Healthcare Realty Trust Incorporated

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2004


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		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes x No o

As of November 1, 2004, 47,688,224 shares of the Registrant’s Common Stock were outstanding.

HEALTHCARE REALTY TRUST
INCORPORATED

FORM 10-Q

September 30, 2004

TABLE OF CONTENTS


		Page
Part I — Financial Information
	Item 1. Financial Statements
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		2
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
	Item 4. Controls and Procedures		28
Part II — Other Information
	Item 1. Legal Proceedings		29
	Item 6. Exhibits		30
Signature			31
Ex-10.2 Amended and Restated Employment Agreement
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO

Part I. FINANCIAL INFORMATION

Healthcare Realty Trust Incorporated

Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)


	September 30,			December 31,
	2004			2003
ASSETS
Real estate properties:
Land	$	146,649		$	139,732
Buildings, improvements and lease intangibles		1,705,993			1,405,426
Personal property		15,304			14,416
Construction in progress		38,709			13,198

		1,906,655			1,572,772
Less accumulated depreciation		(270,687	)		(232,763	)

Total real estate properties, net		1,635,968			1,340,009
Cash and cash equivalents		4,026			3,840
Mortgage notes receivable		60,765			91,835
Other assets, net		106,537			90,026

Total assets	$	1,807,296		$	1,525,710

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes and bonds payable	$	720,865		$	590,281
Accounts payable and accrued liabilities		36,389			15,649
Other liabilities		19,730			17,502

Total liabilities		776,984			623,432

Commitments		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued and outstanding		0			0
Common stock, $.01 par value; 150,000,000 shares authorized; outstanding 47,682,227 - 2004 and 42,823,916 - 2003		476			428
Additional paid-in capital		1,217,652			1,054,465
Deferred compensation		(16,031	)		(18,396	)
Cumulative net income		563,034			515,659
Cumulative dividends		(734,819	)		(649,878	)

Total stockholders’ equity		1,030,312			902,278

Total liabilities and stockholders’ equity	$	1,807,296		$	1,525,710

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2003, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Consolidated Statements of Income
For The Three Months Ended September 30, 2004 and 2003
(Dollars in thousands, except per share data)
(Unaudited)


	2004		2003
REVENUES:
Master lease rental income	$	23,386	$	21,564
Property operating income		30,352		18,523
Straight-line rent		354		811
Mortgage interest income		1,953		2,710
Other operating income		5,805		4,468

		61,850		48,076
EXPENSES:
General and administrative		3,067		2,701
Adjustment to amortization of deferred compensation		2,440		0
Property operating expenses		15,556		8,757
Interest		11,715		8,627
Depreciation		12,359		10,549
Amortization		2,775		13

		47,912		30,647

INCOME FROM CONTINUING OPERATIONS		13,938		17,429
DISCONTINUED OPERATIONS:
Operating income from discontinued operations		0		481
Loss on sale of real estate properties		0		(461	)

		0		20

NET INCOME	$	13,938	$	17,449

BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.31	$	0.42

Discontinued operations per common share	$	0.00	$	0.00

Net income per common share	$	0.31	$	0.42

DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.31	$	0.42

Discontinued operations per common share	$	0.00	$	0.00

Net income per common share	$	0.31	$	0.42

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC		44,784,456		41,087,329

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED		45,692,624		41,732,935

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	0.640	$	0.620

Healthcare Realty Incorporated

Consolidated Statements of Income
For The Nine Months Ended September 30, 2004 and 2003
(Dollars in thousands, except per share data)
(Unaudited)


	2004		2003
REVENUES:
Master lease rental income	$	69,106	$	65,875
Property operating income		77,862		52,852
Straight-line rent		844		2,001
Mortgage interest income		7,586		7,678
Other operating income		15,195		13,666

		170,593		142,072
EXPENSES:
General and administrative		9,307		8,235
Adjustment to amortization of deferred compensation		2,440		0
Property operating expenses		38,980		25,054
Interest		32,470		25,637
Depreciation		35,018		31,169
Amortization		5,003		40

		123,218		90,135

INCOME FROM CONTINUING OPERATIONS		47,375		51,937
DISCONTINUED OPERATIONS:
Operating income from discontinued operations		0		2,383
Loss on sale of real estate properties		0		(668	)

		0		1,715

NET INCOME	$	47,375	$	53,652

BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	1.11	$	1.27

Discontinued operations per common share	$	0.00	$	0.04

Net income per common share	$	1.11	$	1.31

DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	1.09	$	1.25

Discontinued operations per common share	$	0.00	$	0.04

Net income per common share	$	1.09	$	1.29

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC		42,751,434		40,939,067

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED		43,527,519		41,636,126

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	1.905	$	1.845

Healthcare Realty Trust Incorporated

Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 2004 and 2003
(Dollars in thousands)
(Unaudited)


	2004			2003
Cash flows from operating activities:
Net income	$	47,375		$	53,652
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		39,731			31,543
Deferred compensation amortization		2,548			2,074
Adjustment to amortization of deferred compensation		2,440			0
Increase in other liabilities		3,896			1,075
Increase in other assets		(10,054	)		(9,317	)
Increase in accounts payable and accrued liabilities		16,866			8,206
Increase in straight line rent		(232	)		(2,081	)
Loss on sale of real estate		603			668

Net cash provided by operating activities		103,173			85,820
Cash flows from investing activities:
Acquisition and development of real estate properties		(339,071	)		(78,644	)
Funding of mortgages		0			(28,952	)
Proceeds from sales of real estate		5,189			16,868
Proceeds from mortgage repayments		28,089			20,642

Net cash used in investing activities		(305,793	)		(70,086	)
Cash flows from financing activities:
Borrowings on notes and bonds payable		508,494			149,000
Repayments on notes and bonds payable		(378,798	)		(117,822	)
Dividends paid		(84,941	)		(77,533	)
Debt issuance costs		(2,566	)		0
Termination of interest rate swap		0			18,411
Common stock redemption		0			(10,902	)
Proceeds from issuance of common stock		160,617			24,724

Net cash provided by (used in) financing activities		202,806			(14,122	)

Increase in cash and cash equivalents		186			1,612
Cash and cash equivalents, beginning of period		3,840			402

Cash and cash equivalents, end of period	$	4,026		$	2,014

Healthcare Realty Trust
Incorporated

Notes to Consolidated Financial Statements

September 30, 2004

(Unaudited)

Note 1. Significant Accounting Policies

The accompanying unaudited Consolidated Financial Statements and Notes of Healthcare Realty Trust Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements that are included in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2003. Management believes, however, that all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2004 due to many reasons including, but not limited to, the adjustment to the amortization of deferred compensation recorded in the third quarter of 2004 as discussed below, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effect of trends as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

This interim financial information should be read in conjunction with the financial statements and MD&A included in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2003.

Stock Issued to Employees

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its equity-based awards to employees.

