any time upon giving written notice to Officer of such termination. Upon any Termination Other Than For Cause, Officer shall immediately be paid all accrued salary, bonus compensation, if any, to the extent earned, whether or not vested without regard to such Termination (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans (including accelerated release and full vesting of shares reserved for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder), accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in Section 4.2, but no other compensation or reimbursement of any kind.

          2.5 Termination by Reason of Disability. If, during the term of this Agreement, Officer, in the reasonable judgment of the Board of Directors of Corporation, has failed to perform his duties under this Agreement on account of illness or physical or mental incapacity, and such illness or incapacity continues for a period of more than 12 consecutive months, Corporation shall have the right to terminate Officer’s employment hereunder by written notification to Officer and payment to Officer of all accrued salary, bonus compensation, if any, to the extent earned, deferred compensation, whether or not vested without regard to such illness or incapacity (other than pension plan or profit

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sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans (including accelerated release and full vesting of shares reserved for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder), accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, with the exception of medical and dental benefits which shall continue through the expiration of this Agreement, but Officer shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation.

          2.6 Death. In the event of Officer’s death during the term of this Agreement, Officer’s employment shall be deemed to have terminated as of the last day of the month during which his death occurs and Corporation shall pay to his estate or such beneficiaries as Officer may from time to time designate all accrued salary, bonus compensation, if any, to the extent earned, whether or not vested without regard to such Termination (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans (including accelerated release and full vesting of shares reserved for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder), accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, but Officer’s estate shall not be paid any other compensation or reimbursement of any kind, including without limitation, severance compensation.

          2.7 Voluntary Termination. In the event of a Voluntary Termination, Corporation shall immediately pay all accrued salary, bonus compensation, if any, to the extent earned, vested deferred compensation (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans, accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, but no other compensation or reimbursement of any kind, including without limitation, severance compensation.

          2.8 Termination Upon a Change in Control or Retirement. In the event of (i) a Termination Upon a Change in Control or (ii) retirement by Officer upon attainment of Retirement Eligibility, Officer shall immediately be paid all accrued salary, bonus compensation, if any, to the extent earned through the date of termination, including compensation that was earned and deferred, whether or not vested without regard to the Change in Control (other than pension plan or profit sharing plan benefits which will be paid in accordance with the applicable plan), any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans (including accelerated release and full vesting of shares reserved for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder), accrued vacation pay and any appropriate business expenses incurred by Officer in connection with his duties hereunder, all to the date of termination, and all severance compensation provided in Section 4.1, but no other compensation or reimbursement of any kind.

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          2.9 Notice of Termination. Corporation may effect a termination of this Agreement pursuant to the provisions of this Section 2 upon giving 30 days written notice to Officer of such termination. Officer may effect a termination of this Agreement pursuant to the provisions of this Section 2 upon giving 60 days written notice to Corporation of such termination.

     3. Salary, Benefits and Bonus Compensation.

          3.1 Base Salary. As payment for the services to be rendered by Officer as provided in Section 1 and subject to the terms and conditions of Section 2, Corporation agrees to pay to Officer a “Base Salary” for the 12 calendar months beginning January 1, 2007 at the rate of $282,015 per annum payable in 24 equal semi-monthly installments. The Base Salary for each year (or portion thereof) beginning January 1, 2008 shall be determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) which shall authorize an increase in Officer’s Base Salary in an amount which, at a minimum, shall be equal to the cumulative cost-of-living increment on the Base Salary as reported in the “Consumer Price Index, Nashville, Tennessee, All Items,” published by the U.S. Department of Labor. Officer’s Base Salary shall be reviewed annually by the Compensation Committee. For purposes of computing the amount of severance compensation due under this Agreement, the term “Base Salary” shall also include the market value, as of the date of grant, of any restricted shares of the Corporation to be awarded to Officer in lieu of annual cash salary in 2007, 2008, and 2009, but shall not include the value of any “matching” or inducement restricted shares awarded to Officer under any deferred compensation plan or program maintained by the Corporation.

          3.2 Additional Benefits. During the term of this Agreement, Officer shall be entitled to the following fringe benefits:

     (a) Officer Benefits. Officer shall be eligible to participate in such of Corporation’s benefits and deferred compensation plans as are now generally available or later made generally available to executive officers of Corporation, including, without limitation, the Incentive Plans, and any implementation thereof or incentive award thereunder, profit sharing plans, annual physical examinations, dental and medical plans, personal catastrophe and disability insurance, financial planning, retirement plans and supplementary executive retirement plans, if any. For purposes of establishing the length of service under any benefit plans or programs of Corporation, Officer’s employment with Corporation will be deemed to have commenced on October 20, 1998.

     (b) Vacation. Officer shall be entitled to four weeks of vacation during each year during the term of this Agreement and any extensions thereof, prorated for partial years.

     (c) Reimbursement for Expenses. During the term of this Agreement, Corporation shall reimburse Officer for reasonable and properly documented out-of-pocket business and/or entertainment expenses incurred by Officer in connection with his duties under this Agreement.

     4. Severance Compensation.

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          4.1 Severance Compensation in the Event of a Termination Upon a Change in Control. In the event Officer’s employment is terminated in a Termination Upon a Change in Control, Officer shall be paid as severance compensation 1.5 times his Base Salary (at the rate payable at the time of such termination), through the remaining term of this Agreement and any extensions thereof, on the dates specified in Section 3.1; provided, however, that if Officer is employed by a new employer during such period, the severance compensation payable to Officer during such period will be reduced by the amount of compensation that Officer is receiving from the new employer. However, Officer is under no obligation to mitigate the amount owed Officer pursuant to this Section 4.1 by seeking other employment or otherwise. Notwithstanding anything in this Section 4.1 to the contrary, Officer may in Officer’s sole discretion, by delivery of a notice to Corporation within 30 days following a Termination Upon a Change in Control, elect to receive from Corporation a lump sum severance payment by bank cashier’s check equal to the present value of the flow of cash payments that would otherwise be paid to Officer pursuant to this Section 4.1. However, in no event shall payment pursuant to this Section 4.1 be less than 1.5 times his Base Salary as defined herein for the applicable period. Such present value shall be determined as of the date of delivery of the notice of election by Officer and shall be based on a discount rate equal to the interest rate on 90-day U.S. Treasury bills, as reported in the Wall Street Journal (or similar publication), on the date of delivery of the election notice. If Officer elects to receive a lump sum severance payment, Corporation shall make such payment to Officer within ten days following the date on which Officer notifies Corporation of Officer’s election. In addition to the severance payment payable under this Section 4.1, Officer shall be paid an amount equal to two times the average annual bonus, if any, earned by Officer in the two years immediately preceding the date of termination. Officer shall also receive (i) full vesting of any awards granted to Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder; and (ii) an immediate release of awards that have been reserved by Corporation for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder, or otherwise, and full vesting of such awards. Officer shall continue to accrue retirement benefits and shall continue to enjoy any benefits under any plans of Corporation in which Officer is a participant to the full extent of Officer’s rights under such plans, including any perquisites provided under this Agreement, through the remaining term of this Agreement; provided, however, that the benefits under any such plans of Corporation in which Officer is a participant, including any such perquisites, shall cease upon re-employment by a new employer.

          4.2 Severance Compensation in the Event of a Termination Other Than For Cause. In the event Officer’s employment is terminated in a Termination Other Than For Cause, Officer shall be paid as severance compensation his Base Salary (at the rate payable at the time of such termination), for a period of 18 months from the date of such termination, on the dates specified in Section 3.1; provided, however, that if Officer is employed by a new employer during such period, the severance compensation payable to Officer during such period will be reduced by the amount of compensation that Officer is receiving from the new employer. However, Officer is under no obligation to mitigate the amount owed Officer pursuant to this Section 4.2 by seeking other employment or otherwise. In addition to the severance payment payable under this Section 4.2, Officer shall be paid an amount equal to two times the average annual bonus, if any, earned by Officer in the two years immediately preceding the date of termination and Officer shall also receive (i) full vesting of any awards granted to Officer under the Incentive Plans, and

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any implementation thereof or incentive award thereunder; and (ii) an immediate release of awards that have been reserved for Officer under the Incentive Plans, and any implementation thereof or incentive award thereunder, or otherwise, and full vesting of such awards. Officer shall be entitled to accelerated vesting of any accrued benefit under each deferred compensation plan. Notwithstanding the foregoing, continued benefit accrual shall not apply in the case of any tax-qualified retirement plan if such accrual would adversely affect the tax-qualified status of such plan; provided, however, that the benefit which would otherwise have been contributed by Corporation to the account of Officer in any tax-qualified defined contribution and the single sum value of the benefit plan shall be paid by Corporation to Officer as each such contribution or benefit would have been made or accrued, as applicable, assuming that Officer had remained employed on a full-time basis with a rate of pay equal to his Base Salary. In the case of a Termination Other Than For Cause by reason of the disability of Officer, and if Officer is retired for disability, then Officer will continue to accrue benefits as provided to Corporation’s executive officers at the time he incurs his disability, notwithstanding any subsequent nonsubstantial employment.

          4.3 No Severance Compensation Upon Other Termination. In the event of a Voluntary Termination, Termination For Cause, termination by reason of Officer’s disability pursuant to Section 2.5, or termination by reason of Officer’s death pursuant to Section 2.6, Officer or his estate shall not be paid any severance compensation and shall receive only the benefits as provided in the appropriate section of Article II applicable to the respective termination.

          4.4 Additional Payments Due to Change in Control.

     (a) Gross Up Payment. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by or on behalf of Corporation to or for the benefit of Officer as a result of a “change in control,” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), involving Corporation or its affiliates (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4.4 (a “Payment”)) would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by Officer with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Officer shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Officer of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Officer retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

     (b) Tax Opinion. Subject to the provisions of Section 4.4(c), all determinations required to be made under this Section 4.4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm or law firm selected by Corporation (the “Tax Firm”); provided, however, that the Tax Firm shall not determine that no Excise Tax is payable by Officer unless it delivers to Officer a written opinion (the “Tax Opinion”) that failure to pay the

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Excise Tax and to report the Excise Tax and the payments potentially subject thereto on or with Officer’s applicable federal income tax return will not result in the imposition of an accuracy-related or other penalty on Officer. All fees and expenses of the Tax Firm shall be borne solely by Corporation. Within 15 business days of the receipt of notice from Officer that there has been a Payment, or such earlier time as is requested by Corporation, the Tax Firm shall make all determinations required under this Section 4.4, shall provide to Corporation and Officer a written report setting forth such determinations, together with detailed supporting calculations, and, if the Tax Firm determines that no Excise Tax is payable, shall deliver the Tax Opinion to Officer. Any Gross-Up Payment, as determined pursuant to this Section 4.4, shall be paid by Corporation to Officer within 15 days of the receipt of the Tax Firm’s determination. Subject to the remainder of this Section 4.4, any determination by the Tax Firm shall be binding upon Corporation and Officer; provided, however, that Officer shall only be bound to the extent that the determinations of the Tax Firm hereunder, including the determinations made in the Tax Opinion, are reasonable and reasonably supported by applicable law. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Tax Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Corporation should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that it is ultimately determined in accordance with the procedures set forth in Section 4.4(c) that Officer is required to make a payment of any Excise Tax, the Tax Firm shall reasonably determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Corporation to or for the benefit of Officer. In determining the reasonableness of the Tax Firm’s determinations hereunder, and the effect thereof, Officer shall be provided a reasonable opportunity to review such determinations with the Tax Firm and Officer’s tax counsel. The Tax Firm’s determinations hereunder, and the Tax Opinion, shall not be deemed reasonable until Officer’s reasonable objections and comments thereto have been satisfactorily accommodated by the Tax Firm.

          (c) Notice of IRS Claim. Officer shall notify Corporation in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by Corporation of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 30 calendar days after Officer actually receives notice in writing of such claim and shall apprise Corporation of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that the failure of Officer to notify Corporation of such claim (or to provide any required information with respect thereto) shall not affect any rights granted to Officer under this Section 4.4 except to the extent that Corporation is materially prejudiced in the defense of such claim as a direct result of such failure. Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Corporation notifies Officer in writing prior to the expiration of such period that it desires to contest such claim, Officer shall do all of the following:

     (i) give Corporation any information reasonably requested by Corporation relating to such claim;

     (ii) take such action in connection with contesting such claim as Corporation shall reasonably request in writing from time to time, including, without

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limitation, accepting legal representation with respect to such claim by an attorney selected by Corporation and reasonably acceptable to Officer;

     (iii) cooperate with Corporation in good faith in order effectively to contest such claim; and

     (iv) if Corporation elects not to assume and control the defense of such claim, permit Corporation to participate in any proceedings relating to such claim;

provided, however, that Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Officer harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 4.4, Corporation shall have the right, at its sole option, to assume the defense of and control all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Officer agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Corporation shall determine; provided, however, that if Corporation directs Officer to pay such claim and sue for a refund, Corporation shall advance the amount of such payment to Officer, on an interest-free basis and shall indemnify and hold Officer harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Officer with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Corporation’s right to assume the defense of and control the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Officer shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          (d) Right to Tax Refund. If, after the receipt by Officer of an amount advanced by Corporation pursuant to Section 4.4, Officer becomes entitled to receive any refund with respect to such claim, Officer shall (subject to Corporation’s complying with the requirements of Section 4.4(c)) promptly pay to Corporation the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Officer of an amount advanced by Corporation pursuant to Section 4.4(c), a determination is made that Officer is not entitled to a refund with respect to such claim and Corporation does not notify Officer in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall, to the extent of such denial, be forgiven and shall not be required to be repaid and the amount of forgiven advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

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     5. Non-Competition; Disclosure of Investments. During the term of this Agreement, including the period, if any, during which Officer shall be entitled to severance compensation pursuant to Section 4.2:

          (a) Officer shall not, without the prior written consent of Corporation, directly or indirectly, own, manage, operate, control, be connected with as an officer, employee, partner, consultant or otherwise, or otherwise engage or participate in any corporation or other business entity engaged in the business of buying, selling, developing, building and/or managing real estate facilities for the medical, healthcare and retirement sectors of the real estate industry. Officer understands and acknowledges that Corporation carries on business nationwide and that the nature of Corporation’s activities cannot be confined to a limited area. Accordingly, Officer agrees that the geographic scope of this Section 5 shall include the United States of America. Notwithstanding the foregoing, the ownership by Officer of less than 2% of any class of the outstanding capital stock of any corporation conducting such a competitive business which is regularly traded on a national securities exchange or in the over-the-counter market shall not be a violation of the foregoing covenant.

          (b) Simultaneously with Officer’s execution of this Agreement and upon each anniversary of the Effective Date, Officer shall notify the Chairman of the Compensation Committee of the nature and extent of Officer’s investments, stock holdings, employment as an employee, director, or any similar interest in any business or enterprise other than Corporation; provided, however, that Officer shall have no obligation to disclose any investment under $100,000 in value or any holdings of publicly traded securities which are not in excess of one percent of the outstanding class of such securities. Notwithstanding any provision herein to the contrary, the restrictions and covenants of this Section 5 shall not apply in the event of a Termination Upon a Change in Control.

          (c) Officer shall not contact or solicit, directly or indirectly, any customer, client, tenant or account whose identity Officer obtained through association with Corporation, regardless of the geographical location of such customer, client, tenant or account, nor shall Officer, directly or indirectly, entice or induce, or attempt to entice or induce, any employee of Corporation to leave such employ, nor shall Officer employ any such person in any business similar to or in competition with that of Corporation. Officer hereby acknowledges and agrees that the provisions set forth in this Section 5 constitute a reasonable restriction on his ability to compete with Corporation and will not adversely affect his ability to earn income sufficient to support himself and/or his family.

          (d) The parties hereto agree that, in the event a court of competent jurisdiction shall determine that the geographical or durational elements of this covenant are unenforceable, such determination shall not render the entire covenant unenforceable. Rather, the excessive aspects of the covenant shall be reduced to the threshold which is enforceable, and the remaining aspects shall not be affected thereby.

     6. Trade Secrets and Customer Lists. Officer agrees to hold in strict confidence all information concerning any matters affecting or relating to the business of Corporation and its subsidiaries and affiliates, including, without limiting the generality of the foregoing, its manner of operation, business plans, business prospects, agreements, protocols, processes, computer programs, customer lists, market strategies, internal

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performance statistics, financial data, marketing information and analyses, or other data, without regard to the capacity in which such information was acquired. Officer agrees that he will not, directly or indirectly, use any such information for the benefit of any person or entity other than Corporation or disclose or communicate any of such information in any manner whatsoever other than to the directors, officers, employees, agents, and representatives of Corporation who need to know such information, who shall be informed by Officer of the confidential nature of such information and directed by Officer to treat such information confidentially. Such information does not include information which (i) was or becomes generally available to the public other than as a result of a disclosure by Officer or his representatives, or (ii) was or becomes available to Officer on a non-confidential basis from a source other than Corporation or its advisors provided that such source is not known to Officer to be bound by a confidentiality agreement with Corporation, or otherwise prohibited from transmitting the information to Officer by a contractual, legal or fiduciary obligation; notwithstanding the foregoing, if any such information does become generally available to the public, Officer agrees not to further discuss or disseminate such information except in the performance of his duties as Officer. Upon Corporation’s request, Officer will return all information furnished to him related to the business of Corporation. The parties hereto stipulate that all such information is material and confidential and gravely affects the effective and successful conduct of the business of Corporation and Corporation’s goodwill, and that any breach of the terms of this Section 6 shall be a material breach of this Agreement. The terms of this Section 6 shall remain in effect following the termination of this Agreement.

     7. Use of Proprietary Information. Officer recognizes that Corporation possesses a proprietary interest in all of the information described in Section 6 and has the exclusive right and privilege to use, protect by copyright, patent or trademark, manufacture or otherwise exploit the processes, ideas and concepts described therein to the exclusion of Officer, except as otherwise agreed between Corporation and Officer in writing. Officer expressly agrees that any products, inventions, discoveries or improvements made by Officer, his agents or affiliates based on or arising out of the information described in Section 6 shall be (i) deemed a work made for hire under the terms of United States Copyright Act, 17 U.S.C. § 101 et seq., and Corporation shall be the owner of all such rights with respect thereto and (ii) the property of and inure to the exclusive benefit of Corporation.

8. Miscellaneous.

          8.1 Payment Obligations. Corporation’s obligation to pay Officer the compensation and to make the arrangements provided herein shall be unconditional, and Officer shall have no obligation whatsoever to mitigate damages hereunder. If litigation after a Change in Control shall be brought to enforce or interpret any provision contained herein, Corporation, to the extent permitted by applicable law and Corporation’s Articles of Incorporation and Bylaws, hereby indemnifies Officer for Officer’s reasonable attorneys’ fees and disbursements incurred in such litigation.

          8.2 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof.

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          8.3 Entire Agreement; Modifications. Except as otherwise provided herein, this Agreement represents the entire understanding among the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof, including without limitation, that certain Employment Agreement between Corporation and Officer dated as of January 1, 2005, and any understandings, agreements or obligations respecting any past or future compensation, bonuses, reimbursements or other payments to Officer from Corporation. All modifications to the Agreement must be in writing and signed by the party against whom enforcement of such modification is sought.

          8.4 Notices. All notices and other communications under this Agreement shall be in writing and shall be given by personal delivery, nationally recognized overnight courier, telefacsimile or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given upon receipt in the event of personal delivery or overnight courier, three days after mailing, or 12 hours after transmission of a telefacsimile to the respective persons named below:

     If to Corporation:

Healthcare Realty Trust Incorporated
3310 West End Avenue, Suite 700
Nashville, Tennessee 37203
Phone: (615) 269-8175
Fax: (615) 269-8122

     If to Officer:

B. Douglas Whitman
5306 Otter Creek Ct.
Brentwood, TN 37027
Phone: (615) 309-8323
Fax: (615) 690-8410

Any party may change such party’s address for notices by notice duly give pursuant to this Section 8.4.

          8.5 Headings. The Section headings herein are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement.

          8.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.

          8.7 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled by arbitration in Nashville, Tennessee in accordance with the Rules of the American Arbitration Association, and judgment upon any proper award rendered by the Arbitrators may be entered in any court having jurisdiction thereof. There shall be three arbitrators, one to be chosen directly by each party at will, and the third arbitrator to be selected by the two arbitrators so chosen. To the extent permitted

12

by the Rules of the American Arbitration Association, the selected arbitrators may grant equitable relief. Each party shall pay the fees of the arbitrator selected by him and of his own attorneys, and the expenses of his witnesses and all other expenses connected with the presentation of his case. The cost of the arbitration including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees and costs shall be borne equally by the parties. To the extent that Officer prevails with respect to any portion of an arbitration award, Officer shall be reimbursed by Corporation for the costs and expenses incurred by Officer in connection with the arbitration in an amount proportionate to the award to Officer as compared to the amount in dispute.

          8.8 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, and all other provisions of this Agreement shall be deemed valid and enforceable to the extent possible.

          8.9 Survival of Corporation’s Obligations. Corporation’s obligations hereunder shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business, or similar event relating to Corporation. This Agreement shall not be terminated by any merger or consolidation or other reorganization of Corporation. In the event any such merger, consolidation or reorganization shall be accomplished by transfer of stock or by transfer of assets or otherwise, the provisions of this Agreement shall be binding upon and inure to the benefit of the surviving or resulting corporation or person. This Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, successors and assigns of the parties; provided, however, that except as herein expressly provided, this Agreement shall not be assignable either by Corporation (except to an affiliate of Corporation in which event Corporation shall remain liable if the affiliate fails to meet any obligations to make payments or provide benefits or otherwise) or by Officer.

