Healthcare Realty Trust Incorporated

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: September 30, 2005


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 o No þ

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

Yes þ Noo

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

As of November 1, 2005, 47,757,000 shares of the Registrant’s Common Stock were outstanding.

Part I. FINANCIAL INFORMATION

Healthcare Realty Trust Incorporated

Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)


	September 30,			December 31,
	2005			2004
ASSETS

Real estate properties:
Land	$	136,328		$	137,470
Buildings, improvements and lease intangibles		1,674,619			1,660,690
Personal property		21,495			16,327
Construction in progress		6,819			18,826

		1,839,261			1,833,313
Less accumulated depreciation		(303,466	)		(270,519	)

Total real estate properties, net		1,535,795			1,562,794

Cash and cash equivalents		5,386			2,683

Mortgage notes receivable		95,648			40,321

Assets held for sale, net		7,981			61,246

Other assets, net		96,110			83,766


Total assets	$	1,740,920		$	1,750,810


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Notes and bonds payable	$	741,564		$	719,264

Accounts payable and accrued liabilities		44,951			28,279

Other liabilities		23,002			22,651


Total liabilities		809,517			770,194


Commitments		—			—

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; outstanding 47,757,000 – 2005 and 47,701,108,– 2004		478			477

Additional paid-in capital		1,220,170			1,218,137

Deferred compensation		(13,559	)		(15,153	)

Cumulative net income		583,714			542,733

Cumulative dividends		(859,400	)		(765,578	)


Total stockholders’ equity		931,403			980,616


Total liabilities and stockholders’ equity	$	1,740,920		$	1,750,810

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, 2004, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Consolidated Statements of Income

For The Three Months Ended September 30, 2005 and 2004

(Dollars in thousands, except per share data)

(Unaudited)


	2005			2004
REVENUES:
Master lease rental income	$	18,908		$	18,065
Property operating income		35,441			29,844
Straight-line rent		267			329
Mortgage interest income		2,624			1,953
Other operating income		9,735			9,593

		66,975			59,784

EXPENSES:
General and administrative		4,682			3,105
Property operating expenses		19,108			15,277
Other operating expenses		4,291			3,566
Interest		12,318			11,735
Depreciation		15,013			11,312
Amortization		3,063			2,775

		58,475			47,770


INCOME FROM CONTINUING OPERATIONS		8,500			12,014

DISCONTINUED OPERATIONS:
Income from discontinued operations		171			2,879
Gain (loss) on sale of real estate properties and (impairments), net		(6	)		(37	)

		165			2,842

NET INCOME	$	8,665		$	14,856


BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.18		$	0.27

Discontinued operations per common share	$	0.01		$	0.06

Net income per common share	$	0.19		$	0.33


DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.18		$	0.26

Discontinued operations per common share	$	0.00		$	0.06

Net income per common share	$	0.18		$	0.32


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,484,410			44,958,369


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,443,704			45,866,536


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	0.660		$	0.640

Healthcare Realty Trust Incorporated
Consolidated Statements of Income
For The Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands, except per share data)
(Unaudited)


	2005			2004
REVENUES:
Master lease rental income	$	56,254		$	54,351
Property operating income		101,133			76,195
Straight-line rent		(1,143	)		718
Mortgage interest income		6,276			7,586
Other operating income		27,050			24,911

		189,570			163,761

EXPENSES:
General and administrative		12,006			9,566
Property operating expenses		53,609			39,072
Other operating expenses		11,879			10,716
Interest		35,920			32,511
Depreciation		38,858			31,850
Amortization		9,208			5,003

		161,480			128,718


INCOME FROM CONTINUING OPERATIONS		28,090			35,043

DISCONTINUED OPERATIONS:
Income from discontinued operations		6,118			9,452
Gain (loss) on sale of real estate properties and (impairments), net		6,773			(604	)

		12,891			8,848

NET INCOME	$	40,981		$	43,891


BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.60		$	0.82

Discontinued operations per common share	$	0.28		$	0.21

Net income per common share	$	0.88		$	1.03


DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.59		$	0.80

Discontinued operations per common share	$	0.27		$	0.20

Net income per common share	$	0.86		$	1.00


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,457,378			42,809,829


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,399,383			43,711,648


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	1.965		$	1.905

Healthcare Realty Trust Incorporated

Consolidated Statements of Cash Flows

For The Nine Months Ended September 30, 2005 and 2004

(Dollars in thousands)

(Unaudited)


	2005			2004
Cash flows from operating activities:
Net income	$	40,981		$	43,891
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		48,882			39,557
Deferred compensation amortization		2,835			2,663
Increase in other liabilities		588			3,921
Increase in other assets		(8,938	)		(5,128	)
Increase in accounts payable and accrued liabilities		16,682			17,449
(Increase) decrease in straight line rent		1,305			(232	)
(Gain) loss on sales of real estate and impairments		(6,773	)		604

Net cash provided by operating activities		95,562			102,725

Cash flows from investing activities:
Acquisition and development of real estate properties		(89,825	)		(338,760	)
Funding of mortgages and notes receivable		(65,316	)		(2,907	)
Proceeds from sales of real estate		130,079			5,189
Proceeds from mortgage and notes repayments		5,674			30,096