In the third quarter of 2004, management concluded that certain amendments related to retirement provisions in the employment agreements of certain officers that were effective as of January 1, 2000 impacted the measurement dates and amortization periods related to restricted stock reserved for or released, subject to vesting provisions, to those officers. The Company has concluded that the non-cash amortization of restricted stock for those officers for the years 2000 through 2003 was understated in total by approximately $2.3 million, and was understated by approximately $121,000 for the nine months ended September 30, 2004. Further, the Company concluded that the deferred compensation balance on the balance sheet was overstated by $7.3 million and the additional paid in capital balance was overstated by $4.9 million at September 30, 2004 due to the change in the measurement dates and the understatement of amortization expense. The adjustments related to prior period financial statements are not, in the opinion of management, material to the consolidated financial statements for each of the prior years or current year financial statements. Therefore, the Company has adjusted the deferred compensation balance, additional paid in capital balance, and related amortization expense in its Consolidated Financial Statements for the three and nine months ended September 30, 2004. There was no impact to total stockholders’ equity as a result of these adjustments.

The following table represents the effect on net income and earnings per share for the three and nine months ended September 30, 2004 and 2003, as if the Company had applied the fair value-based method and recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share data)	2004			2003			2004			2003
Net income, as reported	$	13,938		$	17,449		$	47,375		$	53,652
Compensation expense for equity-based awards to employees under the fair value method		(114	)		(112	)		(351	)		(337	)

Pro-forma net income	$	13,824		$	17,337		$	47,024		$	53,315
Earnings per share, as reported
Basic	$	0.31		$	0.42		$	1.11		$	1.31
Assuming dilution	$	0.31		$	0.42		$	1.09		$	1.29
Pro-forma earnings per share
Basic	$	0.31		$	0.42		$	1.10		$	1.30
Assuming dilution	$	0.30		$	0.42		$	1.08		$	1.28

During the three and nine months ended September 30, 2004, the Company granted 540 and 21,961 shares of restricted stock to directors and employees, respectively, under its various benefit plans having a value at the date of grant of approximately $20,500 and $0.9 million, respectively. The shares have vesting periods ranging from three to 12 years, though the amortization period may be shorter for awards to certain officers having employment agreements which allow for accelerated vesting of shares upon retirement.

Retirement Plans

The Company has retirement plans under which certain employees, as designated by the Compensation Committee of the Board of Directors, and the Company’s outside directors may receive retirement benefits. These benefits are described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The plans are unfunded and benefits will be paid from earnings of the Company. The following table sets forth the benefit obligation for the three and nine months ended September 30, 2004 and 2003.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2004			2003			2004			2003
Benefit obligation, beginning of period	$	5,755		$	5,145		$	5,682		$	4,609
Service costs		132			105			385			314
Interest costs		94			71			268			212
Other		(10	)		7			(306	)		23
Actuarial gain (loss)		0			86			(58	)		256

Benefit obligation, end of period		5,971			5,414			5,971			5,414
Unrecognized net actuarial gain		(643	)		(588	)		(643	)		(588	)

Net pension liability in accrued liabilities	$	5,328		$	4,826		$	5,328		$	4,826

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, revised December 2003, (“FIN 46R”), “Consolidation of Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity in its

financial statements. FIN 46R replaces FASB Interpretation No. 46, “Consolidations of Variable Interest Entities”, which was issued in January 2003. Beginning in 2004, the Company was required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation was applied beginning on January 1, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts was not practicable, fair value at the date FIN 46R was first applied could be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company adopted FIN 46R to existing VIEs in which it has variable interests. The adoption of FIN 46R did not have an impact on the Company’s Consolidated Balance Sheet.

Reclassifications

The Company has reclassified the lease guaranty amounts related to properties having property operating agreements from “property operating income” to “other operating income” (previously “interest and other income”) on the Company’s income statement. Property operating agreements between the Company and sponsoring health systems contractually obligate the sponsoring health systems to provide the Company with a minimum operating yield on its investment in the property in return for the right to control the use and other operating decisions of the property. If the Company’s minimum operating yield is not achieved through the normal operations of the property, the Company will calculate and accrue any lease guaranty amounts as income that the sponsor is responsible to pay to the Company under the terms of the property operating agreement. At September 30, 2004, 20 of the Company’s 255 properties involved this type of agreement. The lease guaranty amounts totaled $4.7 million and $3.5 million, respectively, for the three months ended September 30, 2004 and 2003 and totaled $12.2 million and $10.3 million, respectively, for the nine months ended September 30, 2004 and 2003.

The Company has also reclassified the amortization of its at-market lease intangible assets, recorded as part of the allocation of the purchase price of real estate assets acquired, from property operating income and depreciation expense to amortization expense. The amortization expense for these at-market lease intangibles for the three months ended September 30, 2004 and 2003 totaled $2.8 million and $0, respectively, and totaled $5.0 million and $0, respectively, for the nine months ended September 30, 2004 and 2003.

Note 2. Properties

The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and build-to-suit development services, and capital for the construction of new facilities as well as for the acquisition of existing properties. These activities constitute a single business segment as defined by the Financial Accounting Standards Board Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As of September 30, 2004, the Company had investments in 255 properties and mortgages located in 31 states as follows:


	Number of		Investments
	Properties		(in thousands)		Percent
Medical office/Outpatient facilities		166	$	1,305,765		66.4	%
Assisted living facilities		36		200,613		10.1	%
Skilled nursing facilities		36		199,854		10.1	%
Inpatient rehabilitation facilities		9		156,494		8.0	%
Independent living facilities		5		62,306		3.2	%
Other inpatient facilities		3		32,569		1.7	%
Corporate property		—		9,819		0.5	%

		255	$	1,967,420		100.0	%

Asset Acquisitions and Dispositions

During the first quarter of 2004, the Company invested $18.0 million in a 141,765 square foot medical office building on an Advocate Healthcare hospital campus in Illinois and invested $30.0 million in seven medical office buildings totaling 283,452 square feet on Ascension Health hospital campuses in Michigan and Arizona. The Company provides property management services on the buildings on Ascension Health campuses. These acquisitions were funded with proceeds from the Unsecured Credit Facility due 2006.

During the first quarter of 2004, the Company sold the annex portion of a physician clinic in Florida for $1.8 million, equal to the Company’s basis in the property. In this transaction, the Company received $0.5 million in cash proceeds and a $1.3 million mortgage note.

During the second quarter of 2004, the Company acquired six medical office buildings located in Tennessee from affiliates of Ascension Health, Inc. for $70.8 million with an aggregate square footage of approximately 711,198. The Company also acquired four medical office buildings from affiliates of MedStar Health, two of which are located in Washington, D.C., and two of which are located in Maryland, for $41.3 million with an aggregate square footage of approximately 269,539. The Company provides property management services for these ten buildings. Finally, the Company acquired a 27,895 square foot assisted living facility in Florida for $4.8 million, and purchased land in Hawaii for $5.8 million for the construction of a medical office building.