          8.10 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement.

          8.11 Withholdings. All compensation and benefits to Officer hereunder shall be reduced only by all federal, state, local and other withholdings and similar taxes and payments that are required by applicable law. Except as otherwise specifically agreed by Officer, no other offsets or withholdings shall apply to reduce the payment of compensation and benefits hereunder.

          8.12 Indemnification. In addition to any rights to indemnification to which Officer is entitled to under Corporation’s Articles of Incorporation and Bylaws, Corporation shall indemnify Officer at all times during and after the term of this Agreement to the maximum extent permitted under Section 2-418 of the General Corporation Law of the State of Maryland or any successor provision thereof and any other applicable state law, and shall pay Officer’s expenses in defending any civil or criminal action, suit, or proceeding in advance of the final disposition of such action, suit, or proceeding, to the maximum extent permitted under such applicable state laws.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written.

Corporation: Healthcare Realty Trust Incorporated
By:	/s/ David R. Emery
	Name:	David R. Emery
	Title:	Chairman and Chief Executive Officer Date: February 26, 2007

Officer:
 

/s/ B. Douglas Whitman

B. Douglas Whitman 

Date: February 26, 2007 

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EX-13

EXHIBIT 13

SELECTED FINANCIAL INFORMATION

     The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements of the Company:

	Years Ended December 31,
(Dollars in thousands, except per share data)	2006(1)		2005(2)		2004(2)		2003(2)		2002(2)
Statement of Income Data:
Total revenues	$	264,882	$	251,772	$	220,196	$	171,263	$	161,508
Total expenses	$	229,375	$	215,881	$	179,085	$	127,270	$	122,486
Income from continuing operations	$	35,507	$	35,891	$	41,111	$	43,993	$	39,022
Discontinued operations	$	4,212	$	16,777	$	14,422	$	16,409	$	23,361
Net income	$	39,719	$	52,668	$	55,533	$	60,402	$	62,383
Per Share Data:
Basic:
Income from continuing operations per common share	$	0.76	$	0.77	$	0.94	$	1.07	$	0.82
Discontinued operations per common share	$	0.09	$	0.36	$	0.33	$	0.40	$	0.58
Net income per common share	$	0.85	$	1.13	$	1.27	$	1.47	$	1.40
Diluted:
Income from continuing operations per common share	$	0.75	$	0.76	$	0.92	$	1.05	$	0.81
Discontinued operations per common share	$	0.09	$	0.35	$	0.32	$	0.39	$	0.56
Net income per common share	$	0.84	$	1.11	$	1.24	$	1.44	$	1.37
Weighted average common shares outstanding — Basic		46,527,857		46,465,215		43,706,528		41,142,619		40,701,516
Weighted average common shares outstanding — Diluted		47,498,937		47,406,798		44,627,475		41,840,188		41,487,780
Balance Sheet Data (as of the end of the period):
Real estate properties, net	$	1,558,620	$	1,517,247	$	1,562,794	$	1,331,323	$	1,287,113
Mortgage notes receivable	$	73,856	$	105,795	$	40,321	$	91,835	$	102,792
Assets held for sale, net	$	—	$	21,415	$	61,246	$	—	$	—
Total assets	$	1,734,639	$	1,747,652	$	1,750,810	$	1,501,802	$	1,473,806
Notes and bonds payable	$	849,982	$	778,446	$	719,264	$	590,281	$	545,063
Total stockholders’ equity	$	825,672	$	912,468	$	980,616	$	876,130	$	891,452
Other Data:
Funds from operations — Basic (3)	$	101,106	$	107,943	$	110,172	$	103,716	$	94,261
Funds from operations — Diluted (3)	$	101,106	$	107,943	$	110,172	$	103,716	$	94,261
Funds from operations per common share — Basic (3)	$	2.17	$	2.32	$	2.52	$	2.52	$	2.32
Funds from operations per common share — Diluted (3)	$	2.13	$	2.28	$	2.47	$	2.48	$	2.27
Dividends declared and paid per common share	$	2.64	$	2.63	$	2.55	$	2.47	$	2.39

(1)	The Company plans to sell its senior living portfolio during the first and second quarters of 2007. See Note 15 to the Consolidated Financial Statements.
(2)	The years ended December 31, 2005, 2004, 2003 and 2002 are restated for discontinued operations presentation. See Note 1 for more details on the Company’s discontinued operations at December 31, 2006.
(3)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of Funds From Operations (“FFO”), including why the Company presents FFO and a reconciliation of FFO to net income.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Business Overview

     Healthcare Realty Trust Incorporated (the “Company”) operates under the Internal Revenue Code of 1986, as amended, as an indefinite life real estate investment trust (“REIT”). The Company, a self-managed and self-administered REIT, integrates owning, managing and developing income-producing real estate properties and mortgages associated with the delivery of 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.

     Substantially all of the Company’s revenues are derived from rentals on its healthcare real estate properties, from interest earned on mortgage loans, and from revenues from the consolidation of variable interest entities (“VIEs”) related to the operations of six senior living facilities owned by the Company. See Note 1 to the Consolidated Financial Statements regarding these VIEs. The Company typically incurs operating and administrative expenses, including compensation, office rental and other related occupancy costs, as well as various expenses incurred in connection with managing its existing portfolio and acquiring additional properties. The Company also incurs interest expense on its various debt instruments and depreciation and amortization expense on its real estate portfolio.

Executive Overview

     Since its inception, the Company has been selective about the properties it acquires and develops. Management believes that by investing in properties associated with or adjacent to leading healthcare providers and in markets with a robust demand for outpatient healthcare facilities, the Company will enhance its prospects for long-term stability and growth. The Company’s portfolio, diversified by facility type, geography, and tenant mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and changes in clinical practice patterns.

     Based on market transactions during the last several quarters, management continues to see high valuations in the medical office sector. Despite the highly competitive market for these assets, the Company continues to aggressively pursue existing property investments and is focused on improving operations in its existing portfolio of managed, multi-tenanted properties.

     Given the competitive environment for acquisitions of healthcare properties, the Company has increased its efforts on developing outpatient medical facilities, which management believes offers higher returns and long-term growth potential. While the time required to construct and lease some of these developments may take two or three years, management believes that the Company’s ability to identify promising development opportunities, construct quality facilities, and lease them strategically will lead to higher returns over the long-term.

     The Company remains focused on outpatient-related facilities, whose tenants historically have represented, together with their related acute care hospital providers, more than half of the $2 trillion in national healthcare spending each year.

     The Company has six development projects underway – three with Baylor Health Care System in Texas, and one each in Colorado, Washington state, and Hawaii – totaling 770,000 square feet and with budgets totaling $177.8 million. The Company expects completion of the Texas and Washington state projects in 2007, the Colorado project (which includes two buildings) in 2008, and the Hawaii project in 2009. Management expects its development pipeline, with selective acquisitions and dispositions in the ordinary course of business, should result in net new investments of approximately $150 — $200 million annually.

     To fund its investment activity, the Company continues to be well positioned from a capital structure and liquidity viewpoint. At December 31, 2006, the Company had $190.0 million of indebtedness outstanding with borrowing capacity remaining of $210.0 million under its Unsecured Credit Facility due 2009, its debt-to-book capitalization ratio was 51.0%, and 76% of its existing debt portfolio had maturity dates after 2010.

Sale of the Senior Living Portfolio

     The Company announced on February 26, 2007 its plan to sell its portfolio of senior living assets. At December 31, 2006, the senior living portfolio included 62 real estate properties in which the Company had investments totaling $340.6 million ($269.3 million, net) and 16 mortgage notes and notes receivable in which the Company had investments totaling $71.8 million. The

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Company’s real estate portfolio, after selling the senior living assets, will consist predominantly of medical office and outpatient facility types, which management believes will further reduce the business-risk profile of the Company. Following the sales, the Company will have investments of approximately $1.6 billion in 177 real estate properties and mortgages. Sales of the properties are expected to close during the first and second quarters of 2007, subject to the terms of definitive agreements customary to these types of transactions. Proceeds of the sales are expected to fund repayments of debt on the Company’s Unsecured Credit Facility due 2009 and the payment of a one-time special dividend to its shareholders. See Note 15 to the Company’s Consolidated Financial Statements for more details of the senior living portfolio.

TRENDS AND MATTERS IMPACTING OPERATING RESULTS

     Management monitors factors and trends important to the Company and REIT industry in order to gauge the potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company.

Acquisitions

     During 2006, the Company acquired approximately $105.7 million of properties, mortgage notes, or equity interests in unconsolidated limited liability companies. See Note 4 to the Consolidated Financial Statements for more information on these acquisitions.

     Due to the high valuations of healthcare properties and the increased interest by non-traditional healthcare real estate investors in owning these types of properties, the Company expects its acquisitions of existing outpatient properties to be less than $100 million for the upcoming year.

Dispositions

     During 2006, the Company sold properties or received payments on mortgage notes resulting in net cash proceeds of approximately $104.3 million. In these transactions, the Company received mortgage notes receivable totaling $15.4 million and mortgage note prepayment penalty fees and lease termination fees totaling $2.5 million. See Note 4 to the Consolidated Financial Statements for more information on these dispositions. The Company’s gross investment in these assets was approximately $124.0 million ($114.1 million, net).

     The Company plans to dispose of its senior living assets, as discussed above, and may make other divestitures in the normal course of business during 2007. Following the sales of the senior living assets, the Company estimates that the remaining portfolio will generate a net income from continuing operations per annum run rate of approximately $32.0 million, or $0.67 per diluted common share, by the third quarter of 2007 and an FFO per annum run rate of approximately $77.0 million, or $1.63 per diluted common share, by the third quarter of 2007. The FFO amounts above include estimated net income and real estate-related depreciation and amortization. These estimates assume that the operating results of the properties in the remaining portfolio are consistent with the operating results at December 31, 2006. Actual results could vary significantly from these estimates due to a number of factors including those risks discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Investment Trends

     As of December 31, 2006, approximately 54% of the Company’s real estate investments consisted of properties leased to unaffiliated lessees pursuant to long-term net lease agreements or subject to financial support agreements with the healthcare sponsors that provide guarantees of the return on the Company’s investment in the properties. Approximately 41% of the Company’s real estate investments are multi-tenanted properties with shorter-term occupancy leases, but without other financial support agreements, with the remaining 5% of investments relating to the Company’s mortgage notes receivable portfolio and its investments in unconsolidated limited liability companies which are invested in real estate properties.

     Due to the high valuations of healthcare properties and the increased interest by non-traditional healthcare real estate investors in owning these types of properties, the Company has found it difficult to make accretive acquisitions. While the Company continues to pursue selective acquisitions, it has increased its efforts to develop outpatient medical facilities. By developing, rather than acquiring, those outpatient medical facilities, the Company expects to earn higher returns with greater growth potential. The diversity of tenants in these properties – physicians in nearly two-dozen specialties, as well as surgery, imaging, and diagnostic centers – and their diverse, historically stable sources of revenue lower the risk. While the time required to construct and lease some of these developments can take two to three years, over the long-term, the Company’s ability to efficiently manage and lease these properties is expected to lead to improved results.

     The development investments that the Company pursues fall into one of two categories: they are either relationship-based, such as the properties developed in conjunction with Baylor Health Care in Dallas; or they are market-driven, where the underlying fundamentals in a particular market make the development of medical office and outpatient facilities, without an existing healthcare system relationship, compelling. The Company’s relationship-based development pipeline currently represents over half of its

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opportunities. The Company is also taking advantage of its development expertise to pursue market-driven development opportunities. These opportunities – on sites that are most often near acute-care hospitals and in markets with strong population growth – are compelling because of fewer use and leasing restrictions, shorter development timelines, and the prospect for higher investment returns.

Discontinued Operations

     In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), discussed in more detail in Note 1 to the Consolidated Financial Statements, the Company must present the results of operations of significant real estate assets disposed of or held for sale as discontinued operations. Therefore, the results of operations from such assets are classified as discontinued operations for the current period, and all prior periods presented are restated to conform to the current period presentation. Readers of the Company’s Consolidated Financial Statements should be aware that each future disposal will result in a change to the presentation of the Company’s operations in the historical Consolidated Statements of Income as previously filed. Such reclassifications to the Consolidated Statements of Income will have no impact on previously reported net income.

     During the first quarter of 2007, the Company’s Board of Directors approved a plan to sell the Company’s senior living portfolio. Upon approval of this plan, the Company determined in accordance with SFAS No. 144, that these assets met the held for sale criteria during the first quarter of 2007. See “Sale of the Senior Living Portfolio” above and Note 15 to the Consolidated Financial Statements for more detail on these planned divestitures.

Amortization of In-Place Leases

     As discussed in Application of Critical Accounting Policies and in Note 1 to the Company’s Consolidated Financial Statements, when a building is acquired with in-place leases, SFAS No. 141, “Business Combinations” (“SFAS No. 141”), requires that the cost of the acquisition be allocated between the tangible real estate and the intangible assets related to in-place leases based on their fair values. Where appropriate, the intangible assets recorded could include goodwill or customer relationship assets. The value of above- or below-market in-place leases is amortized against rental income or property operating expense over the average remaining term of the leases in-place upon acquisition. The value of at-market in-place leases and other intangible assets are amortized and reflected in amortization expense in the Company’s Consolidated Statements of Income. For the lease intangibles in place as of December 31, 2006, the remaining lives of the in-place leases ranged from one to 77 months. As the acquisition volume of in-place leases increases, the related amortization will increase. As these lease intangibles begin to fully amortize, the amount of amortization expense could decrease significantly from year to year.

Variable Interest Entities

     Included in the Company’s Consolidated Financial Statements for the years ended December 31, 2006, 2005 and 2004 are the assets, liabilities and results of operations of VIEs related to six senior living properties owned by the Company, pursuant to the provisions of FASB Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities” (“FIN No. 46R”). The Company has lease and loan arrangements with each of these VIEs. Upon consolidation of these VIEs, rental income, notes receivable and related interest income recorded by the Company are eliminated against the offsetting amounts on the VIEs’ financial statements consolidated by the Company. As such, the Company’s results of operations reflect the operations of the VIEs rather than the lease and note agreements in place with the operators.

     The properties related to all of the Company’s 21 VIEs, including the six VIEs consolidated by the Company, will be sold by the Company as part of the sale of its senior living portfolio in 2007 which is discussed in more detail above. If circumstances dictate, however, the structure of future transactions with operators could create VIEs, which could result in consolidation of the VIEs’ results of operations.

FUNDS FROM OPERATIONS

     Funds From Operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” In 2003, the Securities and Exchange Commission issued a statement that impairment charges could not be added back to net income in calculating FFO. As such, the impairments discussed below negatively impacted FFO. Impairment charges will be recognized from time to time and will negatively impact FFO.

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     As required by SFAS No. 144, the Company must assess the potential for impairment of its real estate properties and other long-lived assets whenever certain events occur, or a change in circumstances indicate that the Company’s net carrying amount recorded may not be fully recoverable. The Company recorded impairment charges of $5.6 million, $0.7 million, and $1.2 million, respectively, for the years ended December 31, 2006, 2005 and 2004. Included in impairment charges for 2006 is an impairment related to one building and an impairment related to acquired patient accounts receivable from a healthcare provider in a troubled debt restructuring that occurred in the fourth quarter of 2005. The impairment charges in 2005 and 2004 were related to the disposition of real estate assets which included the write-off of non-cash straight-line rent receivables.

     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. 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; because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs; and finally, because research analysts publish their earnings estimates and consensus estimates for healthcare REITs only in terms of fully diluted FFO per share and in terms of net income or earnings per share. 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 accounting principles generally accepted in the United States of America 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.

     The table below reconciles FFO to net income for the three years ended December 31, 2006.

	Year Ended December 31,
(Dollars in thousands, except per share data)	2006			2005			2004
Net income	$	39,719		$	52,668		$	55,533
Net gains on sales of real estate properties		(3,275	)		(7,483	)		—
Real estate depreciation and amortization		64,662			62,758			54,639
Total adjustments		61,387			55,275			54,639
Funds From Operations — Basic and Diluted	$	101,106		$	107,943		$	110,172
Weighted average common shares outstanding — Basic		46,527,857			46,465,215			43,706,528
Weighted average common shares outstanding — Diluted		47,498,937			47,406,798			44,627,475
Funds From Operations Per Common Share — Basic	$	2.17		$	2.32		$	2.52
Funds From Operations Per Common Share — Diluted	$	2.13		$	2.28		$	2.47

     During the first and second quarters of 2007, the Company plans to dispose of its senior living portfolio. FFO and FFO per share generated from these properties for the year ended December 31, 2006 was approximately $31.0 million, or $0.67 per basic common share ($0.65 per diluted common share).

RESULTS OF OPERATIONS

     As discussed above under the heading “Sale of the Senior Living Portfolio,” the Company plans to sell its senior living portfolio in 2007. Included in income from continuing operations and net income for the year ended December 31, 2006 were the results of operations from these assets totaling approximately $20.3 million, or $0.44 per basic common share ($0.43 per diluted common share). Based on the Company’s intent to sell these assets and in accordance with SFAS No. 144, the Company has concluded that these assets met the held for sale criteria during the first quarter of 2007. As such, depreciation and amortization on these assets will cease during the first quarter of 2007 upon meeting the held for sale criteria. See Note 15 to the Consolidated Financial Statements for further details on the historical results of operations of these assets. The actual results of operations for 2007 from these assets will depend on timing of the sales of the assets and will be included in discontinued operations for 2007.

2006 Compared to 2005

     For the year ended December 31, 2006, net income was $39.7 million, or $0.85 per basic common share ($0.84 per diluted common share), on total revenues from continuing operations of $264.9 million compared to net income of $52.7 million, or $1.13 per

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basic common share ($1.11 per diluted common share), on total revenues from continuing operations of $251.8 million for the year ended December 31, 2005. FFO was $101.1 million, or $2.17 per basic common share ($2.13 per diluted common share), for the year ended December 31, 2006 compared to $107.9 million, or $2.32 per basic common share ($2.28 per diluted common share), in 2005.

					Change
(Dollars in thousands)	2006		2005		$			%
REVENUES
Master lease rental income	$	83,251	$	70,983	$	12,268			17.3	%
Property operating income		127,200		135,035		(7,835	)		-5.8	%
Straight-line rent		2,358		295		2,063			699.3	%
Mortgage interest income		11,014		9,103		1,911			21.0	%
Other operating income		41,059		36,356		4,703			12.9	%
		264,882		251,772		13,110			5.2	%
EXPENSES
General and administrative		16,867		16,089		778			4.8	%
Property operating expenses		70,449		72,677		(2,228	)		-3.1	%
Other operating expenses		17,209		15,938		1,271			8.0	%
Impairments		5,611		—		5,611			—
Bad debt expense, net		1,256		1,308		(52	)		-4.0	%
Interest		53,553		48,395		5,158			10.7	%
Depreciation		54,492		49,321		5,171			10.5	%
Amortization		9,938		12,153		(2,215	)		-18.2	%
		229,375		215,881		13,494			6.3	%
Income from continuing operations		35,507		35,891		(384	)		-1.1	%
Discontinued operations:
Net income from discontinued operations		1,010		10,007		(8,997	)		-89.9	%
Gain on sales of real estate properties, net of impairments		3,202		6,770		(3,568	)		-52.7	%
		4,212		16,777		(12,565	)		-74.9	%
Net income	$	39,719	$	52,668	$	(12,949	)		-24.6	%

     Total revenues from continuing operations for the year ended December 31, 2006 increased $13.1 million, or 5.2%, compared to 2005 for primarily the following reasons:

– Master lease rental income increased $12.3 million, or 17.3%, from 2005 to 2006. During 2006, the Company acquired $65.0 million of real estate properties pursuant to master lease agreements resulting in additional master lease rental income in 2006 of approximately $2.7 million. In addition, the Company recognized an additional $2.2 million in master lease rental income from its 2005 acquisitions. The Company also recognized master lease income of $5.4 million related to new master lease agreements executed during 2005 on properties whose income was previously reported in property operating income. The remaining $2.0 million increase was generally attributable to annual rent increases.

– Property operating income decreased $7.8 million, or 5.8%, from 2005 to 2006. During the fourth quarter of 2005, the Company entered into master lease agreements related to properties whose gross revenues were previously reported in property operating income, resulting in a $7.4 million decrease in property operating income from 2005 to 2006.

– Straight-line rent increased $2.1 million from 2005 to 2006. Three leases with one operator were restructured in 2005 resulting in a $2.0 million reversal of the straight-line rent receivable previously recorded and the elimination of future straight-line rental income on the leases.

– Mortgage interest income increased $1.9 million, or 21.0%, from 2005 to 2006 mainly due to new mortgage note receivables resulting in additional mortgage interest income of $4.9 million offset by the repayment of seven mortgage note receivables resulting in a decrease to mortgage interest income of $3.0 million.

– Other operating income increased $4.7 million, or 12.9%, from 2005 to 2006 due mainly to mortgage note prepayment penalty fees totaling $2.2 million received in 2006 from the repayment of two of the Company’s mortgage notes receivable, a property substitution deferral fee of $1.8 million from one operator and bankruptcy liquidation proceeds of $0.8 million received during 2006 related to past due rents due from a former operator.