Net cash used in investing activities		(19,388	)		(306,382	)

Cash flows from financing activities:
Borrowings on notes and bonds payable		163,248			508,494
Repayments on notes and bonds payable		(143,690	)		(378,798	)
Dividends paid		(93,822	)		(84,941	)
Proceeds from issuance of common stock		793			160,616
Debt issuance costs		0			(2,566	)

Net cash provided by (used in) financing activities		(73,471	)		202,805


Increase (decrease) in cash and cash equivalents		2,703			(852	)
Cash and cash equivalents, beginning of period		2,683			4,917

Cash and cash equivalents, end of period	$	5,386		$	4,065

Healthcare Realty Trust
Incorporated

Notes to Consolidated Financial Statements

September 30, 2005

(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 of America 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 of America 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, 2004. 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, 2005 due to many reasons including, but not limited to, 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, 2004.

Significant inter-company accounts and transactions have been eliminated in the Consolidated Financial Statements.

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.

The following table represents the effect on net income and earnings per share for the three and nine months ended September 30, 2005 and 2004, 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)	2005			2004			2005			2004
Net income, as reported	$	8,665		$	14,856		$	40,981		$	43,891
Compensation expense for equity-based awards to employees under the fair value method		(216	)		(114	)		(621	)		(351	)

Pro-forma net income	$	8,449		$	14,742		$	40,360		$	43,540
Earnings per share, as reported
Basic	$	0.19		$	0.33		$	0.88		$	1.03
Assuming dilution	$	0.18		$	0.32		$	0.86		$	1.00
Pro-forma earnings per share
Basic	$	0.18		$	0.33		$	0.87		$	1.02
Assuming dilution	$	0.18		$	0.32		$	0.85		$	1.00

During the three and nine months ended September 30, 2005, the Company granted 0 and 30,529 shares, respectively of restricted stock to employees under its various benefit plans having a value at the date of grant of approximately $0 and $1.2 million, respectively. The shares have vesting periods ranging from 3 to 10 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.

Beginning in 2006, the Company will be required to adopt and account for its equity-based awards to employees based on Statement of Financial Accounting Standards No. 123R, “Share Based Payments.” The Company believes that this new pronouncement will only result in a change in the Company’s accounting for its employee stock purchase plan and does not believe the impact will be material to its results of operations.

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, 2004. 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, 2005 and 2004.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

(in thousands)	2005			2004			2005			2004

Benefit obligation, beginning of period	$	7,139		$	5,755		$	6,615		$	5,682
Service costs		149			132			449			385
Interest costs		102			94			306			268
Other		8			(10	)		27			(306	)
Actuarial gain (loss)		1			0			5			(58	)

Benefit obligation, end of period		7,399			5,971			7,402			5,971
Unrecognized net actuarial gain		(1,044	)		(643	)		(1,047	)		(643	)

Net pension liability in accrued liabilities	$	6,355		$	5,328		$	6,355		$	5,328

Note 2. Restatements

During 2005, the Company concluded that previously issued financial statements should be restated. The results of operations for the years ended December 31, 2004, 2003, 2002 and interim periods for the years ended December 31, 2004 and 2003 were restated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Note 3. Properties

The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and development services, and capital for the construction of new facilities as well as for the acquisition of existing properties. 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, 2005, the Company had investments in 246 properties and mortgages located in 29 states as follows:


	Number of		Investments
	Properties		(in thousands)		Percent
Medical office/Outpatient facilities(1)		162	$	1,311,795		67.5	%
Assisted living facilities		33		182,849		9.4	%
Skilled nursing facilities		32		185,212		9.5	%
Inpatient rehabilitation facilities		9		156,495		8.0	%
Independent living facilities		7		62,532		3.2	%
Other inpatient facilities		3		32,569		1.7	%
Corporate property		—		13,140		0.7	%

		246	$	1,944,592		100.0	%

(1) Includes assets held for sale totaling $9.7 million ($8.0 million, net) as of September 30, 2005.

Asset Acquisitions and Dispositions

During the first quarter of 2005, the Company invested in three mortgages totaling $50.4 million. The mortgages are secured by two groups of skilled nursing facilities and a group of assisted living facilities. Also, during the first quarter of 2005, a senior living operator purchased nine of the ten properties it leased from the Company producing net proceeds to the Company totaling $58.9 million, including the repayment of certain receivables. These nine properties covered by the purchase options exercised by this operator comprised approximately $62.5 million ($50.8 million, net) of the Company’s real estate properties. The Company recognized a gain of approximately $6.1 million from the sale of these nine properties. Finally, the Company sold a comprehensive ambulatory care center in Florida for net proceeds totaling $4.8 million. The Company recognized an impairment charge related to the sale of approximately $25,000. The proceeds received by the Company from the property dispositions were used to fund the three mortgage investments made during the quarter.