During the second quarter of 2004, the Company sold a 25,000 square foot assisted living facility in Georgia for $4.5 million. The Company has not accounted for this as discontinued operations because it was not considered material. Also, two mortgage notes receivable totaling $6.4 million were repaid in full and a $4.7 million mortgage note was converted into full equity ownership of a skilled nursing facility in Tennessee.

During the third quarter of 2004, the Company acquired from Baylor Health Care System 20 medical office buildings in and around Dallas, Texas for $133.0 million with an aggregate square footage of approximately 1.1 million. This acquisition was funded with proceeds from the equity offering described in Note 7. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


	Estimated Fair			Estimated
	Value			Useful Life
	(in thousands)			(in Years)
Land	$	3,692			N/A
Buildings		105,901			39
At-Market Lease Intangibles		15,459			1 to 9
Below-Market Lease Intangibles, net		(392	)		1.5 to 8
Ground Lease Intangible		6,791			75
Customer Relationship Asset		1,619			39

	$	133,070

During the third quarter, two mortgage notes receivable were repaid totaling $21.2 million. The proceeds from the repayments were used to partially repay the outstanding balance on the unsecured credit facility and for general corporate purposes. Also in the third quarter, the Company acquired a parcel of land in Texas for $1.8 million. Finally, the Company sold two parcels of land in Pennsylvania for $0.2 million in net proceeds.

Pro forma financial information reflecting the real estate acquisitions described above is included in Note 3 to the Consolidated Financial Statements.

Other Developments

A number of the Company’s properties are subject to options in favor of the operator to repurchase the properties for the amount of the Company’s investment. Completion of the repurchase is contingent upon the operator having access to funding and certain other matters covered by the applicable contracts. The Company has in the past received notices of the exercise of such options where the repurchase did not occur. On June 24, 2004, the Company received notice from a senior living operator that it intends to exercise options to purchase the properties it leases from the Company. A closing of the proposed purchase of these properties would be contingent upon the operator’s ability to secure financing and the resolution of other matters. Therefore, the Company cannot express an opinion as to whether or not the proposed purchase might occur or when it might close. However, as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has evaluated and concluded that it does not believe it is probable that the transactions will close in the next twelve months. As a result, the operations of these properties are not reflected as discontinued operations in the accompanying Consolidated Financial Statements. The properties covered by the purchase options exercised by this senior living operator comprise approximately $74.9 million of the Company’s assets and accounted for approximately 3.8% of the Company’s revenues on a consolidated basis for the nine months ended September 30, 2004. The Company has not received any other notices of intent to exercise options to purchase. The Company has real estate investments in properties with other operators totaling $258.5 million, which contain options with various conditions, terms, timing, and duration to purchase that are currently exercisable by the respective operators or lessees.

Note 3. Pro Forma Financial Information

Introduction to Unaudited Pro Forma Consolidated Financial Statements

The following unaudited pro forma Consolidated Income Statements for the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, present the results of operations of the Company as if the transactions described in the Notes to the Unaudited Pro Forma Financial Statements were completed on January 1, 2003. These unaudited pro forma financial statements should be read in connection with, and are qualified in their entirety by reference to the financial statements of the Company for the year ended December 31, 2003. These unaudited pro forma financial statements include management’s estimates and assumptions of future revenues and expenses and purchase price allocations of the disclosed properties, interest rates and capital financing requirements, among other items, and are not necessarily indicative of the expected results of operations of the Company for any future period. These pro forma financial statements include assumptions related only to transactions described in the Notes to the Unaudited Pro Forma Financial Statements and do not attempt to forecast actual expected results of operations of the Company for any future period.

Healthcare Realty Trust Incorporated
Unaudited Pro Forma Consolidated Statement of Income
For The Nine Months Ended September 30, 2004
(Dollars in thousands, except per share data)


			Pro Forma Adjustments
	Company		Ascension		Baylor		Other		Other
	Historical		Acquisition		Acquisition		Acquisitions		Adjustments			Pro Forma
			(A)		(A)		(A)		(C), (D)
REVENUES:
Master lease rental income	$	69,106	$	0	$	0	$	145	$	0		$	69,251
Property operating income		77,862		478		11,133		5,995		0			95,468
Straight line rent		844		9		130		93		0			1,076
Mortgage interest income		7,586		0		0		0		0			7,586
Other operating income		15,195		0		0		0		0			15,195

		170,593		487		11,263		6,233		0			188,576
EXPENSES:
General and administrative		9,307		0		0		0		0			9,307
Adjustment to amortization of deferred compensation		2,440		0		0		0		0			2,440
Property operating expenses		38,980		238		4,410		3,445		0			47,073
Interest		32,470		0		0		0		1,804			34,274
Depreciation		35,018		0		0		0		2,623			37,641
Amortization		5,003		0		0		0		4,599			9,602

		123,218		238		4,410		3,445		9,026			140,337

INCOME FROM CONTINUING OPERATIONS	$	47,375	$	249	$	6,853	$	2,788	$	(9,026	)	$	48,239

INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE — BASIC	$	1.11										$	1.04

INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE — DILUTED	$	1.09										$	1.02

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - - BASIC		42,751,434								3,584,672			46,336,106

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - - DILUTED		43,527,519								3,584,672			47,112,191

Healthcare Realty Trust Incorporated
Unaudited Pro Forma Consolidated Statement of Income
For The Twelve Months Ended December 31, 2003
(Dollars in thousands, except per share data)


			Pro Forma Adjustments
	Company		Ascension		Baylor		Other			Other
	Historical		Acquisition		Acquisition		Acquisitions			Adjustments			Pro Forma
			(B)		(B)		(B)			(C), (D)
REVENUES:
Master lease rental income	$	88,963	$	0	$	0	$	443		$	0		$	89,406
Property operating income		73,109		2,858		19,351		27,382			0			122,700
Straight line rent		2,553		52		226		404			0			3,235
Mortgage interest income		10,441		0		0		0			0			10,441
Other operating income		17,983		0		0		(27	)		0			17,956

		193,049		2,910		19,577		28,202			0			243,738
EXPENSES:
General and administrative		11,122		0		0		0			0			11,122
Property operating expenses		34,876		1,426		7,665		15,435			0			59,402
Interest		34,601		0		0		0			12,761			47,362
Depreciation		41,932		0		0		0			7,182			49,114
Amortization		1,315		0		0		0			11,305			12,620

		123,846		1,426		7,665		15,435			31,248			179,620

INCOME FROM CONTINUING OPERATIONS	$	69,203	$	1,484	$	11,912	$	12,767		$	(31,248	)	$	64,118

INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE — BASIC	$	1.68											$	1.40

INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE — DILUTED	$	1.66											$	1.38

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - - BASIC		41,129,282									4,600,000			45,729,282

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - - DILUTED		41,780,088									4,600,000			46,380,088

Notes to the Unaudited Pro Forma Financial Statements

(A) Unaudited Pro Forma Consolidated Income Statement Acquisition Adjustments for the Nine Months Ended September 30, 2004