     Total expenses for the year ended December 31, 2006 compared to the year ended December 31, 2005 increased $13.5 million, or 6.3%, for primarily the following reasons:

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– General and administrative expenses increased $0.8 million, or 4.8%, for 2006 compared to 2005 due mainly to an increase in the liability and related expense for the Company’s pension plan totaling $0.8 million and additional compensation expense of $0.2 million from the adoption and implementation of SFAS No. 123(R), “Share-Based Payment.”

– Property operating expenses decreased $2.2 million, or 3.1%, from 2005 to 2006 mainly due to the execution of master lease agreements in the fourth quarter of 2005 related to properties previously managed by the Company whose expenses were reflected in property operating expense.

– Other operating expenses increased $1.3 million, or 8.0%, from 2005 to 2006 due mainly to increases in operating expenses of VIEs related mainly to provider taxes and compensation-related expenses that are consolidated in the Consolidated Financial Statements of the Company.

– Impairment charges totaling $5.6 million were recognized in 2006 related to two assets. The Company recorded a $1.5 million impairment on one building and a $4.1 million impairment related to a patient accounts receivable portfolio acquired by the Company in 2005 as part of a troubled debt restructuring with a healthcare provider. See Note 1 and Note 3 to the Consolidated Financial Statements for additional information on these impairment charges.

– Interest expense increased $5.2 million, or 10.7%, from 2005 to 2006. Interest expense increased mainly due to additional principal amounts drawn on the Company’s unsecured credit facility resulting in additional interest expense of $5.6 million compared to 2005. Also, interest expense on the Company’s interest rate swaps increased $1.3 million during 2006 due to rising interest rates. These interest rate swaps were terminated in June 2006. Additionally, the Company recognized $0.8 million in additional interest expense related to a note payable entered into in 2005. These increases were partially offset by a decrease in interest expense of $2.3 million related to the senior notes due 2006 which were repaid in April 2006.

– Depreciation expense increased $5.2 million, or 10.5%, from 2005 to 2006. Depreciation expense increased mainly due to the acquisition of real estate properties, as well as additional building and tenant improvements, resulting in additional depreciation expense of approximately $3.2 million. Also, in 2006 the Company reclassified amounts related to properties acquired in prior years from land to building resulting in an increase of $1.8 million to depreciation expense related to prior years. See Note 1 to the Company’s Consolidated Financial Statements.

– Amortization expense decreased $2.2 million, or 18.2%, from 2005 to 2006, mainly due to a decrease in amortization expense related to lease intangibles recorded as part of the Company’s 2003 and 2004 acquisitions, some of which have been fully amortized.

     Income from discontinued operations totaled $4.2 million and $16.8 million for the years ended December 31, 2006 and 2005, respectively, which includes the results of operations and gains, losses, and impairments related to property disposals during 2006 and 2005. The Company disposed of eight properties during 2006 and disposed of 17 properties during 2005.

2005 Compared to 2004

     For the year ended December 31, 2005, net income was $52.7 million, or $1.13 per basic common share ($1.11 per diluted common share), on total revenues from continuing operations of $251.8 million compared to net income of $55.5 million, or $1.27 per basic common share ($1.24 per diluted common share), on total revenues from continuing operations of $220.2 million for the year ended December 31, 2004. FFO was $107.9 million, or $2.32 per basic common share ($2.28 per diluted common share), for the year ended December 31, 2005 compared to $110.2 million, or $2.52 per basic common share ($2.47 per diluted common share), in 2004.

7

						Change
(Dollars in thousands)	2005		2004			$			%
REVENUES
Master lease rental income	$	70,983	$	67,521		$	3,462			5.1	%
Property operating income		135,035		108,693			26,342			24.2	%
Straight-line rent		295		1,489			(1,194	)		-80.2	%
Mortgage interest income		9,103		8,766			337			3.8	%
Other operating income		36,356		33,727			2,629			7.8	%
		251,772		220,196			31,576			14.3	%
EXPENSES
General and administrative		16,089		13,687			2,402			17.5	%
Property operating expenses		72,677		57,292			15,385			26.9	%
Other operating expenses		15,938		14,517			1,421			9.8	%
Bad debt expense		1,308		(212	)		1,520			-717.0	%
Interest		48,395		43,249			5,146			11.9	%
Depreciation		49,321		42,412			6,909			16.3	%
Amortization		12,153		8,140			4,013			49.3	%
		215,881		179,085			36,796			20.5	%
Income from continuing operations		35,891		41,111			(5,220	)		-12.7	%
Discontinued operations:
Net income from discontinued operations		10,007		15,632			(5,625	)		-36.0	%
Gain on sales of real estate properties, net of impairments		6,770		(1,210	)		7,980			-659.5	%
		16,777		14,422			2,355			16.3	%
Net income	$	52,668	$	55,533		$	(2,865	)		-5.2	%

     Total revenues from continuing operations for the year ended December 31, 2005 increased $31.6 million, or 14.3%, compared to 2004 for primarily the following reasons:

– Master lease rental income increased $3.5 million, or 5.1%, from 2004 to 2005. During 2005, the Company acquired $56.4 million of real estate properties pursuant to master lease agreements resulting in additional master lease rental income in 2005 of approximately $3.7 million.

– Property operating income increased $26.3 million, or 24.2%, from 2004 to 2005. During 2004, the Company acquired 38 medical office buildings, and three buildings that were previously under construction commenced operations during 2005 and 2004, resulting in an aggregate increase in rental income from 2004 to 2005 of approximately $25.8 million.

– Straight-line rent decreased $1.2 million from 2004 to 2005 due mainly to the restructuring of three leases with an operator, resulting in a reversal of the straight-line rent receivable and the elimination of future straight-line rental income on those leases.

– Other operating income increased $2.6 million, or 7.8%, due mainly to a $2.2 million increase in the operating income of the VIEs consolidated in the Consolidated Financial Statements of the Company. The increase in revenues of the VIE facilities was due mainly to an improvement in the payor mix at the facilities. Also, the state in which two of the facilities are located implemented a Medicaid rate reduction in 2003 that was repealed in 2005, thereby increasing Medicaid revenues for 2005.

     Total expenses for the year ended December 31, 2005 compared to the year ended December 31, 2004 increased $36.8 million, or 20.5%, for primarily the following reasons:

– General and administrative expenses increased $2.4 million, or 17.5%, for 2005 compared to 2004 due mainly to increases in compensation and related benefits of approximately $1.4 million related primarily to severance costs ($0.8 million), new employees and annual salary increases ($0.6 million), as well as approximately $0.9 million in additional auditing and legal expenses related to the delayed filing of the Company’s 2004 Annual Report on Form 10-K.

– Property operating expenses increased $15.4 million, or 26.9%, from 2004 to 2005. During 2004, the Company acquired 38 medical office buildings, and three buildings that were previously under construction commenced operations during 2005 and 2004, resulting in an aggregate increase in property operating expenses from 2004 to 2005 of approximately $14.3 million. Also, in December 2005, the Company settled a partner/lessee dispute related to the allocation of prior distributions in a

8

partnership in which the Company is the general partner. As part of that settlement, the Company recorded a $1.0 million charge.

– Other operating expenses increased $1.4 million, or 9.8%, for 2005 compared to 2004 due to increases in property operating expenses of VIEs that are consolidated in the Consolidated Financial Statements of the Company. The increase in expenses of the VIE facilities was due mainly to increased Medicare census in the VIE facilities’ service areas, which generally results in more labor intensive services.

– Bad debt expense increased $1.5 million from 2004 to 2005. In 2005, the Company recorded a $1.2 million bad debt provision, net of recoveries, on acquired patient accounts receivable related to a troubled debt restructuring. See Note 5 to the Company’s Consolidated Financial Statements for more details.

– Interest expense increased $5.1 million, or 11.9%, for 2005 compared to 2004. Interest expense increased $3.8 million due to the issuance of the $300.0 million senior notes due 2014 in March 2004. Also, due to increases in interest rates during 2004 and 2005, the benefits the Company was experiencing on its interest rate swaps deteriorated, resulting in an increase to interest expense of $2.7 million. Further, interest expense increased $0.4 million due to the acquisition of two mortgage notes payable related to the properties acquired in South Carolina in 2005. These increases were partially offset by a decrease in interest expense of $1.9 million due to the $20.3 million principal payments in each of the years 2004 and 2005 on the senior notes due 2006.

– Depreciation and amortization expense increased $10.9 million, or 21.6%, from 2004 to 2005. During 2005 and 2004, the Company acquired 50 real estate properties, and four properties that were previously under construction commenced operations, resulting in an increase to depreciation expense of approximately $4.8 million. Further, as discussed in Note 1 to the Consolidated Financial Statements, when acquiring a real estate property, the Company must allocate a portion of the purchase price to lease intangibles in-place upon acquisition as well as to the building. The lease intangibles are amortized over the weighted average remaining lives of the leases in place upon acquisition, which is generally a much shorter life than the depreciation on the building asset. The lease intangible amortization expense increased $4.1 million from 2004 to 2005. Finally, in 2005, the Company recorded a $1.9 million charge resulting from damages to three of the Company’s buildings caused by two of the hurricanes that struck the Gulf Coast region in 2005.

     Income from discontinued operations totaled $16.8 million and $14.4 million for the years ended December 31, 2005 and 2004, respectively, which includes the results of operations and gains, losses and impairments related to property disposals during 2006, 2005 and 2004. The Company disposed of seven properties during 2006, disposed of 17 properties during 2005, and disposed of two properties during 2004.

LIQUIDITY AND CAPITAL RESOURCES

Key Indicators

     The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets to ensure funds are available for acquisitions and other operating activities as needed, including the following:

– Debt metrics;

– Dividend payout percentage;

– Interest rates, underlying treasury rates, debt market spreads and equity markets.

     The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

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 is making payments as of December 31, 2006, which includes interest payments due where applicable. The Company had no long-term capital lease obligations as of December 31, 2006.

9

	Payments due by period
			Less than 1		1 — 3		3 — 5		More than 5
(Dollars in thousands)	Total		year		years		years		years
Long-term debt obligations (7)	$	1,104,103	$	47,552	$	284,982	$	372,184	$	399,385
Operating lease commitments (1)		219,068		3,011		6,213		5,681		204,163
Construction in progress (2)		118,855		60,091		58,764		0		0
Tenant improvements (3)		6,464		6,464		0		0		0
Note agreements with VIEs (4)		2,747		2,747		0		0		0
Purchase obligation (5)		7,336		7,336		0		0		0
Pension obligation (6)		—		—		—		—		—
Total Contractual Obligations	$	1,458,573	$	127,201	$	349,959	$	377,865	$	603,548

(1)	Includes primarily one office lease and ground leases related to 35 real estate investments for which the Company is currently making payments.
(2)	Includes commitments remaining on the construction of six buildings. The payments due by period are estimated based on cash funding projections of each project.
(3)	Includes tenant improvement allowance obligations remaining on six properties constructed by the Company. The Company has assumed that these obligations will be funded during 2007 in the table above.
(4)	The Company has contractual obligations to fund amounts under various note agreements with VIEs not consolidated in the Company’s Consolidated Financial Statements. As of December 31, 2006, the Company had remaining funding commitments totaling $2.7 million with funding expiration dates through 2013. As the Company cannot determine if and when these funding commitments may be called upon, the entire amount of $2.7 million has been included in the less than one year caption. The Company plans to sell the properties related to these note agreements during 2007 as disclosed under the “Sale of the Senior Living Portfolio” heading above. Once these properties are sold, the Company will no longer be obligated to fund additional amounts under these notes.
(5)	Relates to a purchase agreement executed in 2006 related to the acquisition of a property in Tennessee for approximately $7.3 million, which closed during the first quarter of 2007.
(6)	At December 31, 2006, three employees and three non-employee directors were eligible to retire under the Executive Retirement Plan or the Retirement Plan for Outside Directors. If these individuals retired at normal retirement age and received full retirement benefits based upon the terms of each applicable plan, the future benefits to be paid are estimated to be approximately $32 million as of December 31, 2006. At December 31, 2006, the Company had recorded a $12.2 million liability, included in other liabilities, related to the pension plan obligations in accordance with applicable accounting literature.
(7)	The amounts shown include estimated interest on total debt other than the unsecured credit facility. Also, excluded from the table above are the premium on the Senior Notes due 2011 of $1.1 million and the discount on the Senior Notes due 2014 of $1.2 million which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2006. The Company’s long-term debt principal obligations are presented in more detail in the table below. As discussed under the “Sale of the Senior Living Portfolio” above, the Company plans to sell its senior living portfolio and will repay, in whole or in part, the outstanding balance on its Unsecured Credit Facility due 2009.

Principal

Principal

Contractual

Balance At

Balance At

Maturity

Interest Rates

Interest

Principal

(Dollars in millions)

12/31/06

12/31/05

Date

12/31/06

Payments

Payments

Unsecured credit facilities (a)

$

190.0

$

73.0

1/09

LIBOR + 0.90%

Quarterly

At maturity

Senior notes due 2006

0

29.4

4/06

—

—

Repaid 4/06

Senior notes due 2011

300.0

300.0

5/11

8.125%

Semi-Annual

At maturity

Senior notes due 2014

300.0

300.0

4/14

5.125%

Semi-Annual

At maturity

Mortgage notes payable

60.1

70.7

5/11-7/26

5.49%-8.50

%

Monthly

Monthly

$

850.1

$

773.1

(a) The Company incurred an annual facility fee of 0.20% on the unsecured credit facility due 2009 during 2006.

     In January 2006, the Company entered into a $400 million credit facility (the “Unsecured Credit Facility due 2009”) with a syndicate of 12 banks. The facility may be increased to $650.0 million during the first two years at the Company’s option, subject to

10

obtaining additional capital commitments from the banks. The credit facility matures in 2009, but the term may be extended one additional year. Loans outstanding under the Unsecured Credit Facility due 2009 (other than swing line loans and competitive bid advances) will bear interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate and the Federal Funds rate plus 0.50%) plus (y) a margin ranging from 0.60% to 1.20% (currently 0.90%), based upon the Company’s unsecured debt ratings. The weighted average rate on borrowings outstanding as of December 31, 2006 was 6.25%. Additionally, the Company will pay a facility fee per annum on the aggregate amount of commitments. The facility fee may range from 0.15% to 0.30% per annum (currently 0.20%), based on the Company’s unsecured debt ratings. The Unsecured Credit Facility due 2009 contains certain representations, warranties, and financial and other covenants customary in such loan agreements.

     As of December 31, 2006, the Company had borrowing capacity remaining of $210.0 million under the new facility. Further, as of December 31, 2006, 76% of the Company’s principal debt balances were due after 2010. As of December 31, 2006, approximately 22% of the Company’s debt was variable rate debt, with interest rates based on LIBOR.

     Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings rate the Company’s senior debt Baa3, BBB-, and BBB, respectively. For the year ended December 31, 2006, the Company’s earnings covered fixed charges at a ratio of 1.66 to 1.00; the Company’s stockholders’ equity totaled approximately $827.5 million; and the Company’s debt-to-total capitalization ratio, on a book basis, was approximately
0.51 to 1.

     As of December 31, 2006, the Company was in compliance with all covenant requirements under its various debt instruments.

     In 2001, the Company entered into interest rate swap agreements for notional amounts totaling $125.0 million to offset changes in the fair value of $125.0 million of the Senior Notes due 2011. Under the terms of the interest rate swap agreements, the Company received an 8.125% fixed rate and paid a variable rate of six-month LIBOR plus 4.12%. With the increase in interest rates, the Company was in a net-pay position under the swap agreements, which had the effect of increasing the amount of interest expense recorded on the Company’s Consolidated Statements of Income. Because of the additional interest the Company was paying under the swap agreements and because the Company’s variable rate debt percentage was exceeding its target range of 15% to 30% of total debt, the Company terminated these interest rate swap agreements in June 2006 and paid $10.1 million, equal to the fair value of the interest rate swaps at termination, plus interest due of $0.3 million. See Note 3 to the Consolidated Financial Statements for more details. Subsequent to the termination of the interest rate swap agreements, the Company pays interest on the Senior Notes due 2011 at the coupon rate of 8.125%, and the effective interest rate on the notes is 7.896%.

Sale of the Senior Living Portfolio

     The Company plans to sell its senior living portfolio which will impact the Company’s cash flows from operations for 2007. The Company plans to use the proceeds from the sales to fund repayments on its Unsecured Credit Facility due 2009 and the payment of a one-time special dividend. Subsequent to the anticipated sales, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales.

Shelf Registration

     As of December 31, 2006, the Company can issue an aggregate of approximately $504.1 million of securities remaining under its currently effective shelf registration statements. The Company may from time to time raise additional capital or make investments by issuing, in public or private transactions, equity and debt securities, but the availability and terms of any such issuance will depend upon market and other conditions.

Security Deposits and Letters of Credit

     As of December 31, 2006, the Company held approximately $5.7 million in letters of credit, security deposits, debt service reserves and capital replacement reserves for the benefit of the Company in the event the obligated lessee or borrower fails to perform under the terms of its respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.

Acquisitions, Dispositions and Mortgage Repayments During 2006

2006 Acquisitions

     During 2006, the Company acquired approximately $105.7 million of properties, mortgage notes, or equity interests in unconsolidated limited liability companies.

11

2006 Dispositions

     During 2006, the Company sold properties or received payments on mortgage notes resulting in net cash proceeds of approximately $104.3 million. In these transactions, the Company acquired mortgage notes receivable totaling $15.4 million, received mortgage note prepayment penalty fees of approximately $2.2 million and received a lease termination fee of approximately $0.3 million.

Purchase Options

     Certain of the Company’s leases include purchase option provisions. The provisions vary from lease to lease but generally allow the lessee to purchase the property covered by the lease at the greater of fair market value or an amount equal to the Company’s gross investment. As of December 31, 2006, the Company had a gross investment of approximately $235.5 million in real estate properties that were subject to outstanding, exercisable contractual options to purchase, with various conditions and terms, by the respective operators and lessees that had not been exercised. On a probability-weighted basis, the Company estimates that approximately $39.2 million of the options exercisable at December 31, 2006 may be exercised in the future. During 2007, additional purchase options become exercisable on properties in which the Company has a gross investment of approximately $23.0 million. The Company anticipates, on a probability-weighted basis, that approximately $11.5 million of these additional options may also be exercised in the future. Though other properties may have purchase options exercisable in 2008 and beyond, the Company does not believe it can reasonably estimate the probability of exercise of these purchase options in the future.

Construction In Progress and Other Commitments

     As of December 31, 2006, the Company had a net investment of approximately $28.0 million in three developments in progress, which have a total remaining funding commitment of approximately $38.8 million. The Company anticipates completion of these developments in the second and third quarters of 2007. The Company also has an investment of $10.1 million in a land parcel in Hawaii on which the Company anticipates it will begin construction of a $64.6 million medical office building in late 2007. The Company has a total remaining funding commitment of approximately $54.4 million and anticipates completion of the building in 2009. In addition, the Company anticipates beginning a $26.3 million development project, involving two medical office buildings in Colorado, in the first quarter of 2007 with an anticipated completion date in the first quarter of 2008.

     Construction continues on a 61,000 square foot, $20.1 million medical office building in the state of Washington. The project is being developed by a joint venture in which the Company holds a 75% equity interest. Construction of the building is being funded by mortgage debt of approximately $15.0 million and by partnership capital of approximately $5.1 million, of which the Company will contribute $3.8 million. As of December 31, 2006, the Company had funded approximately $1.6 million of its capital contribution. The Company anticipates completion of the building in the second quarter of 2007.

     The Company also had various remaining first-generation tenant improvement obligations totaling approximately $6.5 million as of December 31, 2006 related to properties that were developed by the Company. Further, management expects its development pipeline, with selective acquisitions and dispositions in the ordinary course, should result in net new investments of approximately $150 — $200 million annually.

     The Company intends to fund these commitments with internally generated cash flows, proceeds from the Unsecured Credit Facility due 2009, proceeds from the sale of assets, proceeds from repayments of mortgage notes receivable, or capital market financings.

Operating Leases

     As of December 31, 2006, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 35 real estate investments. These operating leases have expiration dates through 2079. Rental expense relating to the operating leases for the years ended December 31, 2006, 2005, and 2004 was $4.0 million, $3.5 million, and $2.7 million, respectively. The Company’s future minimum lease payments for its operating leases as of December 31, 2006 are as follows (in thousands):

12

2007	$	3,011
2008		3,053
2009		3,160
2010		3,101
2011		2,580
2012 and thereafter		204,163
	$	219,068

Dividends

     During 2006, the Company’s Board of Directors declared quarterly common stock cash dividends of $0.66 per quarter ($2.64 annualized) as shown in the table below:

	Quarterly
Quarter	Dividend		Date of Declaration	Date of Record	Date Paid
4th Quarter 2005	$	0.66	January 24, 2006	February 15, 2006	March 2, 2006
1st Quarter 2006	$	0.66	April 25, 2006	May 15, 2006	June 1, 2006
2nd Quarter 2006	$	0.66	July 25, 2006	August 15, 2006	September 1, 2006
3rd Quarter 2006	$	0.66	October 24, 2006	November 15, 2006	December 1, 2006

     On January 23, 2007, the Company declared its quarterly common stock dividend in the amount of $0.66 per share ($2.64 annualized) payable on March 2, 2007 to shareholders of record on February 15, 2007.

     The dividends paid during 2006 exceeded cash flows from operations. Such amounts in excess of cash flows from operations were funded by the Company’s Unsecured Credit Facility due 2009.