During the second quarter of 2005, the Company acquired seven senior living properties in Tennessee and South Carolina totaling $45.3 million; invested $11.1 million in a joint venture related to three medical office buildings in Washington; and invested in a $10.8 million mortgage secured by leasehold interests in a group of assisted living facilities. The $11.1 million joint venture is accounted for using the equity method and the company’s investment is included in “other assets” on the Company’s Consolidated Balance Sheet. Also, during the second quarter, a senior living operator exercised its remaining purchase option on 10 properties it leased from the Company by purchasing the tenth property for net proceeds to the Company of $12.1 million, including the repayment of certain receivables. This property comprised approximately $12.4 million ($10.4 million, net) of the Company’s real estate properties as of December 31, 2004. The Company recognized a gain of approximately $1.2 million from the sale of this property. Also, a second senior living operator exercised its purchase options on five properties it leased from the Company producing net proceeds to the Company totaling $53.2 million, including the repayment of certain receivables. The five properties covered by the purchase comprised approximately $50.3 million ($42.1 million, net) of the Company’s real estate properties as of December 31, 2004. The Company recognized a gain of approximately $0.2 million from the sale of the five properties. Finally, during the second quarter of 2005, a $2.9 million mortgage note receivable secured by an assisted living facility in South Carolina was repaid in full, a 19,000 square foot comprehensive ambulatory care center in Florida was sold for $1.9 million, resulting in a $0.7 million impairment charge, and the Company sold a land parcel in Texas for $2.0 million, resulting in no gain or loss.

During the third quarter of 2005, the Company acquired an assisted living facility in Florida for $11.2 million. Also, a $1.3 million mortgage note receivable secured by a physician clinic in Florida was repaid in full.

Purchase Options

The Company had real estate investments in properties totaling approximately $229.4 million, which contain options with various conditions, terms, timing, and duration to purchase that were exercisable by the respective operators or lessees that had not been exercised as of September 30, 2005.

On September 29, 2005, a sponsor under a property operating agreement gave notice to the Company of its intent to purchase three properties under property operating agreements with the Company with a target closing date in December 2005. The three properties covered by the purchase options exercised by this operator comprised approximately $9.7 million ($8.0 million, net) of the Company’s real estate properties and accounted for approximately 0.6% of the Company’s revenues for the nine months ended September 30, 2005. These three properties are included in “Assets Held For Sale” on the Company’s Consolidated Balance Sheet. The Company expects to recognize a gain from the sale of these properties.

Other Developments

In late August 2005, Hurricane Katrina struck the gulf coast region of the United States causing widespread flooding in New Orleans, Louisiana, where the Company owns two multi-story medical office buildings representing a total gross investment of $11.7 million, with a net investment of $10.1 million as of September 30, 2005. These buildings sustained flood damage to the first floor and wind damage. Based on communications with the Company’s insurance carriers and the restoration contractor, preliminary indications are that the two buildings sustained damage from wind and flood of up to $4.0 million. Based on these preliminary estimates, during the third quarter of 2005 the Company recorded a loss of $2.7 million. We are not currently receiving rental income from building tenants, though our property insurance provides coverage for business interruption for a period of up to one year. In addition, the buildings are supported by Property Operating Agreements, which guarantee a net return to the Company of at least $1.2 million per year through 2018. We believe the Property Operating Agreement sponsor is solvent and its income and assets are not dependent upon the operations of the adjoining hospital, which has not yet re-opened. The Company has no reason to believe that the sponsor cannot honor its obligations under the Property Operating Agreement and, therefore, has no reason to believe that the properties are impaired. None of the other hurricanes that struck the United States during the 2005 hurricane season caused any significant damage to any of the Company’s other properties.

Note 4. Notes and Bonds Payable

Notes and bonds payable at September 30, 2005 consisted of the following (in thousands):


Unsecured Credit Facility due 2006	$	49,000
Senior Notes due 2006		29,400
Senior Notes due 2011, net		307,862
Senior Notes due 2014, net		298,676
Mortgage notes payable		56,626
Other note payable		0

	$	741,564

At September 30, 2005, the Company was in compliance with the covenant requirements under its various debt instruments, except that the Company had not timely reported financial information for the year ended December 31, 2004 and the quarters ended March 31 and June 30, 2005 as required under covenants related to its various debt instruments. The Company obtained a waiver from its lenders under its Unsecured Credit Facility due 2006 to waive the financial reporting requirements through November 30, 2005 but was not required to obtain waivers for its other debt instruments.

Unsecured Credit Facility due 2006

In 2003, the Company entered into a $300.0 million credit facility (the “Unsecured Credit Facility due 2006”) with a syndicate of 12 banks, which 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. The credit facility matures in October 2006, but 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, 2005, the weighted average rate was 4.81%. 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 remaining, under its financial covenants, of $179.0 million under the facility at September 30, 2005.