Represents the impact of the Company’s acquisitions for the first nine months of 2004, as if those acquisitions were closed as of January 1, 2003. These transactions were funded by net proceeds from the issuance of the 5.125% $300.0 million senior notes due 2014 and net proceeds from the issuance of 4,600,000 shares of common stock during the third quarter of 2004 at a net price per share of $34.57. The results of operations of the acquired properties have been included in the historical results of the Company subsequent to the dates of the respective acquisitions. The results of operations of the acquired properties prior to the respective acquisition dates are reflected in the accompanying unaudited pro forma Consolidated Statement of Income under the respective pro forma adjustment column headings. The property acquisitions included in the pro forma adjustments for the nine months ended September 30, 2004 include the following:


		Number		Real Estate
Date		of		Investment (1)
Acquired	Location	Buildings		(in millions)
3/1/04	Chicago, IL		1	$	18.1
3/3/04	Detroit, MI (Ascension) (2)		3		20.9
3/8/04	Tucson, AZ		4		9.0
4/20/04	Baltimore, MD and Washington, D.C.		4		42.4
4/23/04	Nashville, TN		6		70.9
4/30/04	Ft. Walton, FL		1		4.8
7/30/04	Dallas/Ft. Worth Texas area (Baylor) (2)		20		133.0

			39	$	299.1

(1) Excludes closing and other costs included in the purchase price.

(2) The financial statements of the acquired properties were audited in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission.

(B) Unaudited Pro Forma Consolidated Income Statement Acquisition Adjustments for the Twelve Months Ended December 31, 2003

Represents the impact of the Company’s acquisitions throughout 2003 and 2004 as if those acquisitions were closed as of January 1, 2003. These transactions were funded with cash on hand, proceeds from the issuance of 5.125% $300.0 million senior notes due 2014, borrowings on the Company’s unsecured credit facility due 2006, and net proceeds from the issuance of 4,600,000 shares of common stock during the third quarter of 2004 at a net price per share of $34.57. The results of operations of the acquired properties have been included in the historical results of the Company subsequent to the dates of the respective acquisitions. The results of operations of the acquired properties prior to the respective acquisition dates are reflected in the accompanying unaudited pro forma Consolidated Statement of Income under the respective pro forma adjustment column headings. The property acquisitions included in the pro forma adjustments for the twelve months ended December 31, 2003 include the following:


		Number		Real Estate
Date		of		Investment (1)
Acquired	Location	Buildings		(in millions)
2/28/03	New Orleans, LA		2	$	10.8
9/12/03	San Antonio, TX		2		26.1
9/29/03	Honolulu, HI		2		20.7
3/1/04	Chicago, IL		1		18.1
3/3/04	Detroit, MI (Ascension) (2)		3		20.9
3/8/04	Tucson, AZ		4		9.0
4/20/04	Baltimore, MD and Washington, D.C.		4		42.4
4/23/04	Nashville, TN		6		70.9
4/30/04	Ft. Walton, FL		1		4.8
7/30/04	Dallas/Ft. Worth Texas area (Baylor) (2)		20		133.0

			45	$	356.7

(C) Depreciation and Amortization Adjustments to the Unaudited Pro Forma Consolidated Statements of Income

As required under Statement of Financial Accounting Standards No. 141, “Business Combinations,” the Company has estimated and allocated the investment in properties acquired to the various components acquired, including land, building, lease intangibles and customer relationship assets. The lease intangible assets are amortized over the average remaining term of the in-place leases upon acquisition, which is typically a shorter life than the estimated life of the building. For the properties acquired since January 1, 2002, the amortization period of these in-place leases has ranged from 13 to 106 months. The amortization of the lease intangible assets could substantially offset the increase to net income from the actual operating results of the acquired properties.

(D) Interest Expense Adjustments to the Unaudited Pro Forma Consolidated Statements of Income

Represents the pro forma net effect on interest expense resulting from the acquisitions described in the notes above, the issuance of the 5.125% senior notes due 2014, the issuance of 4,600,000 shares of common stock, and the change in the outstanding balance of the Company’s unsecured credit facility due 2006, as if these acquisitions and capital financing transactions had occurred on January 1, 2003.

Note 4. Notes and Bonds Payable

Notes and bonds payable at September 30, 2004 consisted of the following (in thousands):


Unsecured Credit Facility due 2006	$	9,000
Senior Notes due 2006		49,700
Senior Notes due 2011, net		311,363
Senior Notes due 2014, net		298,554
Mortgage notes payable		51,081
Other note payable		1,167

	$	720,865

At September 30, 2004, the Company was in compliance with the covenant requirements under its various debt instruments.

Unsecured Credit Facility due 2006

In October 2003, the Company replaced its existing $150.0 million credit facility with a new credit facility. The $300.0 million credit facility (the “Unsecured Credit Facility due 2006”) was entered into with a syndicate of 12 banks and may be increased to $350.0 million during the first two years at the Company’s option subject to it obtaining additional capital commitments from the banks; and the term may be extended one additional year. Rates for borrowings under the Unsecured Credit Facility due 2006 are, at the Company’s option, LIBOR based or based on the higher of the Federal Funds Rate plus -1/2 of 1% or the agent bank’s prime rate and can vary based on the Company’s debt rating. At September 30, 2004, the weighted average rate was 2.77%. In addition, the Company pays a facility fee of 0.35% on the commitment that may also fluctuate based on the Company’s debt rating. The Unsecured Credit Facility due 2006 contains certain representations, warranties, and financial and other covenants customary in such loan agreements. The Company had borrowing capacity of $291.0 million under the facility at September 30, 2004.

Senior Notes due 2006

In 2000, the Company privately placed $70.0 million of unsecured senior notes (the “Senior Notes due 2006”) with multiple purchasers affiliated with two institutions. The Senior Notes due 2006 bear interest at 9.49%, payable semi-annually, and mature on April 1, 2006. On March 31, 2004, the Company repaid $20.3 million of maturing principal and must repay $20.3 million of principal on April 1, 2005 with the remaining principal balance of $29.4 million payable upon maturity. The note agreements pertaining to the Senior Notes due 2006 contain certain representations, warranties and financial and other covenants customary in such loan agreements.

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 of $18.4

million. The fair value of the terminated swaps is combined with the principal balance of the Senior Notes due 2011 on the Company’s Consolidated Balance Sheet. The fair value gain of $18.4 million is being amortized against interest expense over the remaining term of the notes, offsetting the increase in the spread over LIBOR. At September 30, 2004, the aggregate fair value of the current hedge, $3.1 million, is combined with the principal balance of the Senior Notes due 2011 with an offsetting increase to other liabilities on the Company’s Consolidated Balance Sheet. The derivative instruments meet all requirements of a fair value hedge and have been accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value have had no impact on the Company’s Consolidated Income Statement.

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.