     Subsequent to the anticipated sales of the Company’s senior living portfolio, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales. Management expects that the dividend will be reset for the second quarter of 2007 in an amount of approximately $1.54 per common share, per annum, subject to the determination by the Board of Directors.

     Additionally, management expects that the Company would pay a one-time special dividend to shareholders of approximately $4.75 per common share out of the proceeds from the sales of the senior living assets. The payment of this one-time special dividend is dependent on the closing of the sales transactions as currently contemplated. If any of the sales transactions do not close or do not close timely for any reason, the Company may be unable to pay the one-time special dividend or may have to reduce the amount of the dividend.

     As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations, cash flows, and to make accretive new investments.

Liquidity

     Net cash provided by operating activities was $109.1 million and $101.6 million for 2006 and 2005, respectively. Cash flow from operations reflects increased revenues offset by higher costs and expenses, as well as changes in receivables, payables and accruals. The Company’s cash flows from operations are dependent on rental rates and collection of rents on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.

     The Company plans to sell its senior living portfolio which will impact the Company’s cash flows from operations for 2007. The Company plans to use the proceeds from the sales to fund repayments on its Unsecured Credit Facility due 2009 and the payment of a one-time special dividend. Subsequent to the anticipated sales, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales.

     The Company plans to continue to meet its liquidity needs, including funding additional investments in 2007, paying quarterly dividends, and funding debt service, with cash flows from operations, proceeds from the Unsecured Credit Facility due 2009, proceeds of mortgage notes receivable repayments, and proceeds from sales of real estate investments or additional capital market financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

Impact of Inflation

     Inflation has not significantly affected the Company’s earnings due to the moderate inflation rate in recent years and the fact that most of the Company’s leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing the Company’s risk of the adverse effects of inflation. In addition, inflation will have the effect of increasing gross revenue the Company is to receive under the terms of certain leases and financial support

13

arrangements. Leases and financial support arrangements 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 due 2009 is calculated at a variable rate; therefore, the amount of interest payable under the unsecured credit facility will be influenced by changes in short-term rates, which tend to be sensitive to inflation. Generally, changes in inflation and interest rates tend to move in the same direction. 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.

Market Risk

     The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. Additionally, from time to time, the Company may utilize interest rate swaps to either (i) convert fixed rates to variable rates in order to hedge the exposure related to changes in the fair value of obligations, or to (ii) convert variable rates to fixed rates in order to hedge risks associated with future cash flows.

     At December 31, 2006, approximately $660.0 million, or 77.7%, of the Company’s total debt bore interest at fixed rates. Additionally, all of the Company’s mortgage notes receivable and other notes receivable, totaling $73.9 million and $9.4 million, respectively, bore interest based on fixed rates.

     The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market rates.

					Impact on Earnings and Cash Flows
	Outstanding		Calculated Annual		Assuming 10%			Assuming 10%
	Principal Balance		Interest Expense		Increase in Market			Decrease in Market
(Dollars in thousands)	as of 12/31/06		(1)		Interest Rates			Interest Rates
Variable Rate Debt
Unsecured Credit Facility due 2009 ($400 Million)	$	190,000	$	11,837	$	(1,013	)	$	1,013

			Fair Value
					Assuming 10%		Assuming 10%
	Carrying Value				Increase in Market		Decrease in Market
	at 12/31/06		12/31/2006		Interest Rates		Interest Rates		12/31/2005 (2)
Fixed Rate Debt
Senior Notes due 2011, including premium (3)	$	301,083	$	312,777	$	307,472	$	318,128	$	310,270
Senior Notes due 2014, net of discount		298,838		288,434		280,453		296,693		292,814
Mortgage Notes Payable		60,061		61,688		59,971		63,585		71,383
	$	659,982	$	662,899	$	647,896	$	678,406	$	674,467
Fixed Rate Receivables
Mortgage Notes Receivable	$	73,856	$	70,389	$	68,565	$	72,320	$	106,010
Other Notes Receivable		9,401		9,233		9,008		9,464		11,182
	$	83,257	$	79,622	$	77,573	$	81,784	$	117,192

(1)	Annual interest expense was calculated using the December 31, 2006 market rate of 6.23% and a constant principal balance.
(2)	Except as otherwise noted, fair values as of December 31, 2005 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments.
(3)	In June 2006, the Company terminated two interest rate swaps on a notional amount of $125 million, where the underlying debt was $125 million of the Senior Notes due 2011. Prior to termination, the swaps had the effect of converting fixed rates to variable rates with respect to the notional amount. Therefore, the fair value for 2005 includes the effect of the two interest rate swaps.

14

Off-Balance Sheet Arrangements

     The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Cautionary Language Regarding Forward-Looking Statements

     This Annual 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 which 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,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “anticipate” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could significantly affect the Company’s current plans and expectations and future financial condition and results. Further, the results of the transactions anticipated to close in 2007 that are disclosed under the heading “Sale of the Senior Living Portfolio” and elsewhere in this Annual Report are forward-looking, and if such transactions do not close, the results that the Company expects to achieve will not be realized. 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. Shareholders 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. For a detailed discussion of the risk factors associated with the Company, please refer to the Company’s filings with the Securities and Exchange Commission.

APPLICATION OF CRITICAL ACCOUNTING POLICIES TO ACCOUNTING ESTIMATES

     The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. In preparing the Consolidated Financial Statements, management is required to exercise judgments and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements.

     Management routinely evaluates the estimates and assumptions used in the preparation of Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors.

     Management believes the following paragraphs in this section describe the application of critical accounting policies by management to arrive at the critical accounting estimates reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements.

Allowance for Doubtful Accounts and Credit Losses

     The Company is a real estate investment trust that owns, manages and develops income-producing real estate properties and mortgages throughout the United States. Many of the Company’s investments are subject to long-term leases or other financial support arrangements with hospital systems and healthcare providers affiliated with the properties (see Notes 1 and 3 to the Consolidated Financial Statements for further details). Due to the nature of the Company’s agreements, the Company’s accounts receivable and interest receivables result mainly from monthly billings of contractual tenant rents, lease guaranty amounts, principal and interest payments due on notes and mortgage notes receivable, late fees and additional rent.

     Payments on the Company’s accounts receivable are normally collected within 30 days of billing, and payments on the Company’s mortgage notes receivable and notes receivable are based on each note agreement. When receivables remain uncollected, management must decide whether it believes the receivable is collectible and whether to provide an allowance for all or a portion of these receivables. Unlike a financial institution with a large volume of homogeneous retail receivables such as credit card loans or automobile loans that have a predictable loss pattern over time, the Company’s receivable losses have historically been infrequent and are tied to a unique or specific event. The Company’s allowance for doubtful accounts is generally based on specific identification and is recorded for a specific receivable amount once determined that such an allowance is needed.

     Management monitors the aging and collectibility of receivables on an ongoing basis. At least monthly, a report is produced whereby all receivables are “aged” or placed into groups based on the number of days that have elapsed since the receivable was billed. Management reviews the aging report for evidence of deterioration in the timeliness of payments from tenants, sponsors or borrowers. Whenever deterioration is noted, management investigates and determines the reason(s) for the delay, which may include

15

discussions with the delinquent tenant, sponsor, or borrower. Considering all information gathered, management’s judgment must be exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining uncollectibility are the following:

– type of contractual arrangement under which the receivable was recorded, e.g., a mortgage note, a triple net lease, a gross lease, a sponsor guaranty agreement or some other type of agreement;

– tenant’s or debtor’s reason for slow payment;

– industry influences and healthcare segment under which the tenant or debtor operates;

– evidence of willingness and ability of the tenant or debtor to pay the receivable;

– credit-worthiness of the tenant or debtor;

– collateral, security deposit, letters of credit or other monies held as security;

– tenant’s or debtor’s historical payment pattern;

– state in which the tenant or debtor operates; and

– existence of a guarantor and the willingness and ability of the guarantor to pay the receivable.

     Considering these factors and others, management must conclude whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debt expense for the amount it expects will be uncollectible. There is a risk that management’s estimate is over- or under-stated; however, the Company believes that this risk is mitigated by the fact that management re-evaluates the allowance at least once each quarter and bases its estimates on the most current information available. As such, any over- or under-statements in the allowance should be adjusted for as soon as new and better information becomes available.

     Included in the Company’s Consolidated Financial Statements are also receivables related to the Company’s VIEs. These receivables consist primarily of patient receivables of the assisted living and skilled nursing facilities, which are billed and maintained by the operators of those facilities. A significant portion of these receivables are due from Medicare and Medicaid and are generally collected within 60 to 90 days of billing, while the receivables due from private payors are generally collected in a shorter period of time. The Company reviews the aged delinquency reports, which age the receivables by patient or type of payor, to determine whether the Company believes an allowance for uncollectible accounts in addition to the allowance provided for on the property’s financial statements is needed in the Company’s Consolidated Financial Statements. As disclosed above under the heading “Sale of the Senior Living Portfolio,” the Company plans to sell its senior living portfolio which will include properties related to its consolidated VIEs. As such, upon disposition of the properties the related VIEs will no longer be consolidated and included in the Company’s Consolidated Financial Statements.

Accounts Receivable

     As of December 31, 2006 and 2005, the Company’s accounts receivable balances were approximately $19.9 million and $20.3 million, respectively, with allowances for uncollectible accounts of approximately $2.4 million and $2.0 million, respectively. For the years ended December 31, 2006 and 2005, the Company recorded provisions for bad debt expense of $1.3 million and $1.3 million, respectively, and collected or wrote off receivables of $0.7 million and $1.3 million, respectively.

     Currently, the Company has no collectibility issues with its largest tenant, HealthSouth. However, should a collectibility problem arise with respect to any of the Company’s significant tenants, the allowance for doubtful accounts would be increased which could have a material impact on the Company’s Consolidated Financial Statements in future periods.

Mortgage Notes and Notes Receivable

     The Company also evaluates collectibility of its mortgage notes and notes receivable and records necessary allowances on the notes in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS No. 114”), as amended. SFAS No. 114 indicates that a loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. The Company evaluates all of

16

its loans outstanding each quarter for collectibility and considers many factors as described in the list of factors in the accounts receivable discussion above. The Company’s notes receivable balances were approximately $10.4 million and $11.6 million, respectively as of December 31, 2006 and 2005. The Company’s mortgage notes receivable balances were approximately $73.9 million and $105.8 million, respectively, as of December 31, 2006 and 2005. During 2005, the Company reserved $0.1 million related to its notes and mortgage notes receivable which is included in bad debt expense on the Company’s Consolidated Statements of Income. No additional reserves were recorded on notes and mortgage notes receivable during 2006.

     If management had used different estimates, or its methodology for determining and recording the allowance had been different, then the amount of bad debt expense included in the Company’s Consolidated Financial Statements may have been different.

     As disclosed above under the heading “Sale of the Senior Living Portfolio,” the Company plans to sell its senior living portfolio which will include 16 of the Company’s 18 mortgage notes and notes receivable at December 31, 2006 with net carrying amounts totaling approximately $71.8 million and $78.2 million, respectively, at December 31, 2006 and 2005.

Depreciation of Real Estate Assets and Amortization of Related Intangible Assets

     As of December 31, 2006, the Company had invested approximately $1.9 billion in depreciable real estate assets and related intangible assets. When these real estate assets and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate assets are purchased that have in-place leases.

     As described more fully in Note 1 to the Consolidated Financial Statements, for real estate acquisitions subsequent to December 31, 2001, the Company accounts for acquisitions of real estate properties with in-place leases in accordance with the provisions of SFAS No. 141. When a building is acquired with in-place leases, SFAS No. 141 requires that the cost of the acquisition be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-) market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining new leases such as tenant improvements, and customer relationship assets. Any remaining excess purchase price is then allocated to goodwill. The identifiable tangible and intangible assets are then subject to depreciation and amortization. Goodwill is evaluated for impairment on an annual basis unless circumstances suggest that a more frequent evaluation is warranted.

     If assumptions used to estimate the “as if vacant” value of the building or the intangible asset values prove to be inaccurate, the pro-ration of the purchase price between building and intangibles and resulting depreciation and amortization could be incorrect. The amortization period for the intangible assets is the average remaining term of the actual in-place leases as of the acquisition date. To help prevent errors in its estimates from occurring, management applies consistent assumptions with regard to the elements of estimating the “as if vacant” values of the building and the intangible assets, including the absorption period, occupancy increases during the absorption period, and tenant improvement amounts. The Company uses the same absorption period and occupancy assumptions for similar building types, adding the future cash flows expected to occur over the next 10 years as a fully occupied building. The net present value of these future cash flows, discounted using a market rate of return, becomes the estimated “as if vacant” value of the building.

     With respect to the building components, there are several depreciation methods available under accounting principles generally accepted in the United States of America. Some methods record relatively more depreciation expense on an asset in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The “straight-line” method of depreciating real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset over its estimated life.

     The Company has assigned a useful life to its buildings of either 31.5 or 39 years depending on the age of the property when acquired as well as other factors. Many companies depreciate new non-residential real estate assets over longer useful lives. The Company uses a shorter, more conservative, economic life because it believes it more appropriately reflects the economic life of the properties.

Capitalization of Costs

     Accounting principles generally accepted in the United States of America allow for capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period vary depending on the type of costs and the reason for capitalizing the costs.

17

     Direct costs generally include construction costs, professional services such as architectural and legal costs, travel expenses, land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. The Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, occupancy and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s acquisitions and development departments who work on these projects maintain and report their hours daily, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred.

     Management’s judgment is also exercised in determining whether costs that have been previously capitalized in pursuit of an acquisition or development project should be reserved for or written off if the project is abandoned or should circumstances otherwise change that cause the project’s viability to become questionable. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for those types of costs based on their classification.

     The Company classifies its pursuit projects into four categories. The first category of pursuits is essentially “cold calls” that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes pursuits that might reasonably be expected to produce new business opportunities although there can be no assurance that they will result in a new project or contract. Costs for these projects are capitalized but, due to the uncertainty of projects in this category, these costs are reserved at 50% which means that 50% of the costs are expensed in the period incurred. The third category are those pursuits that are either highly probable to result in a project or contract or already have resulted in a project or contract in which the contract requires the operator to reimburse our costs. Many times, these are pursuits involving operators with which the Company is already doing business. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve. The fourth category includes those pursuits that are acquisitions of existing buildings. As required by the Emerging Issues Task Force (“EITF”) Issue No. 97-11, “Accounting for Internal Costs Relating to Real Estate Property Acquisitions,” the Company expenses in the period incurred all internal costs related to those types of acquisitions. Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time.

     Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to general and administrative expenses on the Consolidated Statements of Income. These pursuit costs will ultimately be written off to expense or will be capitalized as part of the constructed real estate asset.

     As of December 31, 2006 and 2005, the Company had capitalized pursuit costs totaling $1.6 million and $1.9 million, respectively, and had provided reserves against these capitalized pursuit costs of $0.5 million and $0.3 million, respectively.

Valuation of Long-Lived and Intangible Assets and Goodwill

     The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicate that the recorded value might not be fully recoverable. Important factors that could cause management to review for impairment include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment those assets subject to purchase options and those impacted by casualties, such as hurricanes. As required by SFAS No. 144, if management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record impairment based on the estimated fair value of the property. The Company recorded impairment of $1.5 million, $0.7 million, and $1.2 million, respectively, for the years ended December 31, 2006, 2005 and 2004 related to real estate properties. The impairments in 2005 and 2004 were recorded upon the disposition of real estate assets and included the write-off of non-cash straight-line rent receivables. The impairment in 2006 relates to one building adjusting the Company’s carrying value of the building to its estimated fair value.

     As required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company ceased amortizing goodwill as of January 1, 2002. In lieu of continued amortization, the Company performs an annual goodwill impairment review. The 2006 and 2005 impairment evaluations each indicated that no impairment had occurred with respect to the $3.5 million goodwill asset.

18

Variable Interest Entity Analysis

     FIN No. 46R provides guidance on and clarifies the application of Accounting Research Bulletin No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN No. 46R provides criteria that, if met, would create a VIE, which would then be subject to consolidation. If an entity is determined to be a VIE, the party deemed to be the primary beneficiary would be required to consolidate the VIE. The primary beneficiary is the party which has the most variability in gains or losses of the VIE. In order to determine which party is the primary beneficiary, the Company must calculate the expected losses and expected returns of the VIE, which requires a projection of expected cash flows and the assignment of probability weights to each possible outcome. Estimating expected cash flows of the VIE and assigning probabilities to each outcome requires significant judgment by management. If assumptions used to estimate expected cash flows prove to be inaccurate, management’s conclusions regarding which party is the VIE’s primary beneficiary could be incorrect, resulting in the Company improperly consolidating the VIE when the Company is not the primary beneficiary or not consolidating the VIE when the Company is the primary beneficiary.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     The management of Healthcare Realty Trust Incorporated (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. The Company’s independent auditors, BDO Seidman, LLP, have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting included herein.

     Management has excluded from its assessment of the effectiveness of internal control over financial reporting the internal control over financial reporting of the variable interest entities (“VIEs”) required to be consolidated by the Company under the provisions of FIN No. 46R, “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51,” during 2006. Since the Company does not have the contractual right, authority or ability, in practice, to assess the internal controls over financial reporting of the VIEs, nor does the Company have the ability to dictate or modify those controls, management has concluded it is unable to assess the effectiveness of the internal control over financial reporting of the VIEs. As of and for the year ended December 31, 2006, 0.2% and 2.0% of the Company’s consolidated assets and net income, respectively, related to the variable interest entities.

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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee

     We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     As described in Note 15, the Company has announced its plan to sell its portfolio of senior living assets during 2007.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Realty Trust Incorporated at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment, and effective December 31, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting For Defined Benefit Pension and Other Post Retirement Plans.

     We were also engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Healthcare Realty Trust Incorporated’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2007 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Memphis, Tennessee
March 1, 2007

20

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee

     We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Healthcare Realty Trust Incorporated maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our audit of internal control over financial reporting of Healthcare Realty Trust also did not include an evaluation of the internal control over financial reporting of the VIEs. Healthcare Realty Trust Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from their assessment of the effectiveness of internal control over financial reporting the internal controls of the variable interest entities (“VIEs”) required to be consolidated by the Company under the provisions of FIN No. 46R, “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51.” As of and for the year ended December 31, 2006, 0.2% and 2.0% of the Company’s assets and net income, respectively, are related to the VIEs.

     In our opinion, management’s assessment that Healthcare Realty Trust Incorporated maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Healthcare Realty Trust Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 and our report dated March 1, 2007 expressed an unqualified opinion.

/s/ BDO Seidman, LLP

Memphis, Tennessee
March 1, 2007

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Consolidated
BALANCE SHEETS

	December 31,
(Dollars in thousands, except per share amounts)	2006			2005
ASSETS
Real estate properties:
Land	$	129,658		$	133,195
Buildings, improvements and lease intangibles		1,741,126			1,670,884
Personal property		22,707			21,932
Construction in progress		38,835			7,030
		1,932,326			1,833,041
Less accumulated depreciation		(373,706	)		(315,794	)
Total real estate properties, net		1,558,620			1,517,247
Cash and cash equivalents		1,950			7,037
Mortgage notes receivable		73,856			105,795
Assets held for sale, net		—			21,415
Other assets, net		100,213			96,158
Total assets	$	1,734,639		$	1,747,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes and bonds payable	$	849,982		$	778,446
Accounts payable and accrued liabilities		32,448			30,774
Other liabilities		26,537			25,964
Total liabilities		908,967			835,184
Commitments and contingencies
Stockholders’ 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; 47,805,448 and 47,768,148 shares issued and outstanding at December 31, 2006 and 2005, respectively		478			478
Additional paid-in capital		1,211,234			1,207,509
Accumulated other comprehensive loss		(4,035	)		—
Cumulative net income		635,120			595,401
Cumulative dividends		(1,017,125	)		(890,920	)
Total stockholders’ equity		825,672			912,468
Total liabilities and stockholders’ equity	$	1,734,639		$	1,747,652

See accompanying notes.

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Consolidated
STATEMENTS OF INCOME

	Year Ended December 31,
(Dollars in thousands, except per share data)	2006		2005		2004
REVENUES
Master lease rental income	$	83,251	$	70,983	$	67,521
Property operating income		127,200		135,035		108,693
Straight-line rent		2,358		295		1,489
Mortgage interest income		11,014		9,103		8,766
Other operating income		41,059		36,356		33,727
		264,882		251,772		220,196
EXPENSES
General and administrative		16,867		16,089		13,687
Property operating expenses		70,449		72,677		57,292
Other operating expenses		17,209		15,938		14,517
Impairments		5,611		—		—
Bad debt expense, net		1,256		1,308		(212	)
Interest		53,553		48,395		43,249
Depreciation		54,492		49,321		42,412
Amortization		9,938		12,153		8,140
		229,375		215,881		179,085
INCOME FROM CONTINUING OPERATIONS		35,507		35,891		41,111
DISCONTINUED OPERATIONS
Net income from discontinued operations		1,010		10,007		15,632
Gain on sales of real estate properties, net of impairments		3,202		6,770		(1,210	)
		4,212		16,777		14,422
NET INCOME	$	39,719	$	52,668	$	55,533
Basic Earnings per Common Share:
Income from continuing operations per common share	$	0.76	$	0.77	$	0.94
Discontinued operations per common share	$	0.09	$	0.36	$	0.33
Net income per common share	$	0.85	$	1.13	$	1.27
Diluted Earnings per Common Share:
Income from continuing operations per common share	$	0.75	$	0.76	$	0.92
Discontinued operations per common share	$	0.09	$	0.35	$	0.32
Net income per common share	$	0.84	$	1.11	$	1.24
Weighted average common shares outstanding — Basic		46,527,857		46,465,215		43,706,528
Weighted average common shares outstanding — Diluted		47,498,937		47,406,798		44,627,475

     See accompanying notes.