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 and on April 1, 2005, the Company repaid $20.3 million of maturing principal in each year 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, 2005, the aggregate fair value of the current swaps, $4.8 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, 2005, the Company had outstanding twelve 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		Sept. 30,		Sept. 30,
	Balance		Rate	Date	Payable	Collateral	2005		2005

Life Insurance Co.	$	23.3	7.765%	7/26	1	Medical office building	$	45.9	$	20.9
Life Insurance Co.		4.7	7.765%	1/17	1	Medical office building		11.0		3.5
Commercial Bank		35.0	7.220%	5/11	8	Ten medical office buildings		79.8		23.0
Commercial Bank		5.6	5.550%	4/31	1	Skilled nursing facility		10.0		5.2
Commercial Bank		4.0	8.000%	4/32	1	Skilled nursing facility		8.0		4.0

					12		$	154.7	$	56.6

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 are fully amortizing notes payable in monthly installments of principal and interest and mature in May 2011. The $5.6 million note is payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due in April 2031. The $4.0 million note is payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due in April 2032. The contractual interest rates for the twelve outstanding mortgage notes ranged from 5.5% to 8.50% at September 30, 2005.

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% and is payable in equal semi-annual installments of principal and interest. This note was repaid in full in July 2005.

Other Long Term Debt Information

The Company paid interest of $1.8 million and $1.4 million, respectively, for the three months ended September 30, 2005 and 2004, and $26.6 million and $19.2 million, respectively, for the nine months ended September 30, 2005 and 2004. The Company capitalized interest of approximately $317,000 and

$352,000, respectively, for the three months ended September 30, 2005 and 2004, and $1.2 million and $0.9 million, respectively, for the nine months ended September 30, 2005 and 2004.

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 September 30, 2005 and 2004 was $0.4 million and $0.5 million, respectively.

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 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 that is expected to be in effect through the remainder of 2005. 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. 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 and nine months ended September 30, 2005 and 2004 (dollars in thousands, except per share data).


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2005			2004			2005			2004

Weighted Average Shares
Weighted Average Shares Outstanding		47,758,528			46,265,921			47,742,312			44,116,919
Unvested Restricted Stock Shares		(1,274,118	)		(1,307,552	)		(1,284,934	)		(1,307,090	)

Weighted Average Shares – Basic		46,484,410			44,958,369			46,457,378			42,809,829


Weighted Average Shares – Basic		46,484,410			44,958,369			46,457,378			42,809,829
Dilutive effect of Restricted Stock Shares		909,071			865,481			891,934			846,985
Dilutive effect of Employee Stock Purchase Plan		50,223			42,686			50,071			54,834

Weighted Average Shares – Diluted		47,443,704			45,866,536			47,399,383			43,711,648


Earnings per Common Share
Income from Continuing Operations	$	8,500		$	12,014		$	28,090		$	35,043
Discontinued operations		165			2,842			12,891			8,848

Net income	$	8,665		$	14,856		$	40,981		$	43,891


Basic Earnings per Common Share
Income from Continuing Operations per common share	$	0.18		$	0.27		$	0.60		$	0.82

Discontinued Operations per common share	$	0.01		$	0.06		$	0.28		$	0.21

Net income per common share	$	0.19		$	0.33		$	0.88		$	1.03


Diluted Earnings per Common Share
Income from Continuing Operations per common share	$	0.18		$	0.26		$	0.59		$	0.80

Discontinued Operations per common share	$	0.00		$	0.06		$	0.27		$	0.20

Net income per common share	$	0.18		$	0.32		$	0.86		$	1.00

Note 7. Subsequent Events

Common Stock Dividend

On November 3, 2005, the Company’s Board of Directors declared its quarterly common stock dividend in the amount of $0.660 per share ($2.64 annualized) payable on December 2, 2005 to shareholders of record on November 17, 2005.

Purchase Options

On November 15, 2005, a lessee gave notice to the Company of its intent to purchase, during the second quarter of 2006, a medical office building it leases from the Company under a master lease agreement. Based on the master lease agreement, the lessee’s purchase price will be equal to the fair market value of the property, to be determined by an appraisal process specified in the master lease. The property comprised approximately $16.4 million ($13.8 million, net) of the Company’s real estate properties at December 31, 2004 and accounted for approximately 1.1% of the Company’s revenues for the year ended December 31, 2004. The Company believes it will recognize a gain on the transaction.

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

Business 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 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, from interest earned on mortgage loans, and from revenues from the consolidation of variable interest entities (“VIEs”) related to six senior living facilities owned by the Company. The Company typically incurs operating and administrative expenses, including compensation expense, office rental and other related occupancy costs, as well as various expenses incurred in connection with managing the 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

The Company continues to be well-positioned from a capital structure and liquidity viewpoint by maintaining a conservative debt-to-book capitalization ratio, by maintaining capacity on its unsecured credit facility due 2006 ($49.0 million outstanding with $179.0 million remaining capacity as of September 30, 2005 under its financial covenants), and by continuing to review and restructure maturities on its debt commitments (no significant repayments on long-term debt until the year 2011).

Since the Company’s inception, it has been selective about the properties it acquires. Management believes that by selecting conservative, long-term investments with healthcare providers, the Company will enhance its prospects for long-term stability and maintenance of the dividend. The Company’s portfolio, diversified by facility type, geography, and tenant concentration, helps mitigate its exposure to ever-changing economic conditions and tenant and sponsor credit risks.