Mortgage Notes Payable

At September 30, 2004, the Company had outstanding ten non-recourse mortgage notes payable, with the related collateral, as follows (dollars in millions):


											Investment in		Contractual
			Effective								Collateral at		Balance at
	Original		Interest			Maturity		Number of Notes			September 30,		September 30,
	Balance		Rate			Date		Payable		Collateral	2004		2004
Life Insurance Co.	$	23.3		7.765	%		7/26		1	Medical office building	$	45.4	$	21.3
Life Insurance Co.		4.7		7.765	%		1/17		1	Medical office building		11.0		3.7
Commercial Bank		35.0		7.220	%		5/11		8	Ten medical office buildings		79.7		26.1

									10		$	136.1	$	51.1

The $23.3 million note is payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due in July 2026. The $4.7 million note is payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due in January 2017. The eight notes totaling $35.0 million and the related collateral are held by special purpose entities whose sole members are wholly owned subsidiaries of the Company. These eight fully amortizing notes are payable in monthly installments of principal and interest and mature in May 2011. The contractual interest rates for the ten outstanding mortgage notes range from 7.22% to 8.50%.

Other Note Payable

In 1999, the Company entered into a $7.0 million note with a commercial bank. This note bears interest at 7.53%, is payable in equal semi-annual installments of principal and interest, and fully amortizes in July 2005.

Interest Paid and Interest Capitalized

The Company paid interest of $1.4 million and $2.1 million, respectively, for the three months ended September 30, 2004 and 2003, and $19.2 million and $21.3 million, respectively, for the nine months ended September 30, 2004 and 2003. The Company capitalized interest of approximately $379,000 and $142,000, respectively, for the three months ended September 30, 2004 and 2003, and $972,000 and $529,000, respectively, for the nine months ended September 30, 2004 and 2003.

Note 5. Commitments and Contingencies

Construction in Progress

Legal Proceedings

On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned subsidiary 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 damages. The Company filed a motion to dismiss the case asserting various defenses. The motion was denied by the court in an order entered on September 28, 2004. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.

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.

Note 6. Net Income 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 and nine months ended September 30, 2004 and 2003 (dollars in thousands, except per share data). During the third quarter of 2004, the Company concluded that certain amendments related to retirement provisions in the employment agreements of certain officers that were effective as of January 1, 2000 impacted the measurement dates and amortization periods related to restricted stock reserved for or awarded to those officers (See Note 1 for further details). As a result, the Company recognized additional non-cash amortization expense in the third quarter of 2004 of approximately $2.4 million or $0.05 per diluted common share.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Weighted Average Shares
Weighted Average Shares Outstanding		46,092,008			42,206,768			44,042,019			42,058,506
Actual restricted stock shares		(1,307,552	)		(1,119,439	)		(1,290,585	)		(1,119,439	)

Weighted Average Shares — Basic		44,784,456			41,087,329			42,751,434			40,939,067

Weighted Average Shares — Basic		44,784,456			41,087,329			41,751,434			40,939,067
Dilutive effect of restricted stock shares		865,482			600,128			721,251			650,002
Dilutive effect of employee stock purchase plan		42,686			45,478			54,834			47,057

Weighted Average Shares — Diluted		45,692,624			41,732,935			43,527,519			41,636,126

Net Income Available to Common Stockholders
Income from Continuing Operations	$	13,938		$	17,429		$	47,375		$	51,937
Discontinued operations		0			20			0			1,715

Net income	$	13,938		$	17,449		$	47,375		$	53,652

Basic Earnings per Common Share
Income from Continuing Operations per common share	$	0.31		$	0.42		$	1.11		$	1.27

Discontinued Operations per common share	$	0.00		$	0.00		$	0.00		$	0.04

Net income per common share	$	0.31		$	0.42		$	1.11		$	1.31

Diluted Earnings per Common Share
Income from Continuing Operations per common share	$	0.31		$	0.42		$	1.09		$	1.25

Discontinued Operations per common share	$	0.00		$	0.00		$	0.00		$	0.04

Net income per common share	$	0.31		$	0.42		$	1.09		$	1.29

Note 7. Stockholders’ Equity

At September 30, 2004, the Company had outstanding 47,682,227 shares of common stock. 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.

Note 8. Subsequent Events

Common Stock Dividend

On October 26, 2004, the Company’s Board of Directors declared an increase in its quarterly common stock dividend from $0.640 per share ($2.56 annualized) to $0.645 per share ($2.58 annualized) payable on December 2, 2004 to shareholders of record on November 15, 2004.

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Overview

Healthcare Realty Trust Incorporated (the “Company”) operates under the Internal Revenue Code of 1986, as amended (the “Code”), as an indefinite life real estate investment trust (“REIT”). The Company, a self-managed and self-administered REIT, follows a general growth strategy that integrates owning, managing, and developing income-producing real estate properties and mortgages associated with the delivery of healthcare services throughout the United States. Management of Healthcare Realty Trust believes that by providing related real estate services, the Company can differentiate its competitive market position, expand its asset base and increase revenues.

Substantially all of the Company’s revenues are derived from rentals on its healthcare real estate properties and from interest earned on mortgage loans. Most of the Company’s leases and other financial support arrangements with respect to its healthcare real estate properties are designed to reduce the Company’s exposure to increased costs and expenses incurred from the operation of its healthcare properties. However, the Company is experiencing a trend in lease arrangements moving from net leases towards gross or modified gross leases, which could increase the Company’s exposure to higher operating costs and negatively impact the Company’s operating results.

Since the Company’s inception, it has been selective about its acquisitions of properties. Though the Company’s financial capacity typically allows it to take advantage of worthy investment opportunities as they arise, management believes that selecting long-term investments with leading healthcare providers will enhance the prospects for long-term stability and maintenance of the dividend. The Company’s diverse portfolio by facility type, state, occupant and type of agreement, helps mitigate its exposure to ever-changing economic conditions and other tenant, operator and occupant issues that arise from time to time. The Company has acquired approximately $299.1 million in properties during the first nine months of 2004.

Trends and Matters Impacting Operating Results

Management continuously 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 and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 are some of the factors and trends management believes may impact future operations of the Company.

Adjustment to Amortization of Deferred Compensation

In the third quarter of 2004, management concluded that certain amendments related to retirement provisions in the employment agreements of certain officers that were effective as of January 1, 2000 impacted the measurement dates and amortization periods related to restricted stock reserved for or released, subject to vesting provisions, to those officers. The Company has concluded that the non-cash amortization of restricted stock for those officers for the years 2000 through 2003 was understated in total by approximately $2.3 million and was understated by approximately $121,000 for the nine months ended September 30, 2004. Further, the Company concluded that the deferred compensation balance on the balance sheet was overstated by $7.3 million and the additional paid in capital balance was overstated by $4.9 million at September 30, 2004 due to the change in the measurement dates and the understatement of amortization expense. The adjustments to related prior period financial statements are not, in the opinion of management, material to the consolidated financial statements for each of the prior years or current year financial statements. Therefore, the Company has

adjusted the deferred compensation balance, additional paid in capital balance, and related amortization expense in its Consolidated Financial Statements for the three and nine months ended September 30, 2004. There was no impact to total stockholders’ equity as a result of these adjustments.