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Consolidated
STATEMENTS OF STOCKHOLDERS’ EQUITY

								Accumulated
					Additional			Other								Total
	Preferred		Common		Paid-In			Comprehensive			Cumulative		Cumulative			Stockholders’
(Dollars in thousand, except per share data)	Stock		Stock		Capital			Loss			Net Income		Dividends			Equity
Balance at December 31, 2003	$	—	$	430	$	1,038,378		$	—		$	487,200	$	(649,878	)	$	876,130
Issuance of stock		—		47		161,052			—			—		—			161,099
Stock-based compensation		—		—		3,554			—			—		—			3,554
Net income		—		—		—			—			55,533		—			55,533
Dividends to common shareholders ($2.550 per share)		—		—		—			—			—		(115,700	)		(115,700	)
Balance at December 31, 2004		—		477		1,202,984			—			542,733		(765,578	)		980,616
Issuance of stock		—		1		848			—			—		—			849
Stock-based compensation		—		—		3,677			—			—		—			3,677
Net income		—		—		—			—			52,668		—			52,668
Dividends to common shareholders ($2.625 per share)		—		—		—			—			—		(125,342	)		(125,342	)
Balance at December 31, 2005		—		478		1,207,509			—			595,401		(890,920	)		912,468
Issuance of stock		—		—		204			—			—		—			204
Common stock redemption		—		—		(481	)		—			—		—			(481	)
Stock-based compensation		—		—		4,002			—			—		—			4,002
Net income		—		—		—			—			39,719		—			39,719
Other comprehensive loss:
Adjustment required upon adoption of SFAS No. 158		—		—		—			(1,444	)		—		—			(1,444	)
Other comprehensive loss		—		—		—			(2,591	)		—		—			(2,591	)
Comprehensive income																	35,684
Dividends to common shareholders ($2.64 per share)		—		—		—			—			—		(126,205	)		(126,205	)
Balance at December 31, 2006	$	—	$	478	$	1,211,234		$	(4,035	)	$	635,120	$	(1,017,125	)	$	825,672

See accompanying notes.

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Consolidated
STATEMENTS OF CASH FLOWS

	Year Ended December 31,
(Dollars in thousands)	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	39,719		$	52,668		$	55,533
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		65,529			63,529			57,420
Stock-based compensation expense		4,002			3,677			3,554
Increase in straight-line rent receivable		(1,736	)		(99	)		(1,022	)
Gain on sales of real estate properties, net of impairments		(3,202	)		(6,770	)		1,210
Impairments		5,611			—			—
Equity in losses from unconsolidated LLCs		307			90			—
Provision for bad debt, net of recoveries		1,256			1,308			(212	)
Changes in operating assets and liabilities:
Increase in other assets		(1,098	)		(9,855	)		(1,858	)
Increase (decrease) in accounts payable and accrued liabilities		(1,780	)		(3,906	)		6,203
Increase in other liabilities		480			963			5,410
Net cash provided by operating activities		109,088			101,605			126,238
INVESTING ACTIVITIES
Acquisition and development of real estate properties		(126,347	)		(87,399	)		(355,470	)
Funding of mortgages and notes receivable		(22,794	)		(76,636	)		(3,465	)
Investment in unconsolidated LLCs		(10,654	)		(11,135	)		—
Distributions from unconsolidated LLCs		988			326			—
Proceeds from sales of real estate		32,706			124,879			10,189
Proceeds from mortgage and note collections/sales		72,553			14,095			48,636
Net cash used in investing activities		(53,548	)		(35,870	)		(300,110	)
FINANCING ACTIVITIES
Borrowings on notes and bonds payable		364,000			250,348			565,494
Repayments on notes and bonds payable		(287,048	)		(187,296	)		(436,689	)
Dividends paid		(126,205	)		(125,342	)		(115,700	)
Proceeds from issuance of common stock		567			909			161,099
Interest rate swap termination		(10,127	)		—			—
Debt issuance costs		(1,333	)		—			(2,566	)
Common stock redemption		(481	)		—			—
Net cash provided by (used in) financing activities		(60,627	)		(61,381	)		171,638
Increase (decrease) in cash and cash equivalents		(5,087	)		4,354			(2,234	)
Cash and cash equivalents, beginning of year		7,037			2,683			4,917
Cash and cash equivalents, end of year	$	1,950		$	7,037		$	2,683
Supplemental Cash Flow Information:
Interest paid (including interest on interest rate swaps)	$	55,083		$	50,088		$	41,789
Capitalized interest	$	1,292		$	1,412		$	1,782
Non-cash transactions:
Real estate foreclosures (or transfers in lieu of foreclosure)	$	—		$	—		$	6,242
Company-financed real estate property sales	$	16,906		$	—		$	1,300
Capital expenditures accrued	$	3,470		$	2,411		$	4,014

See accompanying notes.

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Notes to
CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Business Overview

     Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust that integrates owning, managing and developing income-producing real estate properties associated with the delivery of healthcare services throughout the United States. As of December 31, 2006, the Company had investments of approximately $2.0 billion in 249 real estate properties and mortgages, including investments in three unconsolidated limited liability companies. The Company’s 237 owned real estate properties are located in 28 states, totaling approximately 12.9 million square feet. In addition, the Company provided property management services to approximately 6.8 million square feet nationwide. Square footage disclosures in this Annual Report on Form 10-K are unaudited.

     Principles of Consolidation

     The Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, consolidated variable interest entities (“VIEs”) and certain other affiliated entities with respect to which the Company controls the operating activities and receives substantially all economic benefits. All material inter-company transactions and balances have been eliminated in consolidation.

     Investments in entities which the Company does not consolidate but for which the Company has the ability to exercise significant influence over operating and financial policies are reported under the equity method. Generally, under the equity method of accounting the Company’s share of the investee’s earnings or loss is included in the Company’s operating results.

     In accordance with the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin No. 51” (“FIN No. 46R”), the Company has concluded that it has an interest in 21 VIEs. The VIEs are derived from relationships between the Company and the tenant/operator of certain skilled nursing facilities or assisted living facilities that are owned by the Company and are operated by a licensed operator. In these cases, the Company has signed lease agreements or management agreements with the operators, as well as working capital or term loan agreements. In certain cases, cash flow deficits were expected in the facilities until operations were stabilized. During the stabilization period, the Company agreed to finance the estimated cash flow deficits but will receive some or all of the economic benefits of the entities (primarily as a result of the entities’ patient care revenues) once the property is stabilized and has positive cash flows. In other cases, the current operators are unable to finance capital expenditures needed in the facilities based on the current cash flows, and the Company has agreed to finance the capital expenditures.

     FIN No. 46R requires a Company to consolidate a VIE if it is the primary beneficiary. The Company has concluded that it is not the primary beneficiary in 15 of the 21 VIEs and, therefore, is not consolidating the 15 entities into the Company’s Consolidated Financial Statements. For the remaining six VIEs, the Company has concluded that it is the primary beneficiary and has consolidated the six entities into its Consolidated Financial Statements. In those cases where the VIEs are consolidated, the Company’s Consolidated Financial Statements include not only the Company’s real estate asset investment of $15.4 million ($12.6 million, net) as of December 31, 2006 and $15.4 million ($13.1 million, net) as of December 31, 2005, but also the assets (mainly receivables), liabilities (mainly accounts payable) and results of operations of the VIE entities. Creditors of the VIEs have no recourse to the general credit of the Company.

     The impact on the Company’s Consolidated Financial Statements from the consolidation of the six VIEs is shown in the table below:

	December 31,
(Dollars in millions)	2006		2005		2004
Number of entities		6		6		6
Carrying amount of consolidated assets that are collateral for the obligations of the VIE	$	0	$	0	$	0
Amounts included in the respective line items in the Consolidated Financial Statements of the Company:
Cash	$	0.4	$	0.2	$	0.1
Other assets (including accounts receivable)	$	3.8	$	3.9	$	3.1
Total liabilities	$	2.0	$	2.5	$	1.5
Other operating income	$	17.8	$	17.6	$	15.4
Other operating expense	$	17.0	$	15.9	$	14.5
Net income	$	0.8	$	1.7	$	0.9

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     Information for the VIEs that are not consolidated in the Company’s Consolidated Financial Statements is shown in the table below:

	December 31,
(Dollars in millions)	2006		2005			2004
Number of entities		15		20			13
Total assets	$	32.5	$	34.4		$	12.2
Net operating income (loss) (1)	$	0.5	$	(1.9	)	$	1.0
Maximum exposure to loss (2)	$	7.5	$	9.0		$	5.3

(1)	Net operating income (loss) for December 31, 2006, 2005 and 2004 includes depreciation and amortization of $0.8 million, $0.7 million and $0.2 million, respectively, and subordinated management fees of $3.4 million, $3.0 million and $1.2 million, respectively.
(2)	Maximum exposure to loss equals the amounts funded by the Company on behalf of the VIEs as of the date specified.

     Segment Reporting

     The Company is in the business of owning, developing, managing, and financing healthcare-related properties. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision making. Therefore, the Company has concluded that it operates as a single segment, as defined by the FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”).

     Use of Estimates in the Consolidated Financial Statements

     Preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

     Accounting for Acquisitions of Real Estate Properties with In-Place Leases

     The Company accounts for its real estate acquisitions with in-place leases in accordance with the provisions of SFAS No. 141, “Business Combinations” (“SFAS No. 141”), which became effective for acquisitions subsequent to December 31, 2001. SFAS No. 141, in combination with paragraph 9 of SFAS No. 142, “Accounting for Goodwill and Intangible Assets” (“SFAS No. 142”), requires that when a building is acquired with in-place leases, the cost of the acquisition be allocated between the tangible real estate and the intangible assets related to in-place leases based on their fair values. Where appropriate, the intangible assets recorded could include goodwill or customer relationship assets. The values related to above- or below-market in-place lease intangibles are amortized to rental income where the Company is the lessor, are amortized to property operating expense where the Company is the lessee, and are amortized over the average remaining term of the in-place leases upon acquisition. The values of at-market in-place leases and other intangible assets, such as customer relationship assets, are amortized and reflected in amortization expense in the Company’s Consolidated Statements of Income.

     The Company’s approach to estimating the value of in-place leases is a multi-step process.

– First, the Company considers whether any of the in-place lease rental rates are above- or below-market. An asset (if the actual rental rate is above-market) or a liability (if the actual rental rate is below-market) is calculated and recorded in an amount equal to the present value of the future cash flows that represent the difference between the actual lease rate and the average market rate.

– Second, the Company estimates an absorption period assuming the building is vacant and must be leased up to the actual level of occupancy when acquired. During that absorption period the owner would incur direct costs, such as tenant improvements, and would suffer lost rental income. Likewise, the owner would have acquired a measurable asset in that, assuming the building was vacant, certain fixed costs would be avoided because the actual in-place lessees would reimburse a certain portion of fixed costs through expense reimbursements during the absorption period. All of these assets (tenant improvement costs avoided, rental income lost, and fixed costs recovered through in-place lessee reimbursements) are estimated and recorded in amounts equal to the present value of future cash flows.

– Third, the Company estimates the value of the building “as if vacant.” The Company uses the same absorption period and occupancy assumptions used in step two, adding to those the future cash flows expected in a fully occupied building. The net present value of these future cash flows, discounted at a market rate of return, becomes the estimated “as if vacant” value of the building.

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–  Fourth, the actual purchase price is allocated based on the various asset fair values described above. The building and tenant improvements components of the purchase price are depreciated over the useful life of the building or the average remaining term of the in-places leases, respectively. The above- or below-market rental rate assets or liabilities are amortized to rental income or property operating expense over the remaining term of the above- or below-market leases. The at-market in-place leases are amortized to amortization expense over the average remaining term of the at-market in-place leases, customer relationship assets are amortized to amortization expense over terms applicable to each acquisition, and any goodwill recorded would be reviewed for impairments at least annually.

     See Note 6 for more details on the Company’s intangible assets as of December 31, 2006.

   Real Estate Properties

     Real estate properties are recorded at cost, which may include both direct and indirect costs. Direct costs may include construction costs, professional services such as architectural and legal costs, travel expenses, and other acquisition costs. Indirect costs may include capitalized interest and overhead costs. As required by Emerging Issues Task Force (“EITF”) Issue No. 97-11, “Accounting for Internal Costs Related to Real Estate Property Acquisitions,” the Company expenses all internal costs related to the acquisition of existing or operating properties (i.e., not in the development stages). As described in the preceding paragraphs, the cost of real estate properties acquired is allocated between land, buildings, tenant improvements, lease and other intangibles, and personal property based upon estimated fair values at the time of acquisition. The Company’s gross real estate assets, on a book-basis, including at-market in-place lease intangibles and assets held for sale, totaled $1.9 billion as of December 31, 2006 and 2005. Assets held for sale totaled $0 and $26.1 million ($21.4 million, net), respectively, as of December 31, 2006 and 2005. On a tax-basis, the Company’s gross real estate assets totaled approximately $1.8 billion and $1.7 billion, respectively, as of December 31, 2006 and 2005 (Unaudited).

     Depreciation and amortization is provided for on a straight-line basis over the asset’s estimated useful life:

Land improvements	15 years
Buildings and improvements	3.3, 7.0, 15.0, 20.0, 31.5 or 39.0 years
Lease intangibles	13 to 106 months
Personal property	3 to 7 years

     As required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company must assess the potential for impairment of our long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. An impairment has occurred when undiscounted cash flows expected to be generated by an asset are less than the carrying value of the asset. The Company recorded impairment charges of $1.5 million, $0.7 million, and $1.2 million, respectively, for the years ended December 31, 2006, 2005 and 2004 related to real estate properties. The impairments in 2005 and 2004 were recorded upon the disposition of real estate assets and included the write-off of non-cash straight-line rent receivables. The impairment in 2006 relates to one building, adjusting the Company’s carrying value of the building to its estimated fair value. See Note 5 for other impairments recorded for the year ended December 31, 2006.

   Discontinued Operations

     The Company periodically sells properties based on market conditions and the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Consolidated Statements of Income in accordance with the criteria established in SFAS No. 144. Pursuant to SFAS No. 144, a company must report discontinued operations when a component of an entity has either been disposed of or is deemed to be held for sale if (i) both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Long-lived assets held for sale are reported at the lower of their carrying amount or their fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale of such properties are characterized as impairment losses relating to discontinued operations in the Consolidated Statements of Income.

     In the Company’s Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004, operations related to 15, 31 and 37 properties, respectively, were included in discontinued operations with operating income (including depreciation and amortization and excluding gains or losses on sale) totaling $1.0 million, $10.0 million and $15.6 million, respectively. The Company did not classify any assets as held for sale as of December 31, 2006. Assets held for sale as of December 31, 2005 included three

28

properties in which the operators had notified the Company of their intent to purchase the properties based on purchase option provisions under the leases or property operating agreements with the Company. These three properties were sold in 2006.

   Cash and Cash Equivalents

     Short-term investments with original maturities of three months or less, when acquired, are classified as cash equivalents.

   Federal Income Taxes

     No provision has been made for federal income taxes. The Company intends at all times to qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company must distribute at least 90% per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real estate investment trust. See Note 13 for further discussion.

   Sales and Use Taxes

     The Company must pay sales and use taxes to certain state tax authorities based on rents collected from tenants in properties located in those states. The Company’s leases generally allow the Company to bill and collect from its tenants the amounts due for these taxes. The Company collected and subsequently paid approximately $1.4 million, $1.4 million and $1.5 million in sales and use taxes related to its properties in Florida for the years ended December 31, 2006, 2005 and 2004 and accounted for these amounts on a net basis on the Company’s Consolidated Income Statement.

   Goodwill and Other Intangible Assets

     Under the provisions of SFAS No. 142 goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. SFAS No. 142 also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment when impairment indicators are present, in accordance with SFAS No. 144 (see previous discussion in the Real Estate Properties policy).

     Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place lease intangible assets, customer relationship intangible assets, and deferred financing costs. In-place lease and customer relationship intangible assets are amortized on a straight-line basis over the applicable lives of the assets. Deferred financing costs are amortized over the term of the related credit facility under the straight-line method, which approximates amortization under the effective interest method. Goodwill is not amortized but is evaluated annually on December 31 for impairment. The 2006 and 2005 impairment evaluations each indicated that no impairment had occurred with respect to the $3.5 million goodwill asset. See Note 6 for more detail of the Company’s intangible assets as of December 31, 2006.

   Allowance for Doubtful Accounts and Credit Losses

     Accounts Receivable

     Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. At least monthly, a report is produced whereby all receivables are “aged” or placed into groups based on the number of days that have elapsed since the receivable was billed. Management reviews the aging report for evidence of deterioration in the timeliness of payment from a tenant, sponsor, or debtor. Whenever deterioration is noted, management investigates and determines the reason(s) for the delay, which may include discussions with the delinquent tenant or sponsor. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are the type of contractual arrangement under which the receivable was recorded, e.g., a triple net lease, a gross lease, a sponsor guaranty agreement, or some other type of agreement; the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; the state in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable.

29

     Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance. The Company does not hold any accounts receivable for sale.

     Mortgage Notes and Notes Receivable

     The Company also evaluates collectibility of its mortgage notes and notes receivable and records necessary allowances on the notes in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS No. 114”), as amended. SFAS No. 114 indicates that a loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. If a mortgage loan or note receivable becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms. As of December 31, 2006 and 2005, there were no recorded investments in mortgage notes or notes receivable that were either on non-accrual status or were past due more than ninety days and continued to accrue interest.

     The Company’s notes receivable balances were approximately $10.4 million and $11.6 million, respectively, as of December 31, 2006 and 2005. Interest rates on the notes are fixed and range from 8.0% to 14.6% with maturity dates ranging from 2007 through 2023 as of December 31, 2006. During 2005, the Company reserved $0.1 million related to its notes and mortgage notes receivable which is included in bad debt expense on the Company’s Consolidated Statements of Income. No additional reserves were recorded on notes and mortgage notes receivable during 2006 and does not hold any notes receivable available for sale.

     The Company had mortgage notes receivable totaling $73.9 million and $105.8 million, respectively, as of December 31, 2006 and 2005, with weighted average maturities of approximately 3.59 years and 1.84 years, respectively. Interest rates on the portfolio ranged from 8.30% to 15.00% as of December 31, 2006 and 9.83% to 13.29% as of December 31, 2005. The interest rates on the mortgage notes receivable portfolio outstanding as of December 31, 2006 are fixed rates. The decrease in the mortgage notes receivable portfolio from December 31, 2005 to December 31, 2006 was mainly due to the repayment of certain mortgage notes during 2006. The Company does not hold any mortgage notes receivable available for sale and believed its mortgage notes were collectible as of December 31, 2006 and 2005.

     Revenue Recognition

     The Company recognizes revenue when collectibility is reasonably assured, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”). In the event the Company determines that collectibility is not reasonably assured, it will discontinue recognizing amounts contractually owed or will establish an allowance for estimated losses.

     The Company derives most of its revenues from its real estate property and mortgage note receivables portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in master lease income, property operating income, or mortgage interest income on the Company’s Consolidated Statements of Income, based on the type of contractual agreement.

     Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Consolidated Balance Sheets, was $8.1 million and $7.2 million, respectively, at December 31, 2006 and 2005.

     Rental Income

     Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. Additional rent, generally defined in most lease agreements as the cumulative increase in a Consumer Price Index (“CPI”) from the lease start date to the CPI as of the end of the previous year, is calculated as of the beginning of each year, and is then billed and recognized as income during the year as provided for in the lease. The Company recorded additional rental income, net of reserves of approximately $2.5 million, $1.6 million and $3.0 million, respectively, for the years ended December 31, 2006, 2005 and 2004. Rental income from properties under a master lease arrangement with the tenant is included in master lease rental income and rental income from properties under various tenant lease arrangements, including operating expense recoveries, is included in property operating income on the Company’s Consolidated Statements of Income.

30

     Mortgage Interest Income

     Mortgage interest income and notes receivable interest income are recognized based on the interest rates, maturity date or amortized period specific to each note. The interest rates on the mortgage notes receivable portfolio outstanding as of December 31, 2006 were fixed rates.

     Other Operating Income

     Other operating income on the Company’s Consolidated Statements of Income generally includes shortfall income recognized under its property operating agreements, revenues from its consolidated VIEs, management fee income, annual inspection fee income, loan exit fee income, prepayment penalty income, and interest income on notes receivable.

     Property operating agreements, between the Company and sponsoring health systems, applicable to 15 of the Company’s 237 owned real estate properties as of December 31, 2006, contractually obligate the sponsoring health system to provide to the Company, for a short term, a minimum return on the Company’s investment in the property in return for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the Company will calculate and accrue any shortfalls as income that the sponsor is responsible to pay to the Company under the terms of the property operating agreement.

     The Company also consolidates the revenues of its VIEs. The VIEs’ revenues consist primarily of net patient revenues that are recorded based upon established billing rates less allowances for contractual adjustments in the period the service is provided.