The Company, though historically having increased the dividend each quarter, decided to maintain the quarterly dividend for the third quarter of 2005 at the same level as the previous quarter. The Company will determine future dividend policy based upon cash generated by operating activities, the Company’s financial condition, relevant financing instruments, capital requirements, annual distribution requirements under the REIT provisions of the Code, and other such factors deemed relevant.

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 and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 are some of the factors and trends that management believes may impact future operations of the Company.

Purchase Options

On January 18, 2005, a senior living operator purchased nine of the ten properties it leased from the Company producing net sales proceeds to the Company totaling $58.9 million, including the repayment of certain receivables, and purchased the tenth property in May 2005 producing net sales proceeds to the Company totaling $12.1 million, including the repayment of certain receivables. The ten properties covered by the purchase options exercised by this operator comprised approximately $74.9 million ($61.2 million, net) of the Company’s real estate properties and accounted for approximately 3.5% of the Company’s revenues for the year ended December 31, 2004. The Company recognized a gain of approximately $6.1 million from the sale of the nine properties in January 2005 and recognized a gain of approximately $1.2 million from the sale of the tenth property in the second quarter of 2005.

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 $53.2 million, including the repayment of certain receivables. The five properties covered by the purchase options exercised by this operator comprised approximately $50.3 million ($42.1 million, net) of the Company’s real estate assets and accounted for approximately 2.5% of the Company’s revenues for the year ended December 31, 2004. The Company recognized a gain of approximately $0.2 million from the sale of the five properties.

As of September 30, 2005, the Company had reinvested all of the proceeds from these two purchases by acquiring approximately $128.7 million of new properties or mortgages. However, since the proceeds were not reinvested immediately, net income for the interim periods of 2005, through September 30, 2005, was negatively impacted.

On September 29, 2005, a sponsor under a property operating agreement gave notice to the Company of its intent to purchase three properties under property operating agreements with the Company with a target closing date in December 2005. The three properties covered by the purchase options exercised by this operator comprised approximately $9.7 million ($8.2 million, net) of the Company’s real estate properties and accounted for approximately 0.6% of the Company’s revenues for the year ended December 31, 2004. The Company expects to recognize a gain from the sale of these properties.

The exercise of the purchase options noted above is largely a function of the historically low interest rate environment. In each case, the operator or sponsor was able to replace higher rate lease or support obligations to the Company with lower rate mortgage debt. The Company cannot predict whether additional purchase options will we exercised, but the Company has not received notice of exercise of any other purchase options through November 15, 2005. The Company has real estate investments in properties totaling approximately $229.4 million at September 30, 2005, which contain options with various conditions, terms, timing, and duration to purchase that have not been exercised.

Investment Trends

As of September 30, 2005, approximately 56% of the Company’s real estate investments consist of properties currently 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 44% are multi-tenanted properties with occupancy leases, but without other financial support agreements. The Company’s recent medical office real estate acquisitions have not included master lease or financial support arrangements with the health systems on whose campuses the acquired properties are located. The income from these recent investments is derived solely from rents paid by the occupying tenants, which include physician practices

and hospital operations. The Company expects future medical office investments to follow this trend, which the Company believes gives it greater opportunity to manage long-term revenue growth. In addition to its medical office investments, the Company also continues to see investment opportunities in the senior living sector of the healthcare industry. The Company may make additional acquisitions of senior living properties or invest in mortgage loans secured by senior living properties.

FAS 144, “Discontinued Operations”

Financial Accounting Standards Board Statement No. 144, “Discontinued Operations,” (“FAS 144”) requires that the Company present all significant real estate disposals since December 31, 2001 as discontinued operations. As a result, each time the Company disposes of a significant real estate asset, the results of operations from that asset will be classified as discontinued operations for the current period, and all prior periods presented will be restated to conform to the current period presentation. As a result, readers of the Company’s financial statements should be aware that each future disposal may result in a change to the presentation of the Company’s operations in the historical statements of income as previously filed. Such income statement reclassifications would have no impact on previously reported net income.

FAS 141,”Business Combinations”

When a building is acquired with in-place leases, Financial Accounting Standards Board Statement No. 141, “Business Combinations,” (“FAS 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 in-place leases upon acquisition, which is typically a shorter period than the ordinary depreciation period for the building. The value of at-market in-place leases is also amortized over the average remaining term of the in-place leases upon acquisition, which is typically a shorter period than the ordinary depreciation period for the building, and is reflected in amortization expense.

Variable Interest Entities

Included in the Company’s Consolidated Financial Statements for the three months ended September 30, 2005 and 2004 are the assets, liabilities and results of operations of variable interest entities (“VIEs”) related to six senior living properties owned by the Company. The Company has contractual lease and note arrangements with the VIEs and records on its books rental and interest revenue related to these arrangements. However, in consolidation, these amounts are eliminated against the rental and interest expense amounts on the VIEs books that are consolidated in the Company’s Consolidated Financial Statements. As a result, on a consolidated basis, what is reflected in the Company’s Consolidated Financial Statements are the operations of the VIEs rather than the rental income and interest income generated from the contractual lease and note arrangements the Company has with the VIEs.

If circumstances dictate, the structure of future transactions with operators may also create VIEs, resulting in consolidation of the entity’s results of operations.