The Company’s non-cash restricted stock amortization will increase approximately $161,000 per year through year 2009 due to the adjustment described above.

FAS 141,“Business Combinations”

Statement of Financial Accounting Standards 141, “Business Combinations” (“FAS 141”) requires that when a building is acquired with in-place leases, the cost of the acquisition should 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 may include goodwill or a customer relationship asset. The value of above or below market in-place leases is amortized against rental income or property operating expenses over the average remaining term of the in-place leases upon acquisition, which is typically a shorter life than the estimated life of the building. The value of the at-market in-place leases is amortized over the average remaining term of the in-place leases upon acquisition and is reflected in amortization expense. For the properties acquired since January 1, 2002, the amortization period of these in-place leases has ranged from 13 to 106 months. The amortization of the lease intangibles could substantially offset the increase to net income from the actual operating results of the acquired property. The amount of in-place lease amortization recorded for the three and nine months ended September 30, 2004 was $2.8 million and $5.0 million, respectively.

Interest Expense

Proceeds from the issuance of the $300 million Senior Notes due 2014 were partially used to repay the outstanding balance on the Unsecured Credit Facility due 2006 of $220 million at the end of the first quarter of 2004 as well as to acquire properties. Although issued at a rate of 5.125%, the rate on the Senior Notes due 2014 has exceeded the rate on the Unsecured Credit Facility due 2006 by approximately 236 to 300 basis points since issued in the first quarter resulting in much higher interest expense, dampening the accretiveness of the acquisitions in 2004.

Equity Offering

As described in Note 7 to the Consolidated Financial Statements, the Company sold 4,600,000 shares of common stock during the third quarter of 2004. The net proceeds of the offering 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. On an earnings per share and FFO per share basis, these additional shares will have the effect of dampening the accretiveness of the acquisitions funded by the proceeds of the offering.

Real Estate Acquisitions

During the first nine months of 2004, the Company acquired approximately $299.1 million in real estate operations, discussed in more detail in Note 2 to the Consolidated Financial Statements. Though the Company continues to see opportunities for acquisitions of real estate properties and construction-related real estate projects, the Company does not expect the volume of acquisitions during 2004 to continue.

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.”

Management believes FFO and FFO per share to be important 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 significant non-cash items, primarily depreciation of real estate. 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; furthermore, because FFO per share is consistently and regularly 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 not 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 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 sets forth computations of FFO and FFO per share for the three and nine months ended September 30, 2004 and 2003 and reconciles FFO to net income. During the third quarter of 2004, the Company concluded that amendments to the employment agreements of certain officers, entered into in the year 2000, impacted the measurement dates and amortization periods related to restricted stock reserved for or awarded to those officers (see Note 1 to the Consolidated Financial Statements for further details). As a result, the Company recognized additional non-cash amortization expense in the third quarter of 2004 of approximately $2.4 million or $0.05 per diluted FFO per share.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2004		2003		2004		2003
Net income	$	13,938	$	17,449	$	47,375	$	53,652
Net loss on sales of real estate properties		37		461		603		668
Real estate depreciation and amortization		14,828		10,308		39,011		30,628

Total adjustments		14,865		10,769		39,614		31,296

Funds From Operations — Basic and Diluted	$	28,803	$	28,218	$	86,989	$	84,948

Funds From Operations Per Common Share — Basic	$	0.64	$	0.69	$	2.03	$	2.08

Funds From Operations Per Common Share — Diluted	$	0.63	$	0.68	$	2.00	$	2.04

Weighted Average Common Shares Outstanding — Basic		44,784,456		41,087,329		42,751,434		40,939,067

Weighted Average Common Shares Outstanding — Diluted		45,692,624		41,732,935		43,527,519		41,636,126

Results of Operations

Third Quarter 2004 Compared to Third Quarter 2003

Net income for the quarter ended September 30, 2004 totaled $13.9 million, or $0.31 per basic common share ($0.31 per diluted common share), on total revenues of $61.9 million. This compares with net income of $17.4 million, or $0.42 per basic and diluted common share, on total revenues of $48.1 million for the quarter ended September 30, 2003.

Total revenues for the quarter ended September 30, 2004 compared to the same period in 2003 increased $13.8 million or 28.6% due mainly to the acquisition of 49 properties during 2003 and 2004 (45 property-managed and four master-leased properties) and the commencement of operations of three properties that were previously under construction.

Total expenses for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003 increased $17.3 million or 56.3% mainly for the reasons discussed below:

• The Company recorded a non-cash amortization adjustment in the third quarter of 2004 related to certain officers’ restricted stock awards totaling $2.4 million. See Note 1 to the Consolidated Financial Statements for further details.

• Property operating expenses increased $6.8 million or 77.6% due mainly to the acquisition of 45 property-managed buildings during 2003 and 2004 and the commencement of operations of three properties that were previously under construction.

• Interest expense increased $3.1 million or 35.8% due mainly to the issuance in March 2004 of $300 million Senior Notes due 2014, offset by a reduction in interest expense due to the repayment in March 2004 of $20.3 million of the Senior Notes due 2006.

• Depreciation and amortization expenses increased $4.6 million or 43.3% due mainly to the acquisition of 49 buildings during 2003 and 2004 and the commencement of operations of three properties that were previously under construction. As discussed in more detail in “Trends and Matters Impacting Operating Results” above, the value of the in-place lease intangibles acquired in a real estate acquisition is amortized over the average remaining term of the in-place leases upon acquisition, a much shorter life than the estimated life of the building. The amount of in-place lease amortization recorded for the three months ended September 30, 2004 and 2003 was $2.8 million and $0, respectively.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Net income for the nine months ended September 30, 2004 totaled $47.4 million, or $1.11 per basic common share ($1.09 per diluted common share), on total revenues of $170.6 million. This compares with net income of $53.7 million, or $1.31 per basic common share ($1.29 per diluted common share), on total revenues of $142.1 million for the nine months ended September 30, 2003.

Total revenues for the nine months ended September 30, 2004 compared to the same period in 2003 increased $28.5 million or 20.1% due mainly to the acquisition of 49 properties during 2003 and 2004 (45 property-managed and four master-leased properties) and the commencement of operations of three properties that were previously under construction.

Total expenses for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 increased $33.1 million or 36.7% mainly for the reasons discussed below:

• Property operating expenses increased $13.9 million or 55.6% due mainly to the acquisition of 45 property-managed buildings during 2003 and 2004 and the commencement of operations of three properties that were previously under construction.