     The Company provides property management services for both third-party and owned real estate properties. Management fees are generally calculated, accrued and billed monthly based on a percentage of cash collections of tenant receivables for the month.

     A detail of other operating income for the years ended December 31, 2006, 2005 and 2004 is as follows:

(Dollars in millions)	2006		2005		2004
Property lease guaranty revenue	$	15.2	$	14.7	$	14.7
VIE operating revenue		17.8		17.6		15.4
Interest income		1.0		1.6		1.3
Management fee income		0.4		0.4		0.4
Loan exit fee and prepayment penalty income		2.2		0.1		1.2
Other		4.5		2.0		0.7
	$	41.1	$	36.4	$	33.7

   Derivative Financial Instruments

     SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (collectively, “SFAS No. 133”) require an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge. The Company’s two interest rate swaps, entered into in 2001, were fair value hedges and were perfectly effective. As such, changes in the fair value of the hedges were reflected as adjustments to the carrying value of the underlying liability. In June 2006, the Company terminated the two interest rate swaps. See Note 7 for more details on the interest rate swaps.

   Contingent Liabilities

     From time to time, the Company may be subject to loss contingencies arising from legal proceedings. Additionally, while the Company maintains comprehensive liability and property insurance with respect to each of its properties, the Company may be exposed to unforeseen losses related to uninsured or underinsured damages.

     The Company continually monitors any matters that may present a contingent liability, and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as deemed necessary in view of changes in available information. Liabilities are recorded when a loss is determined to be both probable and can be reasonably estimated.

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Changes in estimates regarding the exposure to a contingent loss are reflected as adjustments to the related liability in the periods when they occur.

     Because of uncertainties inherent in the estimation of contingent liabilities, it is possible that management’s provision for contingent losses could change materially in the near term. To the extent that any losses, in addition to amounts recognized, are at least reasonably possible, such amounts will be disclosed in the notes to the Consolidated Financial Statements.

   Stock-Based Awards

     During 2006, 2005 and 2004, the Company issued and had outstanding various employee stock-based awards. These awards included restricted stock issued to employees pursuant to the 2003 Employees Restricted Stock Incentive Plan (the “Restricted Stock Plan”), the Optional Deferral Plan and the 2000 Employee Stock Purchase Plan (“Employee Stock Purchase Plan”). See Note 10, Stock Plans. The Employee Stock Purchase Plan features a “look-back” provision which enables the employee to purchase a fixed number of shares at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise, with optional purchase dates occurring once each quarter for twenty-seven months.

     Prior to 2006, the Company followed the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations in accounting for its stock-based awards to employees and followed the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended. Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which revised SFAS No. 123 and superseded APB Opinion No. 25. This statement focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions, including employee stock purchase plans under certain conditions, but does not change the accounting guidance for share-based payment transactions with parties other than employees. This statement requires all share-based payments to employees to be recognized in the income statement based on their fair values. SFAS No. 123(R) permitted companies to adopt its requirements using one of two methods. The Company elected to follow the modified prospective method.

     The compensatory nature of the Restricted Stock Plan and the determination of the related compensation expense under the provisions of SFAS No. 123(R) are consistent with the accounting treatment prescribed by APB Opinion No. 25. However, the look-back feature under the Employee Stock Purchase Plan does not qualify for non-compensatory accounting treatment under SFAS No. 123(R) as it did under the provisions prescribed by APB Opinion No. 25, and, instead, requires fair value measurement using the Black-Scholes or other pricing model and the recognition of expense over the vesting period. The accounting for the look-back feature associated with the Employee Stock Purchase Plan under SFAS No. 123(R) is consistent with the accounting prescribed by SFAS No. 123, and as interpreted in FASB Technical Bulletin No. 97-1, “Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option.” Therefore, the compensation expense recognized upon adoption of SFAS No. 123(R) was determined in the same manner that the pro-forma compensation expense was calculated under SFAS No. 123, using the Black-Scholes model. In the first quarter of 2006, the Company recognized in general and administrative expenses approximately $227,000 of compensation expense related to the January 1, 2006 grant of options to purchase shares under the Employee Stock Purchase Plan, where such options were immediately vested on the date of grant. The Company grants options under its Employee Stock Purchase Plan once a year, during the first quarter, and thus records compensation expense related to those grants only in that quarter each year.

     The following table represents the effect on net income and earnings per share for the twelve months ended December 31, 2005 and 2004, as if the Company had applied the fair value-based method and recognition provisions of SFAS No. 123(R), as described above:

(Dollars in thousands, except per share data)	2005			2004
Net income, as reported	$	52,668		$	55,533
Add: Compensation expense for equity-based awards to employees, included in net income		3,647			3,523
Deduct: Compensation expense for equity-based awards to employees under the fair value method		(3,871	)		(3,680	)
Pro-forma net income	$	52,444		$	55,376
Earnings per share, as reported:
Basic	$	1.13		$	1.27
Assuming dilution	$	1.11		$	1.24
Pro-forma earnings per share:
Basic	$	1.13		$	1.27
Assuming dilution	$	1.11		$	1.24

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   Earnings Per Share

     Basic earnings per share is calculated using weighted average shares outstanding less issued and outstanding but unvested restricted shares of common stock. Diluted earnings per share is calculated using weighted average shares outstanding plus the dilutive effect of the outstanding stock options from the Employee Stock Purchase Plan and restricted shares of common stock, using the treasury stock method and the average stock price during the period. See Note 11 for further discussion.

   Accounting for Defined Benefit Pension Plans

     The Company has pension plans under which the Company’s Board of Directors and certain designated officers may receive retirement benefits upon retirement and the completion of five years of service with the Company. The plans are unfunded and benefit payments will be made from earnings of the Company. The pension plans are accounted for in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132(R),” (“SFAS No. 158”) which the Company adopted during 2006.

   Reclassifications

     Certain reclassifications have been made in the Consolidated Financial Statements for the years ended December 31, 2005 and 2004 to conform to the 2006 presentation.

   New Pronouncements

     Accounting Changes and Error Corrections

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces APB Opinion No. 20, “Accounting Changes” (“APB Opinion No. 20”), and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is applicable for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

     APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, SFAS No. 154 requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. Finally, SFAS No. 154 requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle.

     SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability.

     During 2006, the Company reclassified amounts related to properties acquired in three transactions during the 1990’s from land to building based on management’s determination that misclassifications had been made in the original recording of the transactions. As required under SFAS No. 154, the Company reviewed the effects of the misclassification from both a quantitative and qualitative perspective. Based on the analyses, management concluded that the adjustments required to correct the misclassification were not material to the current year’s or any prior years’ financial statements and, therefore, recorded the necessary adjustment of $8.0 million from land to building on the Company’s Consolidated Balance Sheet as of December 31, 2006 and recorded a corresponding adjustment to depreciation expense of $1.8 million, or $0.04 per basic and diluted common share, in the Company’s Consolidated Statement of Income for the year ended December 31, 2006.

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     Accounting for Uncertainty in Income Taxes

     In July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, “Accounting for Income Taxes,” (“FIN No. 48”) which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 will be effective for the Company beginning January 1, 2007. FIN No. 48 currently is not expected to have a material impact on the Company’s Consolidated Financial Statements.

     Fair Value Measurements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value, which should increase the consistency and comparability of fair value measurements and disclosures. This statement applies to other current pronouncements that require or permit fair value measurements but does not require any new fair value measurements. SFAS No. 157 will be effective for the Company beginning January 1, 2008 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.

     Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans

     Effective December 31, 2006, the Company adopted SFAS No. 158 which requires the recognition of the funded status of a company’s benefit plans as a net liability or asset with an offsetting adjustment to accumulated other comprehensive income in stockholders’ equity. Upon adoption, the Company recorded an additional $4.0 million in benefit obligation, included in other liabilities, with an offset to other comprehensive loss, included in accumulated other comprehensive loss which is included in stockholders’ equity on the Company’s Consolidated Balance Sheet. The adjustment of $1.4 million to accumulated comprehensive loss upon adoption of SFAS No. 158 represents the net unrecognized actuarial loss remaining as of December 31, 2005, calculated in accordance with SFAS No. 87. The Company has historically measured its benefit obligations as of the balance sheet date, therefore, no changes to the Company’s measurement dates were required.

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2. REAL ESTATE PROPERTIES

     The following table summarizes the Company’s owned real estate properties by type of facility and by state as of December 31, 2006.

					Buildings,
	Number				Improvements,
	of				At-Market Lease
	Facilities				Intangibles		Personal				Accumulated
(Dollars in thousands)	(1)		Land		And CIP		Property		Total		Depreciation
Medical Office/Outpatient Facilities:
California		10	$	17,510	$	90,078	$	88	$	107,676	$	24,795
Florida		26		20,972		177,334		154		198,460		45,488
Tennessee		18		8,371		156,618		139		165,128		25,378
Texas		42		30,259		356,995		876		388,130		63,117
Virginia		15		6,526		67,663		218		74,407		18,988
Other states		51		22,625		389,235		171		412,031		75,211
		162		106,263		1,237,923		1,646		1,345,832		252,977
Assisted Living Facilities: (2)
Florida		2		2,364		14,725		1,101		18,190		857
Georgia		1		0		6,025		0		6,025		1,562
Pennsylvania		7		1,425		29,645		1,110		32,180		8,227
Texas		4		0		28,895		0		28,895		7,491
Virginia		3		889		16,507		279		17,675		4,416
Other states		9		1,514		25,123		200		26,837		6,012
		26		6,192		120,920		2,690		129,802		28,565
Skilled Nursing Facilities: (2)
Michigan		8		700		22,381		1,180		24,261		6,591
Oklahoma		5		120		12,918		0		13,038		2,774
Pennsylvania		3		479		20,596		690		21,765		5,747
South Carolina		4		868		26,053		700		27,621		1,259
Virginia		6		1,459		35,775		0		37,234		9,275
Other states		3		2,289		18,732		405		21,426		4,595
		29		5,915		136,455		2,975		145,345		30,241
Inpatient Rehabilitation Facilities:
Alabama		1		0		17,722		0		17,722		3,744
Florida		1		0		11,703		0		11,703		2,472
Pennsylvania		6		1,214		112,653		0		113,867		27,302
Texas		1		1,116		12,086		0		13,202		3,132
		9		2,330		154,164		0		156,494		36,650
Independent Living Facilities: (2)
Tennessee		3		2,969		16,534		878		20,381		902
Texas		4		7		43,972		145		44,124		11,336
		7		2,976		60,506		1,023		64,505		12,238
Other Inpatient Facilities:
California		1		0		12,688		0		12,688		4,032
Indiana		1		1,071		42,335		0		43,406		543
Michigan		1		4,405		9,454		0		13,859		2,454
Texas		1		506		5,516		0		6,022		1,514
		4		5,982		69,993		0		75,975		8,543
Corporate Property		—		0		0		14,373		14,373		4,492
Total Property		237	$	129,658	$	1,779,961	$	22,707	$	1,932,326	$	373,706

(1)	Includes six lessee developments.
(2)	The Company plans to sell its senior living portfolio during the first and second quarters of 2007. See Note 15.

3. REAL ESTATE PROPERTY LEASES

     The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases or are supported through other financial support arrangements with expiration dates through 2022. Some leases and financial arrangements provide for fixed rent renewal terms of five years, or multiples thereof, in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease and for a short period thereafter, with an option (see Purchase Options below) or a right of first refusal to purchase the leased property. The Company’s portfolio of master leases generally requires the lessee to pay minimum rent, additional rent based upon fixed percentage increases or increases in the Consumer Price Index and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.

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     Future minimum lease payments under the non-cancelable operating leases and guaranteed amounts due to the Company under property operating agreements as of December 31, 2006 are as follows (in thousands):

2007	$	192,437
2008		174,392
2009		142,098
2010		115,693
2011		97,098
2012 and thereafter		338,388
	$	1,060,106

     The Company had only one customer, HealthSouth Corporation, that accounted for 10% or more of the Company’s revenues for the three years ended December 31, 2006, including revenues from discontinued operations. HealthSouth provided 10% of the Company’s revenues for the years ended December 31, 2006 and 2005 and 11% of the Company’s revenues for the year ended December 31, 2004.

Purchase Options Exercisable

     Certain of the Company’s leases include purchase option provisions. The provisions vary from lease to lease but generally allow the lessee to purchase the property covered by the lease at the greater of fair market value or an amount equal to the Company’s gross investment. As of December 31, 2006, the Company had a gross investment of approximately $235.3 million in real estate properties that were subject to outstanding, exercisable contractual options to purchase, with various conditions and terms, by the respective operators and lessees that had not been exercised.

     Purchase Options Exercised

     In the first quarter of 2006, the Company sold three properties to a sponsor pursuant to a purchase option provision in its property operating agreement with the Company. The Company received notice from the sponsor of its intent to exercise its purchase option on September 29, 2005. As such, the Company included its $9.7 million investment ($8.0 million, net) in the properties in assets held for sale as of December 31, 2005. The Company received net proceeds totaling $11.2 million from the sale and recognized a gain of approximately $3.3 million on the sale.

     In the second quarter of 2006, the Company sold a medical office building to a lessee pursuant to a purchase option provision in its master lease agreement with the Company. The Company received notice from the lessee of its intent to exercise its purchase option on November 15, 2005. As such, the Company included its $16.4 million gross investment ($13.4 million, net) in the building in assets held for sale as of December 31, 2005. The Company fully financed the sale of the building and received a $14.9 million mortgage note receivable, secured by the building. As required by SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), the Company will account for the gain under the installment method, thereby deferring the recognition of the gain of approximately $1.5 million until such time that recognition is allowed under the installment method.

   Impairment Charge

     In accordance with SFAS No. 144, long-lived assets (e.g., properties) must be evaluated for possible impairment whenever facts or circumstances indicate that the carrying value might not be recoverable. During the third quarter of 2006, management identified one property whose estimated future cash flows were not expected, based on a probability-weighted approach, to recover its carrying value. The property had a net carrying value, before impairment, of approximately $3.2 million. The Company recorded an impairment loss of $1.5 million, adjusting its carrying value to its estimated fair value of approximately $1.7 million.

4. ACQUISITIONS, DISPOSITIONS, AND MORTGAGE REPAYMENTS

   Acquisitions

     2006 Real Estate Acquisitions

     In May 2006, as discussed in Note 3 above, the Company fully financed the sale of one of its medical office buildings in California, in which the Company had a $16.4 million gross investment ($13.4 million, net). In the transaction, the Company received a $14.9 million mortgage note receivable, which is secured by the 87,000 square foot facility. As required by SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), the Company will account for the gain under the installment method, thereby deferring the recognition of the gain of approximately $1.5 million until such time that recognition is allowed under the installment method.

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     In June 2006, the Company acquired a 58,474 square foot medical office building and an adjoining 117,525 square foot orthopaedic hospital in Indiana for $65.0 million. These properties are leased under absolute net master lease agreements.

     In September 2006, the Company acquired for $8.3 million an 11-acre site in Texas near two hospitals currently under construction. The Company expects to develop an outpatient medical facility on the site.

     In November 2006, the Company acquired a parcel of land in Hawaii for $2.5 million which is adjacent to land the Company owns. The Company anticipates it will begin construction on a $64.6 million medical office building on the combined parcels in late 2007.

   2006 LLC Investments

     In January 2006, the Company acquired for $2.4 million a non-managing membership interest in a limited liability company (“LLC”), which acquired one medical office building in Oregon. The Company has a 50% ownership interest in the LLC and does not have all of the rights of a controlling member. As such, the Company does not consolidate the LLC but accounts for it under the equity method.

     In March 2006, the Company acquired for $6.6 million a non-managing membership interest in an LLC, which acquired six senior living facilities in Utah. The Company has a 10% ownership interest in the LLC but does not have all of the rights of a controlling member. As such, the Company does not consolidate the LLC but accounts for it under the cost method.

     The Company had net investments in LLCs totaling approximately $20.1 million and $10.7 million, respectively, as of December 31, 2006 and 2005 that are included in other assets on the Company’s Consolidated Balance Sheets.

   2006 Mortgage Note Financings

     During 2006, the Company acquired or originated four mortgage notes receivable for approximately $37.8 million.

     A summary of the 2006 acquisitions, LLC investments and mortgage note financings follows:

	Cash		Real		Mortgage					Square
(Dollars in millions)	Consideration		Estate		Financing		Other			Footage
Real estate acquisitions
Indiana	$	65.0	$	65.0	$	—	$	—			175,999
Texas (land)		8.3		8.3		—		—			—
Hawaii (land)		2.5		2.5		—		—			—
		75.8		75.8		—		—			175,999
LLC investments		9.0		—		—		9.0
Mortgage note financings		20.9		—		37.8		(16.9	)
Total 2006 Acquisitions	$	105.7	$	75.8	$	37.8		$(7.9	)

   2005 Real Estate Acquisitions

     In April 2005, the Company acquired three independent living facilities in Memphis, Tennessee for $18.8 million.

     In May 2005, the Company acquired four skilled nursing facilities in and around Charleston, South Carolina for $17.2 million and assumed $9.3 million in mortgage debt.

     In August 2005, the Company acquired an assisted living facility in Hollywood, Florida for $11.1 million.

   2005 LLC Investment

     In April 2005, the Company acquired a non-managing membership interest in an LLC for $11.1 million, which acquired three medical office buildings. The Company has a 75% ownership interest in the LLC but does not have all of the rights of a controlling member. As such, the Company does not consolidate the LLC but accounts for it under the equity method. As of December 31, 2005, the Company’s net investment in the LLC, included in other assets on the Company’s Consolidated Balance Sheet, was $10.7 million.

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     2005 Mortgage Note Financings

     During 2005, the Company acquired or originated six mortgage notes receivable from six different entities for approximately $72.0 million.

     A summary of the 2005 acquisitions, LLC investment and mortgage note financings follows:

	Cash		Real		Debt			Mortgage					Square
(Dollars in millions)	Consideration		Estate		Assumed			Financing		Other			Footage
Real estate acquisitions
Memphis, TN	$	18.8	$	18.2	$	—		$	—	$	0.6			417,025
Charleston, SC		17.2		26.1		(9.3	)		—		0.4			188,058
Hollywood, FL		11.1		11.2		—			—		(0.1	)		124,596
		47.1		55.5		(9.3	)		—		0.9			729,679
LLC investment		11.1		—		—			—		11.1
Mortgage note financings		72.0		—		—			72.0		—
Total 2005 Acquisitions	$	130.2	$	55.5	$	(9.3	)	$	72.0	$	12.0

     2006 Real Estate Dispositions

     In January 2006, a sponsor under a financial support arrangement exercised a purchase option and purchased two properties in Pennsylvania, providing net proceeds to the Company totaling $11.7 million, including a lease termination fee of $0.3 million. The Company had a gross investment totaling $9.7 million ($8.0 million, net) in the properties and recognized a gain of approximately $3.3 million from the sale.

     In April 2006, the Company sold three medical office buildings in Alabama in which the Company had a gross investment totaling $26.3 million ($21.1 million, net). The Company received net proceeds of approximately $21.0 million and recognized an immaterial gain on the sale.

     In May 2006, pursuant to a purchase option exercised in 2005, the Company sold a 87,000 square foot medical office building in California and financed the sale transaction. See 2006 Real Estate Acquisitions above for further discussion of this transaction.

     In July 2006, the Company partially financed the sale of one of its medical office buildings in Texas, in which the Company had a $2.5 million gross investment ($2.4 million, net). In the transaction, the Company received $0.3 million in cash and a $2.0 million mortgage note receivable which, in total, approximated the Company’s carrying value of its investment in the building.

     2006 Mortgage Notes Receivable Repayments

     During 2006, seven mortgage notes receivable totaling approximately $69.1 million were repaid. The Company also received $2.2 million in prepayment penalties from these transactions, which are included in other operating income on the Company’s Consolidated Statement of Income.

     A summary of the 2006 dispositions follows:

					Lease					Mortgage
			Net Real		Termination/		Other			And Other
	Net		Estate		Prepayment		(Including			Notes			Gain/			Square
(Dollars in millions)	Proceeds		Investment		Penalties		Receivables)			Receivable			(Loss)			Footage
Real estate dispositions
Pennsylvania	$	11.7	$	8.0	$	0.3	$	0.1		$	—		$	3.3			50,883
Alabama		21.0		21.1		—		(0.1	)		—			—			152,063
California		—		13.4		—		—			(13.4	)		—			87,000
Texas		0.3		2.4		—		—			(2.0	)		(0.1	)		17,300
		33.0		44.9		0.3		0			(15.4	)		3.2			307,246
Mortgage notes receivables repayments		71.3		—		2.2		—			69.1			—
Total 2006 Dispositions	$	104.3	$	44.9	$	2.5	$	0		$	53.7		$	3.2

     2005 Real Estate Dispositions

     In January 2005 and May 2005, a senior living operator purchased the ten properties it leased from the Company, producing net sales proceeds to the Company totaling $71.0 million. The ten properties covered by the purchase options exercised by this operator

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comprised approximately $74.9 million ($60.9 million, net) of the Company’s real estate properties. The Company recognized a gain of approximately $7.3 million from the sale of the properties.

     In February 2005 and April 2005, the Company sold two medical office buildings in Florida for approximately $6.8 million in net sales proceeds to the Company. The two properties comprised approximately $9.3 million ($7.4 million, net) of the Company’s real estate properties. The Company recorded a $0.7 million impairment charge from the sale of the two properties.