Impairment Charges

As required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), the Company must assess the potential for impairment of its long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicate that the net carrying value might not be fully recoverable. In 2003, the SEC issued a statement that impairment charges could not be added back to net income in calculating FFO. As a result, impairment charges may be recognized from time to time that will negatively impact FFO.

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 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; 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 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 and nine months ended September 30, 2005 and 2004. FFO for the three and nine months ended September 30, 2004 has been restated. The restatement, described further in Note 2 to the Consolidated Financial Statements filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, decreased (increased) FFO by ($0.9) million and $3.6 million, respectively, and decreased (increased) FFO per diluted common share by $(0.02) and $0.09, respectively, for the three and nine months ended September 30, 2004.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

(Dollars in thousands, except per share data)			2004					2004
	2005		(Restated)			2005			(Restated)

Net income	$	8,665	$	14,856	$	40,981		$	43,891
Net (gain) loss on sales of real estate properties		6		37		(7,483	)		604
Real estate depreciation and amortization		17,889		14,782		47,721			38,871

Total adjustments		17,895		14,819		40,238			39,475

Funds From Operations – Basic and Diluted	$	26,560	$	29,675	$	81,219		$	83,366

Funds From Operations Per Common Share – Basic	$	0.57	$	0.66	$	1.75		$	1.95

Funds From Operations Per Common Share – Diluted	$	0.56	$	0.65	$	1.71		$	1.91

Weighted Average Common Shares Outstanding – Basic		46,484,410		44,958,369		46,457,378			42,809,829

Weighted Average Common Shares Outstanding – Diluted		47,443,704		45,866,536		47,399,383			43,711,648

Results of Operations

Third Quarter 2005 Compared to Third Quarter 2004

Net income for the quarter ended September 30, 2005 totaled $8.7 million, or $0.19 per basic common share ($0.18 per diluted common share), on total revenues from continuing operations of $67.0 million. This compares with net income of $14.9 million, or $0.33 per basic common share ($0.32 per diluted common share), on total revenues from continuing operations of $59.8 million for the quarter ended September 30, 2004.

Total revenues from continuing operations for the quarter ended September 30, 2005 compared to the same period in 2004 increased $7.2 million or 12.0%. This increase was due mainly to the acquisition of $133.0 million of real estate properties during the third quarter of 2004; the acquisition of $56.5 million of real estate properties during 2005; annual CPI or base rent increases; the commencement of operations of two properties that were previously under construction; and the acquisition of $61.2 million of mortgage notes receivable during 2005, offset partially by the repayment of $56.7 million of mortgage notes receivable during 2004 and 2005.

Total expenses for the quarter ended September 30, 2005 compared to the quarter ended September 30, 2004 increased $10.7 million or 22.4% mainly for the reasons discussed below:

• General and administrative expenses increased $1.6 million or 50.8% due mainly to additional audit fees accrued, fees paid to the lenders under the unsecured credit facility due 2006 related to the waiver received for the untimely delivery of audited financial statements for the year ended December 31, 2004, additional payroll and benefits paid in 2005 due to additional employees and annual salary increases, and severance related expenses related to the elimination of four employee positions with the Company.

• Property operating expenses increased $3.8 million or 25.1% due mainly to the acquisition of $133.0 million of real estate properties during the third quarter of 2004 and the commencement of operations of two properties that were previously under construction.

• Other operating expenses increased $0.7 million or 20.3% due to increases in expenses from the variable interest entities consolidated in the Company’s Consolidated Financial Statements.

• Interest expense increased $0.6 million or 5.0% due to increases in interest rates, a higher outstanding balance in 2005 than in 2004 on the unsecured credit facility due 2006, offset partially by a decrease in interest expense from the repayment of $20.3 million in 2005 on the senior notes due 2006.

• Depreciation and amortization expenses increased $4.0 million or 28.3% due mainly to the amortization of lease intangible assets recorded related to the acquisition of $133.0 million of real estate properties during the third quarter of 2004; the acquisition of $56.5 million of real estate properties during 2005; and the commencement of operations of two properties that were previously under construction.

Income from discontinued operations totaled $0.2 million and $2.8 million, respectively, for the three months ended September 30, 2005 and 2004, which includes the results of operations and gains or impairments related to property disposals during 2004 and 2005, as well as assets classified as held for sale. The Company disposed of two properties in 2004 and 17 properties in 2005, and classified three properties as held for sale as of September 30, 2005 that are targeted to close during the second quarter of 2006.

Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004

Net income for the nine months ended September 30, 2005 totaled $41.0 million, or $0.88 per basic common share ($0.86 per diluted common share), on total revenues from continuing operations of $189.6 million. This compares with net income of $43.9 million, or $1.03 per basic common share ($1.00 per diluted common share), on total revenues from continuing operations of $163.8 million for the nine months ended September 30, 2004.

Total revenues from continuing operations for the nine months ended September 30, 2005 compared to the same period in 2004 increased $25.8 million or 15.8% mainly for the reasons discussed below:

• Master lease rental income increased $1.9 million or 3.5% due mainly to the acquisition of $56.5 million of real estate properties under master lease agreements during 2005, as well as, annual CPI or base rent increases.