• Interest expense increased $6.8 million or 26.7% due mainly to the issuance of the $300 million Senior Notes due 2014 in March 2004, higher interest rates on the two interest rate swaps entered into in March 2003 than the interest rate swaps previously in place, reduced by the amortization of the $18.4 million fair value gain realized from the termination of the Company’s two interest rate swaps in March 2003. The increases were also partially offset by a reduction in interest expense due to the repayment in March 2004 of $20.3 million of the Senior Notes due 2006 and the repayment of three mortgage notes payable in October 2003.

• Depreciation and amortization expense increased $8.8 million or 28.2% due mainly to the acquisition of 49 buildings during 2003 and 2004 and the commencement of operations of three properties that were previously under construction. As discussed in more detail in “Trends and Matters Impacting Operating Results” above, the value of the in-place lease intangibles acquired in a real estate acquisition is amortized over the average remaining term of the in-place leases upon acquisition, a much shorter life than the estimated life of the building. The amount of in-place lease amortization recorded for the nine months ended September 30, 2004 and 2003 was $5.0 million and $0, respectively.

Liquidity and Capital Resources

Debt Obligations

As discussed in more detail in Note 4 to the Consolidated Financial Statements, the Company is committed to pay interest and outstanding principal balances on its notes and bonds payable as follows:

Contractual

Balance at

Interest

(dollars in thousands)

9/30/04

Maturity Date

Rate at 6/30/04

Payments

Principal Payments

Unsecured Credit Facility due 2006

9,000

10/06

LIBOR + 1.10%

Quarterly

At maturity (1)

Senior Notes due 2006

49,700

4/06

9.49

Semi-Annual

$20.3 million in 2005

and $29.4 million in

2006

Senior Notes due 2011, net

311,363

5/11

8.125

Semi-Annual

At maturity

Senior Notes due 2014, net

298,554

4/14

5.125

Semi-Annual

At maturity

Mortgage notes payable

51,081

5/11-7/26

7.22%-8.50

Monthly

Monthly or at maturity

Other note payable

1,167

7/05

7.53

Semi-Annual

720,865

(1) The Company pays a quarterly facility fee of 0.35% on the commitment that can change based on the Company’s credit rating.

As of September 30, 2004, 88% of the Company’s outstanding debt balances were due after 2008. The Company’s shareholders’ equity at September 30, 2004, totaled approximately $1.0 billion and its debt to total capitalization ratio, on a book basis, was approximately 0.41 to 1. For the nine months ended September 30, 2004, the Company’s earnings covered fixed charges at a ratio of 2.39 to 1.00. At September 30, 2004, the Company had borrowing capacity of $291.0 million under the Unsecured Credit Facility due 2006.

The Company’s senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s Investor Service, and Fitch Ratings, respectively.

At September 30, 2004, the Company was in compliance with the 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 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 of $18.4 million. The fair value of the terminated swaps is combined with the principal balance of the Senior Notes due 2011 on the Company’s balance sheet. The fair value gain of $18.4 million is being amortized against interest expense over the remaining term of the notes offsetting the increase in the spread over LIBOR. At September 30, 2004, the aggregate fair value of the current hedge, $3.1 million, is combined with the principal balance of the Senior Notes due 2011 with an offsetting increase to other liabilities on the Company’s Consolidated Balance Sheet. The derivative instruments meet all requirements of a fair value hedge and have been accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value have had no impact on the Company’s Consolidated Income Statement.

Shelf Registration

On March 30, 2004, the Company received $296.5 million in net proceeds from the issuance of the $300.0 million Senior Notes due 2014. In addition, the Company received $138.3 million in net proceeds from the issuance of the 4,000,000 shares of common stock on July 28, 2004, and received an additional $20.7 million in net proceeds from the issuance of 600,000 shares of common stock on August 5, 2004 in connection with the underwriters’ over-allotment option. On July 22, 2004, the Company filed a post-effective amendment on Form S-3 pursuant to Rule 462(b) for an additional $28.5 million in order to register additional securities for its equity offering. The Company may, under certain circumstances, borrow additional amounts in connection with the renovation or expansion of its properties, the acquisition or development of additional properties or, as necessary, to meet distribution requirements for REITs under the Internal Revenue Code. The Company may raise additional capital or make investments by issuing, in public or private transactions, its 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 September 30, 2004, the Company had approximately $7.0 million in letters of credit, security deposits, debt service reserves or capital replacement reserves for the benefit of the Company in the event the obligated lessee or operator fails to make payments under the terms of their respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.

Asset Acquisitions and Dispositions

During the first quarter of 2004, the Company invested $18.0 million in a 141,765 square foot medical office building on an Advocate Healthcare hospital campus in Chicago, Illinois and invested $30.0 million in seven medical office buildings totaling 283,452 square feet on Ascension Health hospital campuses in Michigan and Arizona.

Also, during the second quarter, the Company acquired a 27,895 square foot assisted living facility in Florida for $4.8 million, and purchased land in Hawaii for $5.8 million for the construction of a medical office building.

During the third quarter of 2004, the Company acquired from Baylor Health Care System 20 medical office buildings in and around Dallas, Texas for $133.0 million with an aggregate square footage of approximately 1.1 million. See Note 2 to the Consolidated Financial Statements for more details on this acquisition.

The Company funded these acquisitions from net proceeds from the issuance of the $300 million Senior Notes due 2014 and from the equity offering in the third quarter of 2004. The Company provides property management services for the Ascension Health, Medstar Health, and Baylor Health Care properties.

Other Developments

Investment Trends

The lower interest rate environment continues to create intense competition from highly leveraged financial intermediary property buyers. The Company believes that competition from such buyers will eventually subside as interest rates rise to historical levels. However, as growth in the Company’s top line revenues and growth in FFO are a direct reflection of the Company’s ability to make

accretive new investments that outpace disposals and mortgage maturities and prepayments, the Company anticipates that growth in its FFO may be modest or could decline.

Commitments

As of September 30, 2004, the Company had a net investment of approximately $32.6 million in two build-to-suit developments in progress, which have funding commitments remaining totaling approximately $23.2 million and are estimated to be completed late 2004 and mid-2005. The Company also has an investment in a land parcel of $6.1 million in Hawaii. The Company anticipates it will construct a medical office building on the land for an aggregate investment of approximately $47.0 million. The Company intends to fund these commitments with internally generated cash flows, proceeds from the Unsecured Credit Facility due 2006, proceeds from sales of real estate properties, proceeds from repayments of mortgage notes receivable, or proceeds from capital market financing.

Dividends

On July 27, 2004, the Company’s Board of Directors declared an increase in its quarterly common stock dividend from $0.635 per share ($2.54 annualized) to $0.64 per share ($2.56 annualized) payable to stockholders of record on August 16, 2004. This dividend was paid on September 2, 2004. On October 26, 2004, the Company’s Board of Directors declared another increase in the quarterly common stock dividend to $0.645 per share ($2.58 annualized) payable to stockholders of record on November 15, 2004. This dividend is payable on December 2, 2004 and relates to the period July 1, 2004 through September 30, 2004. While the Company has no present plans to change its quarterly common stock dividend policy, the dividend policy is reviewed each quarter by the Company’s Board of Directors.