     On April 20, 2005, a second senior living operator purchased five properties it leased from the Company producing net sales proceeds to the Company totaling $53.5 million. The five properties covered by the purchase options exercised by this operator comprised approximately $53.1 million ($44.4 million, net) of the Company’s real estate assets. The Company recognized a gain of approximately $0.2 million from the sale of the five properties.

     In May 2005, the Company sold a land parcel for approximately $2.0 million in net proceeds to the Company and recognized no gain or loss on the transaction.

     2005 Mortgage Notes Receivable Repayments

     During 2005, two mortgage notes receivable totaling approximately $4.1 million were repaid. The Company also received a $0.1 million prepayment penalty on the transaction.

     A summary of the 2005 dispositions follows:

					Lease				Mortgage
			Net Real		Termination/		Other		And Other
	Net		Estate		Prepayment		(Including		Notes		Gain/			Square
(Dollars in millions)	Proceeds		Investment		Penalties		Receivables)		Receivable		Loss			Footage
Real estate dispositions
Purchase option-10 properties	$	71.0	$	60.9	$	1.8	$	1.0	$	—	$	7.3			563,379
Purchase option-5 properties		53.5		44.4		1.4		2.3		5.2		0.2			292,231
Florida-2 properties		6.8		7.4		—		0.1		—		(0.7	)		58,559
Land Parcel		2.0		1.9		—		0.1		—		—			—
		133.3		114.6		3.2		3.5		5.2		6.8			914,169
Mortgage notes receivables repayments		4.2		—		0.1		—		4.1		—
Total 2005 Dispositions	$	137.5	$	114.6	$	3.3	$	3.5	$	9.3	$	6.8

5. OTHER ASSETS

     Other assets consist primarily of receivables, straight-line rent receivables, and intangible assets. Other assets as of December 31, 2006 and 2005 were as follows:

	December 31,
(In millions)	2006			2005
Accounts receivable	$	19.9		$	20.3
Notes receivable		10.4			11.6
Allowance for uncollectible accounts		(2.5	)		(2.0	)
Straight-line rent receivables		22.8			21.1
Acquired patient accounts receivable, net		2.5			8.9
Equity investment in LLC		20.1			10.7
Deferred financing costs, net		5.5			5.7
Above-market intangible assets, net		6.6			6.7
Customer relationship intangible asset, net		1.4			1.6
Goodwill		3.5			3.5
Prepaid assets		8.1			5.5
Other		1.9			2.6
	$	100.2		$	96.2

     During the fourth quarter of 2005, the Company agreed to terminate several medical office building leases relating to a physician clinic in Virginia. At the time of the lease termination, the Company had outstanding receivables owed by the tenant of approximately $10.3 million. In connection with such termination and a related troubled debt restructuring, the Company received patient accounts receivable of the clinic, having a fair value estimated at $9.1 million, and recorded bad debt expense of $1.2 million on receivables related to the terminated leases which was reflected in bad debt expense on the Company’s Consolidated Statement of Income for the

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year ended December 31, 2005. In connection with these transactions, the Company also entered into a new long-term master lease agreement with a new lessee for the same properties providing for annual minimum lease payments of approximately $5.0 million. During 2005 and 2006, the Company collected $0.2 million and $2.1 million, respectively, of the patient accounts receivable. As a result of the Company’s collection experience, as well as the types and ages of patient receivables remaining, the Company revised its estimate of the fair value of the patient accounts receivable and recorded impairment charges of $4.1 million and related valuation allowances of $0.2 million during 2006 on the patient accounts receivable. See Note 1 for other impairments recorded for the year ended December 31, 2006.

     During the first quarter of 2006, the Company acquired a non-managing membership interest in two LLCs for $9.0 million which is included in the equity investment in LLC line in the table above. See Note 4 for more details on these investments.

6. INTANGIBLE ASSETS AND LIABILITIES

     The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets, including but not limited to goodwill, deferred financing costs, above-, below-, and at-market lease intangibles, and customer relationship intangibles. The Company’s intangible assets and liabilities as of December 31, 2006 and 2005 consisted of the following:

	Balance at						Accumulated Amortization					Weighted
	December 31,						at December 31,					Average Life		Balance Sheet
(In millions)	2006			2005			2006			2005		(Years)		Classification
Goodwill	$	3.5		$	3.5		$	—		$	—		N/A	Other assets
Deferred financing costs		10.7			11.4			5.2			5.7		4.8	Other assets
Above-market lease intangibles		6.9			6.9			0.3			0.2		72.3	Other assets
Customer relationship intangibles		1.5			1.6			0.1			—		36.6	Other assets
Below-market lease intangibles		(0.4	)		(0.4	)		(0.1	)		—		2.2	Other liabilities
At-market lease intangibles		39.0			39.3			31.4			21.5		2.3	Real estate properties
Total	$	61.2		$	62.3		$	36.9		$	27.4		29.3

     Amortization of the intangible assets and liabilities, in place as of December 31, 2006, is expected to be approximately $5.9 million, $3.3 million, $1.7 million, $1.2 million, and $0.7 million, respectively, for each of the years ended December 31, 2007 through 2011.

7. NOTES AND BONDS PAYABLE

     Notes and bonds payable as of December 31, 2006 and 2005 consisted of the following:

	December 31,
(In thousands)	2006		2005
Unsecured credit facility due 2009	$	190,000	$	—
Unsecured credit facility due 2006		—		73,000
Senior notes due 2006		—		29,400
Senior notes due 2011, including premium		301,083		306,629
Senior notes due 2014, net of discount		298,838		298,708
Mortgage notes payable		60,061		70,709
	$	849,982	$	778,446

     As of December 31, 2006, the Company was in compliance with all covenant requirements under its various debt instruments.

     Unsecured Credit Facility due 2009

     In January 2006, the Company entered into a $400 million credit facility (the “Unsecured Credit Facility due 2009”) with a syndicate of 12 banks. The facility may be increased to $650.0 million during the first two years at the Company’s option, subject to obtaining additional capital commitments from the banks. The credit facility matures in January 2009, but the term may be extended one additional year. Loans outstanding under the Unsecured Credit Facility due 2009 (other than swing line loans and competitive bid advances) will bear interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate and the Federal Funds rate plus 0.50%) plus (y) a margin ranging from 0.60% to 1.20% (currently 0.90%), based upon the Company’s unsecured debt ratings. The weighted average rate on borrowings outstanding as of December 31, 2006 was 6.25%. Additionally, the Company will pay a facility fee per annum on the aggregate amount of commitments. The facility fee may range from 0.15% to 0.30% per annum (currently 0.20%), based on the Company’s unsecured debt ratings. The Unsecured Credit Facility due 2009 contains

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certain representations, warranties, and financial and other covenants customary in such loan agreements. The Company had borrowing capacity remaining of $210.0 million under the facility as of December 31, 2006.

     Unsecured Credit Facility due 2006

     In October 2003, the Company entered into a $300.0 million unsecured credit facility (the “Unsecured Credit Facility due 2006”) with a syndicate of 12 banks. Rates for borrowings under the Unsecured Credit Facility due 2006 were, at the Company’s option, based on LIBOR or the higher of the Federal Funds Rate plus 1/2 of 1% or the agent bank’s prime rate and could vary based on the Company’s debt rating. The weighted average rate on borrowings outstanding as of December 31, 2005 was 5.42%. In addition, the Company incurred an annual facility fee of 0.35% on the commitment. In January 2006, the Unsecured Credit Facility due 2006 was repaid with proceeds from the Unsecured Credit Facility due 2009.

     Senior Notes due 2006

     In April 2000, the Company privately placed $70.0 million of unsecured senior notes (the “Senior Notes due 2006”) with multiple purchasers affiliated with two lending institutions. The Senior Notes due 2006 bore interest at 9.49% and were fully repaid on April 3, 2006.

     Senior Notes due 2011

     In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125%, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. The notes were originally issued at a discount of approximately $1.5 million, which yielded an 8.202% interest rate per annum upon issuance. In 2001, the Company entered into interest rate swap agreements for notional amounts totaling $125.0 million to offset changes in the fair value of $125.0 million of the notes. The Company paid interest at the equivalent rate of 1.99% over six-month LIBOR. In March 2003, the Company terminated these interest rate swap agreements and entered into new swaps under terms identical to those of the 2001 swap agreements except that the equivalent rate was adjusted to 4.12% over six-month LIBOR. The Company received cash equal to the fair value of the terminated swaps (“premium”) of $18.4 million, which was combined with the principal balance of the Senior Notes due 2011 on the Company’s Consolidated Balance Sheets and was being amortized against interest expense over the remaining term of the notes, offsetting the increase in the spread over LIBOR. The derivative instruments met all of the requirements of a fair value hedge and were accounted for using the “shortcut method” as set forth in SFAS No. 133. As such, changes in fair value of the derivative instruments had no impact on the Company’s Consolidated Statements of Income. In June 2006, the Company terminated these interest rate swap agreements and paid $10.1 million, equal to the fair value of the interest rate swaps at termination, plus interest due of $0.3 million. The $10.1 million paid by the Company was offset against the remaining premium from the 2003 termination. The remaining net premium of $1.2 million was combined with the principal balance of the Senior Notes due 2011 on the Company’s Consolidated Balance Sheets and will be amortized against interest expense over the remaining term of the notes resulting in a new effective rate on the notes of 7.896%. For the years ended December 31, 2006, 2005 and 2004, the Company amortized $1.0 million, $1.8 million, and $1.7 million, respectively, of the net premium which is included in interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the Senior Notes due 2011 on the Company’s Consolidated Balance Sheets as of December 31, 2006 and 2005:

	December 31,
(In thousands)	2006		2005
Senior Notes due 2011 face value	$	300,000	$	300,000
Unamortized net gain (net of discount)		1,083		12,226
Fair value of interest rate swaps		—		(5,597	)
Senior Notes due 2011 carrying amount	$	301,083	$	306,629

     Senior Notes due 2014

     On March 30, 2004, the Company publicly issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125%, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.5 million, yielding a 5.19% interest rate per annum. For each of the years ended December 31, 2006, 2005 and 2004, the Company amortized approximately $0.1 million of the discount which is included in interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Consolidated Balance Sheets as of December 31, 2006 and 2005:

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	December 31,
(In thousands)	2006			2005
Senior Notes due 2014 face value	$	300,000		$	300,000
Unamortized discount		(1,162	)		(1,292	)
Senior Notes due 2014 carrying amount	$	298,838		$	298,708

     Mortgage Notes Payable

     As of December 31, 2006, the Company had outstanding 10 non-recourse mortgage notes payable, with the related collateral, as follows:

											Investment in
			Effective					Number			Collateral at		Contractual Balance at
	Original		Interest			Maturity		of Notes			December 31,		December 31,		December 31,
(Dollars in millions)	Balance		Rate			Date		Payable		Collateral(5)	2006		2006		2005
Life Insurance Co. (1)	$	23.3		7.765	%		7/26		1	MOB	$	46.2	$	20.5	$	20.8
Life Insurance Co. (2)		4.7		7.765	%		1/17		1	MOB		11.0		3.2		3.4
Commercial Bank (3)		23.4		7.220	%		5/11		5	7 MOBs		53.6		12.6		22.2
Commercial Bank (1)		5.3		5.550	%		4/31		1	SNF		10.3		5.1		5.2
Commercial Bank (1)		4.0		8.000	%		4/32		1	SNF		8.2		3.9		4.0
Life Insurance Co. (4)		15.1		5.490	%		1/16		1	MOB		23.8		14.8		15.1
									10		$	153.1	$	60.1	$	70.7

(1)	Payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due at maturity.
(2)	Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.
(3)	Payable in fully amortizing monthly installments of principal and interest due at maturity. Originally, the Company had 8 mortgage notes totaling $35.0 million on 10 MOBs. Three of the mortgage notes, originally totaling $11.6 million, were defeased during the second quarter of 2006.
(4)	Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.
(5)	MOB-Medical office building; SNF-Skilled nursing facility

     The contractual interest rates for the 10 outstanding mortgage notes ranged from 5.49% to 8.50% at December 31, 2006. Three mortgage notes payable totaling approximately $7.1 million were repaid in April 2006 related to the sale of three medical office buildings which secured the mortgage notes.

     Other Long-Term Debt Information

     Future maturities of the Company’s notes and bonds payable, net of related discount of $1.1 million and premium of $1.2 million, as of December 31, 2006 were as follows (in thousands):

2007	$	3,646
2008		3,923
2009 (1)		194,225
2010		4,549
2011		302,182
2012 and thereafter		341,457
	$	849,982

(1) Includes $190.0 million outstanding on the Unsecured Credit Facility due 2009.

     In the Company’s 1998 acquisition of Capstone Capital Corporation (“Capstone”), it acquired four interest rate swaps previously entered into by Capstone. In order to set the liabilities assumed by the Company, the Company, concurrently with the acquisition, acquired off-setting swaps. The remaining liability as of December 31, 2006, 2005 and 2004 was $0.2 million, $0.4 million and $0.6 million, respectively.

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8. STOCKHOLDERS’ EQUITY

  Common Stock

     The Company had no preferred shares outstanding and had common shares outstanding for each of the three years ended December 31, 2006 as follows:

	Year Ended December 31,
	2006		2005		2004
Common Shares
Balance, beginning of period		47,768,148		47,701,108		42,991,416
Issuance of stock		3,876		29,348		4,686,789
Restricted stock-based awards, net of forfeitures		33,424		37,692		22,903
Balance, end of period		47,805,448		47,768,148		47,701,108

     On July 25, 2006, the Company’s Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company’s common stock. The Company may elect, from time to time, to repurchase shares either when market conditions are appropriate or as a means to reinvest excess cash flows from investing activities. Such purchases, if any, may be made either in the open market or through privately negotiated transactions. As of December 31, 2006 the Company had not repurchased any shares.

     On July 28, 2004, the Company sold 4,000,000 shares of Common Stock, par value $0.01 per share, at $36.30 per share ($34.57 per share net of underwriting discounts and commissions) in an underwritten public offering. The Company received approximately $138.3 million in net proceeds from the offering. On August 5, 2004, the underwriters purchased 600,000 additional shares to cover over-allotments generating approximately $20.7 million in additional net proceeds to the Company. The proceeds from the offering, including the over-allotment proceeds, were used to fund the acquisition of 20 buildings from Baylor Health Care System, to repay the outstanding balance on the Unsecured Credit Facility due 2006, and for general corporate purposes.

     Accumulated Other Comprehensive Income

     As discussed in more detail in Note 1, the Company adopted SFAS No. 158 effective December 31, 2006. Upon adoption of SFAS No. 158, the Company recorded an additional $4.0 million in benefit obligation related to its pension obligations, included in other liabilities, with an offset to other comprehensive income, included in stockholders’ equity on the Company’s Consolidated Balance Sheet.

9. BENEFIT PLANS

  Executive Retirement Plan

     The Company has an Executive Retirement Plan, under which an officer designated by the Compensation Committee of the Board of Directors may receive upon normal retirement (defined to be when the officer reaches age 65 and has completed five years of service with the Company) an amount equal to 60% of the officer’s final average earnings (defined as the average of the executive’s highest three years’ earnings) plus 6% of final average earnings times years of service after age 60 (but not more than five years), less 100% of certain other retirement benefits received by the officer, to be paid in monthly installments over a period not to exceed the greater of the life of the retired officer or his surviving spouse. Assuming the officers currently eligible for retirement retire at the normal retirement date, the Company would begin making benefit payments (other than the $83,000 currently being paid annually) of approximately $1.1 million per year, based on assumptions at December 31, 2006, which would increase annually based on CPI. Rather than receiving monthly payments, the retiring officer has the option to request a lump sum retirement payment, equal to the present value of the total expected payments.

    Retirement Plan for Outside Directors

     The Company has a retirement plan for outside directors under which a director may receive upon normal retirement (defined to be when the director reaches age 65 and has completed at least five years of service as a director) payment annually, for a period equal to the number of years of service as a director but not to exceed 15 years, an amount equal to the director’s annual retainer and meeting fee compensation (for 2006 this amount ranged from $33,000 to $46,750) immediately preceding retirement from the Board. Such benefit payments are to be made to the retired director or his beneficiary in equal quarterly installments for the duration of the applicable payment period.

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    Retirement Plan Information

     Net periodic benefit cost for both the Executive Retirement Plan and the Retirement Plan for Outside Directors (the “Plans”) for the three years in the period ended December 31, 2006 is comprised of the following:

(In thousands)	2006		2005		2004
Service cost	$	995	$	681	$	543
Interest cost		743		487		395
Amortization of net gain/loss		417		169		48
	$	2,155	$	1,337	$	986
Net loss recognized in other comprehensive loss		2,591		—		—
Total recognized in net periodic benefit cost and other comprehensive loss	$	4,746	$	1,337	$	986

     The Company estimates that approximately $0.4 million of the net loss recognized in other comprehensive loss totaling $4.0 million will be amortized to expense in 2007.

     The Plans are un-funded, and benefits will be paid from earnings of the Company. The following table sets forth the benefit obligations as of December 31, 2006 and 2005.

(In thousands)	2006			2005
Benefit obligation at beginning of year	$	8,345		$	6,615
Service cost		995			681
Interest cost		743			487
Benefits paid		(83	)		(83	)
Actuarial gain/loss, net(1)		3,008			645
Benefit obligation at end of year	$	13,008		$	8,345

(1) 2006 includes the impact of changes made to compensation assumptions.

      Amounts recognized in the balance sheet are as follows:

(In thousands)	2006			2005
Net liabilities included in accrued liabilities	$	(8,973	)	$	(6,901	)
Amounts recognized in accumulated other comprehensive loss		(4,035	)		—

     Accounting for the Executive Retirement Plan for the years ended December 31, 2006 and 2005 assumes a discount rate of 6.40% and a compensation increase rate of 2.7%. Accounting for the Retirement Plan for Outside Directors assumes a discount rate of 6.40%. At December 31, 2006, three employees and three non-employee directors were eligible to retire under the Executive Retirement Plan or the Retirement Plan for Outside Directors. If these individuals retired at normal retirement age and received full retirement benefits based upon the terms of each applicable plan, future benefits payable is estimated to be approximately $32 million as of December 31, 2006.

10. STOCK PLANS

    Restricted Stock Plans

          2003 Employees Restricted Stock Incentive Plan

     The 2003 Employees Restricted Stock Incentive Plan, as amended (“The Restricted Stock Plan”), authorizes the Company to issue 2,099,853 shares of common stock to its employees. The Restricted Stock Plan terminates on December 1, 2012. As of December 31, 2006 and 2005, the Company had issued, net of forfeitures, a total of 98,793 and 68,469 restricted shares, respectively, under the Restricted Stock Plan and a total of 1,288,952 and 1,301,852 restricted shares, respectively, under its predecessor plan for compensation-related awards to employees. No additional shares will be issued under the predecessor plan. The shares issued under the Restricted Stock Plan and its predecessor plan are generally subject to fixed vesting periods varying from three to ten years beginning on the date of issue. If an employee voluntarily terminates employment with the Company before the end of the vesting period, the shares are forfeited, at no cost to the Company. Once the shares have been issued, the employee has the right to receive dividends and the right to vote the shares. Compensation expense recognized in 2006, 2005 and 2004 from the amortization of the value of the shares issued under the Restricted Stock Plan and its predecessor plan was $3.5 million, $3.6 million and $3.6 million, respectively.

          Non-Employee Directors’ Stock Plan

     Pursuant to the 1995 Restricted Stock Plan for Non-Employee Directors (the “1995 Directors’ Plan”), the directors’ stock vests for each director upon the date three years from the date of issue and is subject to forfeiture prior to such date upon termination of the director’s service, at no cost to the Company. As of December 31, 2006 and 2005, the Company had issued a total of 43,173 and 27,173 shares, respectively, pursuant to the 1995 Directors’ Plan and had a total of 56,827 and 72,827 authorized shares, respectively,

44

that had not been issued. For 2006, 2005, and 2004, compensation expense resulting from the amortization of the value of these shares was $229,711, $33,783, and $30,571, respectively.

     A summary of the activity under The Restricted Stock Plan, and its predecessor plan, and the 1995 Directors’ Plan and related information for the three years in the period ended December 31, 2006 is as follows:

	2006			2005			2004
Nonvested shares, beginning of year		1,271,548			1,307,966			1,286,824
Granted		46,928			39,220			23,011
Vested		(56,116	)		(75,638	)		(1,869	)
Forfeited		(747	)		—			—
Nonvested shares, end of year		1,261,613			1,271,548			1,307,966
Weighted-average grant date fair value of nonvested shares, beginning of year	$	24.37		$	23.56		$	23.33
Weighted-average grant date fair value of shares granted during the year	$	33.75		$	37.67		$	36.13
Weighted-average grant date fair value of shares vested during the year	$	21.22		$	17.30		$	23.08
Weighted-average grant date fair value of shares forfeited during the year	$	34.15		$	—		$	—
Weighted-average grant date fair value of nonvested shares, end of year	$	24.85		$	24.37		$	23.56
Grant date fair value of shares granted during the year	$	1,583,605		$	1,477,478		$	831,419

     The grant date value of unvested awards at December 31, 2006 issued under the Company’s restricted stock plans was approximately $10.8 million with a weighted-average vesting period remaining of approximately 3.5 years. The vesting periods for the restricted shares granted during 2006 ranged from 30 to 120 months. During the second quarter of 2006, the Company withheld 12,757 shares of common stock from one of its officers to pay estimated withholding taxes related to restricted stock that vested in the quarter. The shares were immediately retired.