• Property operating income increased $24.9 million or 32.7% due mainly to the acquisition of $299.0 million of real estate properties during 2004 and the commencement of operations of two properties that were previously under construction.

• Straight line rent decreased $1.9 million or 259.2% due mainly to the reversal of a $2.1 million straight line rent receivable due to the restructuring of three leases with an operator.

• Mortgage interest income decreased $1.3 million or 17.3% due mainly to the repayment of $52.6 million of mortgage notes receivable during 2004 ($41.5 million during the third and fourth quarters of 2004), offset partially by the acquisition of $61.2 million of mortgage notes receivable during the first nine months of 2005.

• Other operating income increased $2.1 million or 8.6% due mainly to increases in revenues from the variable interest entities consolidated in the Company’s Consolidated Financial Statements.

Total expenses for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 increased $32.8 million or 25.5% mainly for the reasons discussed below:

• General and administrative expenses increased $2.4 million or 25.5% due mainly to additional audit fees accrued, fees paid to the lenders under the unsecured credit facility due 2006 related to the waiver received for the untimely delivery of audited financial statements for the year ended December 31, 2004, additional payroll and benefits paid in 2005 due to additional employees and annual salary increases, and severance related expenses related to the elimination of four employee positions with the Company.

• Property operating expenses increased $14.5 million or 37.2% due mainly to the acquisition of $299.0 million of real estate properties during 2004 and the commencement of operations of two properties that were previously under construction.

• Other operating expenses increased $1.2 million or 10.9% due to increases in revenues from the variable interest entities consolidated in the Company’s Consolidated Financial Statements.

• Interest expense increased $3.4 million or 10.5% due to increases in interest rates, a higher outstanding balance in 2005 than in 2004 on the unsecured credit facility due 2006, offset partially by a decrease in interest expense from the repayments of $20.3 million in each of the years 2005 and 2004 on the senior notes due 2006.

• Depreciation and amortization expenses increased $11.2 million or 30.4% due mainly to the amortization of lease intangible assets recorded related to the acquisition of $355.6 million of real estate properties during 2004 and 2005 and the commencement of operations of two properties that were previously under construction.

Income from discontinued operations totaled $12.9 million and $8.8 million, respectively, for the nine months ended September 30, 2005 and 2004, which includes the results of operations and gains or

impairments related to property disposals during 2004 and 2005, as well as assets classified as held for sale. The Company disposed of two properties in 2004 and 17 properties in 2005, and classified three properties as held for sale as of September 30, 2005 that are targeted to close during the second quarter of 2006.

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)

9/30/05

Maturity Date

Rate at 9/30/05

Payments

Principal Payments

Unsecured Credit Facility due 2006

49,000

10/06

LIBOR + 1.10%

Quarterly

At maturity (1)

Senior Notes due 2006

29,400

4/06

9.49%

Semi-Annual

At maturity

Senior Notes due 2011, net

307,862

5/11

8.125%

Semi-Annual

At maturity

Senior Notes due 2014, net

298,676

4/14

5.125%

Semi-Annual

At maturity

Mortgage notes payable

56,626

5/11-4/32

5.55%-8.50%

Monthly

Monthly or at maturity

741,564


(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, 2005, approximately 86% of the Company’s outstanding debt balances were due after 2010. The Company’s shareholders’ equity at September 30, 2005, totaled approximately $0.9 billion and its debt to total capitalization ratio, on a book basis, was approximately 0.44 to 1. For the nine months ended September 30, 2005, the Company’s earnings covered fixed charges at a ratio of 1.72 to 1.00. At September 30, 2005, the Company had borrowing capacity of $179.0 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.

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, 2005, the aggregate fair value of the current swaps, $4.8 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

The Company may from time to time 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. Due to the Company’s untimely filing of its Form 10-K for the year ended December 31, 2004 and Form 10-Q’s during 2005, the Company will not be eligible to issue securities under a Form S-3 for twelve months after the Company is current on its filings with the Securities and Exchange Commission. During that twelve-month period, the Company will not be able to issue securities under its existing shelf registration statements but it may access the capital markets using other forms of registration statements. Upon filing this Form 10-Q, the Company believes it will be current on all of its periodic filings.

Security Deposits and Letters of Credit

As of September 30, 2005, the Company had approximately $5.9 million in letters of credit, security deposits, debt service reserves or capital replacement reserves for the benefit of the Company in the event the obligated lessee or operator fails to make payments under the terms of their respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.