Liquidity

Historically, the terms of the leases and other financial support agreements the Company has relating to its properties obligate the tenants or sponsors to pay the operating expenses and taxes relating to the properties. As a result of these types of arrangements, the Company does not believe any increases in property operating expenses or taxes would significantly impact the Company’s operating results with respect to those properties during the respective terms of the agreements. However, as the Company continues to acquire more owned and managed properties, a greater percentage of its lease arrangements are gross or modified gross. As such, the Company’s operating results may be negatively impacted from increases in operating expenses on properties with those types of lease arrangements.

The Company plans to continue to meet its liquidity needs, including funding additional investments in 2004 and 2005, paying quarterly dividends, and funding debt service, from its cash flows, proceeds from the Unsecured Credit Facility due 2006, proceeds from additional repayments of mortgage notes receivable, proceeds from the sale 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 or in sufficient amounts to meet its liquidity needs. See the Company’s Consolidated Statements of Cash Flows for further detail of the Company’s cash flows for the nine months ended September 30, 2004.

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 many 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 risk of any adverse effects of inflation to the Company. 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 arrangements. Leases and financial support arrangements vary in the remaining terms of obligations from one to 18 years, further reducing the risk of any adverse effects of inflation to the Company. Interest payable under the interest rate swaps and the unsecured credit facilities is calculated

at a variable rate; therefore, the amount of interest payable under the swaps and this debt 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 when interest rate increases outpace inflation, our operating results should be negatively impacted. Likewise, when increases in inflation outpace increases in interest rates, our operating results should be positively impacted.

Off-Balance Sheet Arrangements

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

Cautionary Language Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q 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. 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 Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2003.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three months ended September 30, 2004, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect its internal controls over financial reporting during the period covered by this report. The Company, however, continues its process of assessing, improving and formalizing its system of internal controls and disclosure controls and procedures.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned subsidiary 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 damages. The Company filed a motion to discuss the case asserting various defenses. The motion was denied by the court in an order entered on September 28, 2004. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.

Item 6. Exhibits


	Exhibit 3.1 Second Articles of Amendment and Restatement of the Registrant (1)

	Exhibit 3.2 Amended and Restated Bylaws of the Registrant (2)

	Exhibit 4.1 Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

	Exhibit 4.2 First Supplemental Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

	Exhibit 4.3 Form of 8.125% Senior Note Due 2011 (3)

	Exhibit 4.4 Second Supplemental Indenture, dated as of March 30, 2004, by the Company and Wachovia Bank, National Association (4)

	Exhibit 4.5 Form of 5.125% Senior Note Due 2014 (4)

	Exhibit 10.1 Underwriting Agreement, dated July 22, 2004, by and between the Company, Legg Mason Wood Walker, Incorporated, A.G. Edwards & Sons, Inc. and Wachovia Capital Markets, LLC (5)

	Exhibit 10.2 Amended and Restated Employment Agreement, dated as of July 28, 2004, by and between David R. Emery and Healthcare Realty Trust Incorporated (filed herewith).

	Exhibit 31.1 Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2 Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.

(2) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 1999 and hereby incorporated by reference.

(3) Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.

(4) Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.

(5) Filed as an exhibit to the Company’s Form 8-K filed July 27, 2004 and herby incorporated by reference

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HEALTHCARE REALTY TRUST INCORPORATED

By: /s/ Scott W. Holmes
Scott W. Holmes
Senior Vice President and Chief Financial Officer

Date: November 9, 2004

Exhibit Index


Exhibit		Description
Exhibit 3.1		Second Articles of Amendment and Restatement of the Registrant (1)

Exhibit 3.2		Amended and Restated Bylaws of the Registrant (2)

Exhibit 4.1		Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

Exhibit 4.2		First Supplemental Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

Exhibit 4.3		Form of 8.125% Senior Note Due 2011 (3)

Exhibit 4.4		Second Supplemental Indenture, dated as of March 30, 2004, by the Company and Wachovia Bank, National Association (4)

Exhibit 4.5		Form of 5.125% Senior Note Due 2014 (4)

Exhibit 10.1		Underwriting Agreement, dated July 22, 2004, by and between the Company, Legg Mason Wood Walker, Incorporated, A.G. Edwards & Sons, Inc. and Wachovia Capital Markets, LLC (5)

Exhibit 10.2		Amended and Restated Employment Agreement, dated as of July 28, 2004, by and between David R. Emery and Healthcare Realty Trust Incorporated (filed herewith).

Exhibit 31.1		Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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(A)		Unaudited Pro Forma Consolidated Income Statement Acquisition Adjustments for the Nine Months Ended September 30, 2004

		Represents the impact of the Company’s acquisitions for the first nine months of 2004, as if those acquisitions were closed as of January 1, 2003. These transactions were funded by net proceeds from the issuance of the 5.125% $300.0 million senior notes due 2014 and net proceeds from the issuance of 4,600,000 shares of common stock during the third quarter of 2004 at a net price per share of $34.57. The results of operations of the acquired properties have been included in the historical results of the Company subsequent to the dates of the respective acquisitions. The results of operations of the acquired properties prior to the respective acquisition dates are reflected in the accompanying unaudited pro forma Consolidated Statement of Income under the respective pro forma adjustment column headings. The property acquisitions included in the pro forma adjustments for the nine months ended September 30, 2004 include the following:

(1)		Excludes closing and other costs included in the purchase price.

(2)		The financial statements of the acquired properties were audited in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission.

(C)		Depreciation and Amortization Adjustments to the Unaudited Pro Forma Consolidated Statements of Income

		As required under Statement of Financial Accounting Standards No. 141, “Business Combinations,” the Company has estimated and allocated the investment in properties acquired to the various components acquired, including land, building, lease intangibles and customer relationship assets. The lease intangible assets are amortized over the average remaining term of the in-place leases upon acquisition, which is typically a shorter life than the estimated life of the building. For the properties acquired since January 1, 2002, the amortization period of these in-place leases has ranged from 13 to 106 months. The amortization of the lease intangible assets could substantially offset the increase to net income from the actual operating results of the acquired properties.

(D)		Interest Expense Adjustments to the Unaudited Pro Forma Consolidated Statements of Income

		Represents the pro forma net effect on interest expense resulting from the acquisitions described in the notes above, the issuance of the 5.125% senior notes due 2014, the issuance of 4,600,000 shares of common stock, and the change in the outstanding balance of the Company’s unsecured credit facility due 2006, as if these acquisitions and capital financing transactions had occurred on January 1, 2003.

(1)		Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.

(2)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 1999 and hereby incorporated by reference.

(3)		Filed as an exhibit to the Company’s Form 8-K filed May 17, 2001 and hereby incorporated by reference.

(4)		Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.

(5)		Filed as an exhibit to the Company’s Form 8-K filed July 27, 2004 and herby incorporated by reference



	By:	/s/ Scott W. Holmes
		Scott W. Holmes
		Senior Vice President and Chief Financial Officer