    Dividend Reinvestment Plan

     The Company is authorized to issue 1,000,000 shares of Common Stock to shareholders under the Dividend Reinvestment Plan. As of December 31, 2006, the Company had a total of 326,172 shares issued under the plan of which 4,468 shares were issued in 2006 and 17,216 were issued in 2005.

    Employee Stock Purchase Plan

     In January 2000, the Company adopted the Employee Stock Purchase Plan, pursuant to which the Company is authorized to issue shares of Common Stock. As of December 31, 2006 and 2005, the Company had a total of 608,240 and 636,653 shares authorized under the Employee Stock Purchase Plan, respectively, which had not been issued or optioned. Under the Employee Stock Purchase Plan, each eligible employee in January of each year is able to purchase up to $25,000 of Common Stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option (the “Exercise Date”). The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee Stock Purchase Plan expire if not exercised 27 months after each such option’s date of grant. Cash received from employees upon exercising options under the Employee Stock Purchase Plan for the years ended December 31, 2006, 2005, and 2004 was $0.4 million, $0.3 million and $1.3 million, respectively.

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     A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period ended December 31, 2006 is as follows:

	2006			2005			2004
Outstanding, beginning of year		158,026			141,037			157,354
Granted		148,698			119,730			103,452
Exercised		(14,958	)		(12,132	)		(48,785	)
Forfeited		(65,135	)		(45,659	)		(25,448	)
Expired		(55,150	)		(44,950	)		(45,536	)
Outstanding and exercisable at end of year		171,481			158,026			141,037
Weighted-average exercise price of options outstanding, beginning of year	$	28.28		$	27.97		$	24.86
Weighted-average exercise price of options granted during the year	$	28.28		$	34.60		$	30.39
Weighted-average exercise price of options exercised during the year	$	28.34		$	25.78		$	25.81
Weighted-average exercise price of options forfeited during the year	$	30.39		$	31.69		$	27.56
Weighted-average exercise price of options expired during the year	$	30.39		$	24.86		$	23.80
Weighted-average exercise price of options outstanding, end of year	$	30.55		$	28.28		$	27.97
Weighted-average fair value of options granted during the year (calculated as of the grant date)	$	6.55		$	7.74		$	6.29
Intrinsic value of options exercised during the year	$	167,552		$	84,749		$	726,677
Intrinsic value of options outstanding and exercisable (calculated as of December 31)	$	1,470,417		$	64,729		$	1,795,933
Range of exercise prices of options outstanding (calculated as of December 31)	$	27.07 - $34.60		$	28.28 - $28.28		$	23.80 - $30.39
Weighted-average contractual life of outstanding options (calculated as of December 31, in years)		0.8			0.8			0.8

     The fair values for these options were estimated at the date of grant using a Black-Scholes options pricing model with the weighted-average assumptions for the options granted during the period noted in the following table. The risk-free interest rate was based on the U.S. Treasury constant maturity-nominal two-year rate whose maturity is nearest to the date of the expiration of the latest option outstanding and exercisable; the expected life of each option was estimated using the historical exercise behavior of employees; expected volatility was based on historical volatility of the Company’s stock, and expected forfeitures were based on historical forfeiture rates within the look-back period.

	2006			2005			2004
Risk-free interest rates		4.82	%		3.08	%		1.27	%
Expected dividend yields		6.68	%		7.5	%		8.68	%
Expected life (in years)		1.46			1.51			1.54
Expected volatility		19.9	%		19.4	%		19.2	%
Expected forfeiture rates		76	%		76	%		76	%

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11. EARNINGS PER SHARE

     The table below sets forth the computation of basic and diluted earnings per share as required by FASB Statement No. 128, “Earnings Per Share” for the three years in the period ended December 31, 2006.

	Year Ended December 31,
(Dollars in thousands, except per share data)	2006			2005			2004
Weighted Average Shares
Weighted Average Shares Outstanding		47,803,671			47,746,562			45,015,205
Unvested Restricted Stock Shares		(1,275,814	)		(1,281,347	)		(1,308,677	)
Weighted Average Shares — Basic		46,527,857			46,465,215			43,706,528
Weighted Average Shares — Basic		46,527,857			46,465,215			43,706,528
Dilutive effect of Restricted Stock Shares		930,052			894,134			867,671
Dilutive effect of Employee Stock Purchase Plan		41,028			47,449			53,276
Weighted Average Shares — Diluted		47,498,937			47,406,798			44,627,475
Earnings Available to Common Stockholders
Income from Continuing Operations	$	35,507		$	35,891		$	41,111
Discontinued Operations		4,212			16,777			14,422
Net income	$	39,719		$	52,668		$	55,533
Basic Earnings Per Common Share
Income from Continuing Operations per common share	$	0.76		$	0.77		$	0.94
Discontinued Operations per common share		0.09			0.36			0.33
Net income per common share	$	0.85		$	1.13		$	1.27
Diluted Earnings Per Common Share
Income from Continuing Operations per common share	$	0.75		$	0.76		$	0.92
Discontinued Operations per common share		0.09			0.35			0.32
Net income per common share	$	0.84		$	1.11		$	1.24

12. COMMITMENTS AND CONTINGENCIES

    Construction in Progress

     As of December 31, 2006, the Company had a net investment of approximately $28.0 million in three developments in progress, which has a total remaining funding commitment of approximately $38.8 million. The Company anticipates completion of these developments in the second and third quarters of 2007. The Company also has an investment of $10.1 million in a land parcel in Hawaii on which the Company anticipates it will begin construction of a $64.6 million medical office building in late 2007. The Company has a total remaining funding commitment of approximately $54.4 million and anticipates completion of the building in 2009. In addition, the Company anticipates beginning a $26.3 million development project, involving two medical office buildings in Colorado, in the first quarter of 2007 with an anticipated completion date in the first quarter of 2008.

    Other Construction Commitments

     Construction continues on a 61,000 square foot, $20.1 million medical office building in the state of Washington. The project is being developed by a joint venture in which the Company holds a 75% equity interest. Construction of the building is being funded by mortgage debt of approximately $15.0 million and by partnership capital of approximately $5.1 million, of which the Company will contribute $3.8 million. As of December 31, 2006, the Company had funded approximately $1.6 million of its capital contribution. Completion of the building is expected in the second quarter of 2007.

     The Company also had various remaining first-generation tenant improvement obligations totaling approximately $6.5 million as of December 31, 2006 related to properties that were developed by the Company.

47

    Operating Leases

     As of December 31, 2006, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 35 real estate investments with expiration dates through 2079. The Company’s corporate office lease covers approximately 30,934 square feet of rented space and expires on October 31, 2010, with two five-year renewal options. Annual base rent on the corporate office lease increases approximately 3.25% annually and the Company’s ground leases generally increase annually based on increases in CPI. Rental expense relating to the operating leases for the years ended December 31, 2006, 2005 and 2004 was $4.0 million, $3.5 million and $2.7 million, respectively. The Company’s future minimum lease payments for its operating leases as of December 31, 2006 are as follows (in thousands):

2007	$	3,011
2008		3,053
2009		3,160
2010		3,101
2011		2,580
2012 and thereafter		204,163
	$	219,068

Legal Proceedings

     On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the Capstone officers and directors remained in their positions following the Company’s acquisition of Capstone. The complaint seeks an accounting and disgorgement of monies obtained by the allegedly wrongful conduct and other unspecified compensatory and punitive damages. There is currently a stay on discovery in the case. The plaintiff and certain defendants in the case reached an agreement to settle a portion of the claims presented in the case and such settlement was approved by the court in January 2007. This settlement did not include the Company or several other defendants. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.

     In May, 2006, Methodist Health System Foundation, Inc. (“the Foundation”) filed suit against a wholly-owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana. The Foundation is the sponsor under financial support agreements which support the Company’s ownership and operation of two medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an affiliate of Universal Health Services, Inc. in 2003. The Foundation’s assets and income are not primarily dependent upon the operations of Methodist Hospital, which has remained closed since Hurricane Katrina struck in August 2005. The Foundation’s suit alleges that Hurricane Katrina and its aftermath should relieve the Foundation of its obligations under the financial support agreements. The agreements do not contain any express provision allowing for termination upon a casualty event. The Company believes the Foundation’s claims are not meritorious and will vigorously defend the enforceability of the financial support agreements.

     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 financial condition or results of operations.

    Purchase Contracts

     The Company has executed a purchase agreement to acquire a property in Tennessee for approximately $7.3 million, which closed during the first quarter of 2007.

    Hurricane Casualty Losses

     The Company owns two multi-story office buildings in New Orleans, Louisiana that sustained flood and wind damage from Hurricane Katrina in August 2005. The buildings in Louisiana were temporarily closed after the hurricane, but were restored and re-opened on February 1, 2006.

48

     The Company has insurance coverage for damage caused by wind and flood, subject to certain deductibles and limitations. Estimated insurance recoveries, pursuant to the policy provisions, total approximately $2.1 million and are applied first to repairs and clean-up expenditures (to the extent not subject to coverage limitations), and then to capital replacements. Through December 31, 2006, the Company estimated its expenditures related to returning the New Orleans properties to their previous operating condition, as required by the contractual arrangements with tenants/sponsors, to be approximately $4.7 million. The $4.7 million estimate includes estimates for repairs, clean-up expenditures, and capital replacement expenditures.

     As of December 31, 2006, repairs and other expenditures necessary to return the properties to their previous operating condition were substantially completed. The Company received insurance proceeds totaling approximately $0.9 million during 2006 and had a remaining receivable of approximately $1.2 million at December 31, 2006 which is included in other assets on the accompanying Consolidated Balance Sheet. The Company recognized approximately $0.7 million and $1.9 million of net casualty losses during the year ended December 31, 2006 and December 31, 2005 respectively, which are included in depreciation expense in the accompanying Consolidated Statement of Income.

13. OTHER DATA (Unaudited)

    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 currently distribute at least 90% of its 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 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 years ended December 31, 2006:

	Year Ended December 31,
(In thousands)	2006			2005			2004
Net income	$	39,719		$	52,668		$	55,533
Items to Reconcile Net Income to Taxable Income:
Depreciation and amortization		19,499			15,519			12,189
Gain or loss on disposition of depreciable assets		5,010			2,851			668
Straight-line rent		(2,296	)		(97	)		(1,570	)
VIE Consolidation		1,110			3,183			6,861
Provision for bad debt		2,603			8,273			(4,200	)
Deferred compensation		3,832			4,314			3,554
Other		5,210			(2,494	)		(2,225	)
		34,968			31,549			15,277
Taxable income (1)	$	74,687		$	84,217		$	70,810

(1) Before REIT dividend paid deduction.

49

Characterization Of Distributions

     Distributions in excess of earnings and profits generally constitute a return of capital. The following table gives the characterization of the distributions on the Company’s common shares for the three years ended December 31, 2006, 2005 and 2004. For the three years ended December 31, 2006, 2005 and 2004, there were no preferred shares outstanding. As such, no dividends were distributed for those periods.

	2006					2005					2004
	Per share		%			Per share		%			Per share		%
Common Shares:
Ordinary Income	$	1.48		56.17	%	$	1.77		67.37	%	$	1.63		63.78	%
Return of Capital		1.14		43.00	%		0.74		28.20	%		0.92		36.22	%
20% Capital Gain		—		—			—		—			—		—
Unrecaptured section 1250 gain		0.02		0.83	%		0.12		4.43	%		—		—
Qualified 5-year Capital gain		—		—			—		—			—		—
Common shares distributions	$	2.64		100.00	%	$	2.63		100.00	%	$	2.55		100.00	%

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of cash and cash equivalents, receivables and payables are a reasonable estimate of their fair value as of December 31, 2006 and 2005 due to their short-term nature. The fair value of notes and bonds payable is estimated using cash flow analyses as of December 31, 2006 and 2005, based on the Company’s current interest rates for similar types of borrowing arrangements. The fair value of the mortgage 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. The fair value of the notes receivable is estimated using cash flow analyses based on assumed market rates of interest consistent with rates on 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 December 31, 2006 and 2005.

	December 31, 2006				December 31, 2005
(In millions)	Carrying value		Fair value		Carrying value		Fair value
Notes and bonds payable (1)	$	850.0	$	852.9	$	778.4	$	777.6
Mortgage notes receivable	$	73.9	$	70.4	$	105.8	$	106.0
Notes receivable, net of allowances	$	9.4	$	9.2	$	11.6	$	11.2

(1) In June 2006, the Company terminated two interest rate swaps on a notional amount of $125 million, where the underlying debt was $125 million of the Senior Notes due 2011. Prior to termination, the swaps had the effect of converting fixed rates to variable rates with respect to the notional amount. The fair value at December 31, 2005 includes the effect of the two interest rate swaps.

15. SUBSEQUENT EVENTS

    Dividend Declared

     On January 23, 2007, the Company declared its quarterly Common Stock dividend in the amount of $0.66 per share ($2.64 annualized) payable on March 2, 2007 to shareholders of record on February 15, 2007.

    Sale of the Senior Living Portfolio

     The Company announced on February 26, 2007 its plan to sell its portfolio of senior living assets. The portfolio includes 62 real estate properties and 16 mortgage notes and notes receivable, including properties related to all of the Company’s 21 VIEs, six of which were consolidated by the Company. See Note 1 for more information on these VIEs. Sales of the senior living properties are expected to close during the first and second quarters of 2007, subject to the terms of definitive agreements customary to these types of transactions. Proceeds of the sales are expected to fund repayments of debt on the Company’s Unsecured Credit Facility due 2009 and the payment of a one-time special dividend to its shareholders. Subsequent to the anticipated sales, the Company intends to reset its quarterly dividend to an amount commensurate with the smaller asset base resulting from the sales.

     Management has analyzed the impact of the plan to sell the assets in accordance with SFAS No. 144 and has concluded that these assets met the held for sale criteria during the first quarter of 2007. The major categories of assets and liabilities as of December 31, 2006 and 2005 and results of operations for the years ended December 31, 2006, 2005, and 2004 of the real estate properties and

50

mortgage notes and notes receivable to be sold which are included in the Company’s Consolidated Financial Statements are shown in the table below.

	December 31,
(Dollars in thousands)	2006			2005
Balance Sheet data (as of the period ended):
Land	$	15,082		$	15,008
Buildings, improvements and lease intangibles		317,881			313,965
Personal property		7,640			7,119
		340,603			336,092
Accumulated depreciation		(71,254	)		(60,574	)
Real estate properties, net		269,349			275,518
Cash and cash equivalents		439			189
Mortgage notes receivable		56,957			52,232
Other assets, net		14,339			15,935
Total assets	$	341,084		$	343,874
Notes and bonds payable	$	9,005		$	9,147
Accounts payable and accrued liabilities		3,392			3,996
Other liabilities		744			685
Total liabilities	$	13,141		$	13,828

	December 31,
	2006		2005			2004
Statements of Income data (for the years ended):
Revenues
Master lease rental income	$	24,920	$	22,565		$	19,178
Straight-line rent		0		(2,059	)		455
Mortgage interest income		5,913		3,538			968
Other operating income		19,380		18,841			16,078
		50,213		42,885			36,679
Expenses
General and administrative		529		542			509
Property operating expenses		719		1,262			2,274
Other operating expenses		17,035		15,882			14,517
Bad debt expense, net		299		11			(437	)
Interest		599		411			9
Depreciation		10,685		9,817			8,568
		29,866		27,925			25,440
Income from Continuing Operations	$	20,347	$	14,960		$	11,239
Income from Continuing Operations per basic common share	$	0.44	$	0.32		$	0.26
Income from Continuing Operations per diluted common share	$	0.43	$	0.32		$	0.25

51

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Quarterly financial information for the years ended December 31, 2006 and 2005 is summarized below. The results of operations have been restated, as applicable, to show the effect of reclassifying properties sold or to be sold as discontinued operations as required by SFAS No. 144.

	Quarter Ended
(in thousands, except per share data)	March 31		June 30			September 30			December 31
2006
Revenues from continuing operations	$	63,968	$	67,029		$	68,066		$	65,819
Income from continuing operations	$	7,886	$	11,742		$	8,223		$	7,656
Discontinued operations	$	4,609	$	(236	)	$	(160	)	$	(1	)
Net income	$	12,495	$	11,506		$	8,063		$	7,655
Basic Earnings per common share:
Income from continuing operations	$	0.17	$	0.25		$	0.18		$	0.16
Discontinued operations	$	0.10	$	0.00		$	(0.01	)	$	—
Net income	$	0.27	$	0.25		$	0.17		$	0.16
Diluted Earnings per common share:
Income from continuing operations	$	0.17	$	0.25		$	0.17		$	0.16
Discontinued operations	$	0.09	$	(0.01	)	$	—		$	—
Net income	$	0.26	$	0.24		$	0.17		$	0.16
2005
Revenues from continuing operations	$	59,911	$	59,963		$	65,676		$	66,222
Income from continuing operations	$	9,943	$	7,905		$	7,562		$	10,481
Discontinued operations	$	10,805	$	3,662		$	1,103		$	1,207
Net income	$	20,748	$	11,567		$	8,665		$	11,688
Basic Earnings per common share:
Income from continuing operations	$	0.22	$	0.17		$	0.16		$	0.22
Discontinued operations	$	0.23	$	0.08		$	0.03		$	0.03
Net income	$	0.45	$	0.25		$	0.19		$	0.25
Diluted Earnings per common share:
Income from continuing operations	$	0.21	$	0.17		$	0.16		$	0.22
Discontinued operations	$	0.23	$	0.07		$	0.02		$	0.03
Net income	$	0.44	$	0.24		$	0.18		$	0.25

52

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

	State
	of
Subsidiary	Incorporation
593HR, Inc.	TN
Bellaire Medical Plaza SPE, LLC	DE
Chippenham Medical Offices SPE, LLC	DE
Durham Medical Office Building, Inc.	TX
Healthcare Acquisition of Texas, Inc.	AL
Healthcare Realty Services Incorporated	AL
HR — Farmington, LLC	MI
HR — Novi, LLC	MI
HR Acquisition I Corporation	MD
HR Acquisition of Alabama, Inc.	AL
HR Acquisition of Pennsylvania, Inc.	PA
HR Acquisition of San Antonio, Ltd.	AL
HR Acquisition of Virginia Limited Partnership	AL
HR Assets, Inc. (inactive)	TX
HR Assets, LLC	DE
HR Interests, Inc.	TX
HR of Bay View, Inc.	AL
HR of Bonita Bay, Ltd.	AL
HR of California, Inc.	AL
HR of Cape Coral, Ltd.	AL
HR of Conway, Inc.	AL
HR of Kingsport, Inc.	AL

	State
	of
Subsidiary	Incorporation
HR of Las Vegas, Ltd.	AL
HR of Los Angeles, Inc.	AL
HR of Los Angeles, Ltd.	AL
HR of Massachusetts, Inc.	AL
HR of San Antonio, Inc.	TX
HR of Sarasota, Ltd.	AL
HR of South Carolina, Inc.	AL
HRT Holdings, Inc.	DE
HRT of Alabama, Inc.	AL
HRT of Delaware, Inc.	DE
HRT of Illinois, Inc.	DE
HRT of Louisiana, Inc.	LA
HRT of Mississippi, Inc.	DE
HRT of Roanoke, Inc.	VA
HRT of Tennessee, Inc.	TN
HRT of Virginia, Inc.	VA
HRT Properties of Texas, Ltd.	TX
Johnston-Willis Medical Offices SPE, LLC	DE
K-S Building SPE, LLC	DE
Pasadena Medical Plaza SSJ Ltd.	FL
Pennsylvania HRT, Inc.	PA
Property Technology Services, Inc.	TN
San Antonio SSP, Ltd.	TX
Southwest General Medical Building (TX) SPE, LLC	DE

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Healthcare Realty Trust Incorporated
Nashville, Tennessee

     We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-120695, No. 333-109306, No. 333-117590, and No. 333-79452) and on Form S-8 (No. 333-117590) of Healthcare Realty Trust Incorporated of our reports dated March 1, 2007, relating to the consolidated financial statements, and the effectiveness of Healthcare Realty Trust Incorporated’s internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 1, 2007 relating to the financial statement schedules, which appear in this Annual Report on Form 10-K.

/s/ BDO Seidman, LLP

Memphis, Tennessee
March 1, 2007

EX-31.1

EXHIBIT 31.1

HEALTHCARE REALTY TRUST INCORPORATED
ANNUAL CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David R. Emery, certify that:

     1. I have reviewed this annual report on Form 10-K of Healthcare Realty Trust Incorporated;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2007
	/s/ David R. Emery
	David R. Emery
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

HEALTHCARE REALTY TRUST INCORPORATED
ANNUAL CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott W. Holmes, certify that:

     1. I have reviewed this annual report on Form 10-K of Healthcare Realty Trust Incorporated;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2007
	/s/ Scott W. Holmes
	Scott W. Holmes
	Senior Vice President and
	Chief Financial Officer

EX-32

EXHIBIT 32

HEALTHCARE REALTY TRUST INCORPORATED
ANNUAL CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Healthcare Realty Trust Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Emery, Chairman of the Board and Chief Executive Officer of the Company, and I, Scott W. Holmes, Senior Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 28, 2007
	/s/ David R. Emery
	David R. Emery
	Chairman of the Board and Chief Executive Officer
	/s/ Scott W. Holmes
	Scott W. Holmes
	Senior Vice President and
	Chief Financial Officer