Asset Acquisitions and Dispositions

During the second quarter of 2005, the Company acquired seven senior living properties in Tennessee and South Carolina totaling $45.3 million; invested $11.1 million in a joint venture related to three medical office buildings in Washington; and invested in a $10.8 million mortgage secured by leasehold interests in a group of assisted living facilities. The $11.1 million joint venture is accounted for using the equity method and the Company’s investment is included in “other assets” on the Company’s Consolidated Balance Sheet. Also, during the second quarter, a senior living operator exercised its remaining purchase option on 10 properties it leased from the Company by purchasing the tenth property for net proceeds to the Company of $12.1 million, including the repayment of certain receivables. This property comprised approximately $12.4 million ($10.4 million, net) of the Company’s real estate properties as of December 31, 2004. The Company recognized a gain of approximately $1.2 million from the sale of this property. Also, a second senior living operator exercised its purchase options on five properties it leased from the Company producing net proceeds to the Company totaling $53.2 million, including the repayment of certain receivables. The five properties covered by the purchase comprised approximately $50.3 million ($42.1 million, net) of the Company’s real estate properties as of December 31, 2004. The Company recognized a gain of approximately $0.2 million from the sale of the five properties. Finally, during the second quarter of 2005, a $2.9 million mortgage note receivable secured by an assisted living facility in South Carolina was repaid in full, a 19,000 square foot comprehensive ambulatory care center in Florida was sold for $1.9 million, resulting in a $0.7 million impairment charge, and the Company sold a land parcel in Texas for $2.0 million, resulting in no gain or loss.

Purchase Options Exercised

On September 29, 2005, a sponsor under a property operating agreement gave notice to the Company of its intent to purchase three properties under property operating agreements with the Company with a target closing date in December 2005. The three properties covered by the purchase options exercised by this operator comprised approximately $9.7 million ($8.2 million, net) of the Company’s real estate properties and accounted for approximately 0.6% of the Company’s revenues for the year ended December 31, 2004. The Company expects to recognize a gain from the sale of these properties.

Construction in Progress

As of September 30, 2005, the Company had an investment of approximately $6.8 million in a land parcel in Hawaii. The Company anticipates it will begin construction during 2006 on a medical office building on the land. 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 26, 2005, the Company’s Board of Directors declared an increase in its quarterly common stock dividend from $0.655 per share ($2.62 annualized) to $0.660 per share ($2.64 annualized) payable to shareholders of record on August 15, 2005. This dividend was paid on September 1, 2005.

The Company, though historically having increased the dividend each quarter, decided to maintain the quarterly dividend for the third quarter of 2005 at the same level as the previous quarter. The Company will determine future dividend policy based upon cash generated by operating activities, the Company’s financial condition, relevant financing instruments, capital requirements, annual distributions required under the REIT provisions of the Code and other such factors deemed relevant.

Liquidity

The Company plans to continue to meet its liquidity needs, including funding additional investments in 2005 and 2006, paying quarterly dividends, and funding debt service, with cash flows from operations, with proceeds from the Unsecured Credit Facility due 2006, proceeds of mortgage notes receivable repayments, and 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 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 17 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, 2004.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three months ended September 30, 2005, 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, 2004.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure 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 ineffective. The Company disclosed the details of its ineffective controls in its Management Report on Internal Control over Financial Reporting in its Form 10-K for the year ended December 31, 2004.

(b) Changes in Internal Control over Financial Reporting

The Company has instituted effective improvements to internal controls over financial reporting, including identification of the need for additional personnel. On May 1, 2005, the Company hired a CPA with approximately 13 years of experience to fill the senior accounting manager vacancy and become the controller. In addition, the Company has hired a CPA with approximately 11 years of experience and was formerly an Audit Senior Manager with Ernst & Young LLP who will serve as the principal accounting officer. In the future, the principal accounting officer will ensure that each transaction will be reviewed in detail for compliance with all applicable accounting literature. Further, the function of the Company’s Investment Committee, which is comprised of the CEO, CFO, COO and General Counsel, has been expanded to include review and approval of restructurings, dispositions, and other significant transactions. This Committee meets regularly, analyzes and approves or disapproves the relevant transactions. The Committee considers whether the transactions fit the investment parameters and financial objectives of the Company. The Principal Accounting Officer will be a member of this committee to further ensure that accounting expertise is applied to such transactions.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 6.

(a)

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 Specimen Stock Certificate (1)

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

Exhibit 4.3 First Supplemental Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

Exhibit 4.4 Form of 8.125% Senior Note Due 2011 (3)

Exhibit 4.5 Second Supplemental Indenture, dated as of March 30, 2004, by the Company and Wachovia Bank, National Association (4)

Exhibit 4.6 Form of 5.125% Senior Note Due 2014 (4)

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

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

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


(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.

(6)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2004 and hereby incorporated by reference.

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		Specimen Stock Certificate (1)

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

Exhibit 4.3		First Supplemental Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee (3)

Exhibit 4.4		Form of 8.125% Senior Note Due 2011 (3)

Exhibit 4.5		Second Supplemental Indenture, dated as of March 30, 2004, by the Company and Wachovia Bank, National Association (4)

Exhibit 4.6		Form of 5.125% Senior Note Due 2014 (4)

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

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

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


(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 hereby incorporated by reference.

(6)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2004 and hereby incorporated by reference.

HEALTHCARE REALTY TRUST INCORPORATED

/s/ Scott W. Holmes

Scott W. Holmes

Senior Vice President and Chief Financial Officer


	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		12

Item 3. Quantitative and Qualitative Disclosures about Market Risk		22

Item 4. Controls and Procedures		22

Part II — Other Information

Item 1. Legal Proceedings		23

Item 6. Exhibits		24

Signature		25
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