HEALTHCARE REALTY TRUST INCORPORATED

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, 2006


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

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

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

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

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

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

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

As of November 1, 2006, 47,816,079 shares of the Registrant’s Common Stock were outstanding.

Part I. FINANCIAL INFORMATION

Healthcare Realty Trust Incorporated

Condensed Consolidated Balance Sheets

(Dollars in thousands)


	(Unaudited)
	September 30,			December 31,
	2006			2005
ASSETS
Real estate properties:
Land	$	137,629		$	133,195
Buildings, improvements and lease intangibles		1,728,559			1,670,884
Personal property		22,324			21,932
Construction in progress		25,101			7,030

		1,913,613			1,833,041
Less accumulated depreciation		(356,506	)		(315,794	)

Total real estate properties, net		1,557,107			1,517,247

Cash and cash equivalents		3,747			7,037

Mortgage notes receivable		75,462			105,795

Assets held for sale, net		0			21,415

Other assets, net		100,837			96,158


Total assets	$	1,737,153		$	1,747,652

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Notes and bonds payable	$	820,852		$	778,446

Accounts payable and accrued liabilities		41,634			30,774

Other liabilities		21,822			25,964


Total liabilities		884,308			835,184

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; issued and outstanding 47,816,079 – 2006 and 47,768,148 – 2005		478			478

Additional paid-in capital		1,222,233			1,220,522

Deferred compensation		(11,755	)		(13,013	)

Cumulative net income		627,465			595,401

Cumulative dividends		(985,576	)		(890,920	)


Total stockholders’ equity		852,845			912,468


Total liabilities and stockholders’ equity	$	1,737,153		$	1,747,652

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, 2005, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Income

For The Three Months Ended September 30, 2006 and 2005
(Dollars in thousands, except per share data)
(Unaudited)


	2006			2005
REVENUES:
Master lease rental income	$	21,528		$	17,744
Property operating income		31,628			35,626
Straight-line rental income		524			286
Mortgage interest income		2,957			2,624
Other operating income		11,429			9,396

		68,066			65,676

EXPENSES:
General and administrative		4,245			4,682
Property operating expenses		17,752			19,056
Other operating expenses		4,163			4,291
Impairment		3,811			0
Bad debt expense		184			131
Interest		14,033			12,176
Depreciation		13,188			14,724
Amortization		2,467			3,054

		59,843			58,114


INCOME FROM CONTINUING OPERATIONS		8,223			7,562

DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations		(87	)		1,109
Gain on sales of real estate properties and impairments, net		(73	)		(6	)

		(160	)		1,103


NET INCOME	$	8,063		$	8,665


BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.18		$	0.16

Discontinued operations per common share	$	(0.01	)	$	0.03

Net income per common share	$	0.17		$	0.19


DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.17		$	0.16

Discontinued operations per common share	$	0.00		$	0.02

Net income per common share	$	0.17		$	0.18


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,545,285			46,484,410


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,491,385			47,443,704


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

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Nine Months Ended September 30, 2006 and 2005
(Dollars in thousands, except per share data)
(Unaudited)


	2006		2005
REVENUES:
Master lease rental income	$	61,698	$	52,511
Property operating income		94,843		101,179
Straight-line rental income		2,265		(1,127	)
Mortgage interest income		9,096		6,276
Other operating income		31,160		26,711

		199,062		185,550

EXPENSES:
General and administrative		13,005		12,006
Property operating expenses		53,409		53,468
Other operating expenses		13,000		11,879
Impairment		3,811		0
Bad debt expense		1,251		131
Interest		39,652		35,484
Depreciation		39,036		37,990
Amortization		8,048		9,181

		171,212		160,139


INCOME FROM CONTINUING OPERATIONS		27,850		25,411

DISCONTINUED OPERATIONS:
Income from discontinued operations		1,012		8,797
Gain on sales of real estate properties and impairments, net		3,202		6,773

		4,214		15,570


NET INCOME	$	32,064	$	40,981


BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.60	$	0.55

Discontinued operations per common share	$	0.09	$	0.33

Net income per common share	$	0.69	$	0.88


DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations per common share	$	0.59	$	0.54

Discontinued operations per common share	$	0.09	$	0.32

Net income per common share	$	0.68	$	0.86


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC		46,522,939		46,457,378


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED		47,473,738		47,399,383


DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD	$	1.980	$	1.965

Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Cash Flows

For The Nine Months Ended September 30, 2006 and 2005
(Dollars in thousands)
(Unaudited)


	2006			2005
Cash flows from operating activities:
Net income	$	32,064		$	40,981
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		47,842			48,913
Deferred compensation amortization		2,832			2,835
FAS 123R stock compensation expense		227			0
Increase (decrease) in other liabilities		135			(776	)
(Increase) decrease in other assets		1,398			(10,594	)
Increase in accounts payable and accrued liabilities		6,846			15,745
(Increase) decrease in straight-line rent receivable		(1,643	)		1,305
Equity in losses from unconsolidated LLCs		160			251
Provision for bad debts		1,251			131
Impairment		3,811			0
Gain on sales of real estate and impairments, net		(3,202	)		(6,773	)

Net cash provided by operating activities		91,721			92,018

Cash flows from investing activities:
Acquisition and development of real estate properties		(107,542	)		(81,421	)
Funding of mortgages and notes receivable		(21,479	)		(64,976	)
Investments in unconsolidated LLCs		(10,314	)		(11,135	)
Distributions from unconsolidated LLCs		726			326
Proceeds from sales of real estate		33,020			124,879
Proceeds from mortgages and notes receivable repayments		68,980			11,013

Net cash used in investing activities		(36,609	)		(21,314	)

Cash flows from financing activities:
Borrowings on notes and bonds payable		310,000			163,248
Repayments on notes and bonds payable		(272,323	)		(138,280	)
Dividends paid		(94,656	)		(93,822	)
Proceeds from issuance of common stock		391			853
Common stock redemption		(481	)		0
Debt issuance costs		(1,333	)		0

Net cash used in financing activities		(58,402	)		(68,001	)


Increase (decrease) in cash and cash equivalents		(3,290	)		2,703
Cash and cash equivalents, beginning of period		7,037			2,683

Cash and cash equivalents, end of period	$	3,747		$	5,386

Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements

September 30, 2006
(Unaudited)

Note 1. Significant Accounting Policies

Overview

The accompanying unaudited Condensed 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, 2005. 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, 2006 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, 2005.

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

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

Certain reclassifications have been made in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2005 to conform to the September 30, 2006 presentation. The Company has revised the investing portion of its Condensed Consolidated Statement of Cash Flows to include capital expenditures, certain note receivable advances and payments, and certain partnership distributions that were previously included in the operating portion totaling approximately $1.7 million. The Company also revised the fair value of interest rate swaps included in the financing portion totaling $5.4 million, which was previously included in the operating ($1.3 million) and investing ($4.1 million) portions of the statement. These reclassifications, along with other insignificant reclassifications, resulted in a decrease to net cash provided by operating activities of approximately $3.5 million, an increase to net cash used in investing activities of approximately $1.9 million and a decrease to net cash used in financing activities of approximately $5.4 million.

Stock Issued to Employees

During 2006 and 2005, the Company issued and had outstanding various employee stock-based awards. These awards included restricted stock issued to employees pursuant to the 2003 Employees Restricted Stock Incentive Plan (the “Restricted Stock Plan”) and shares issued to employees pursuant to the 2000 Employee Stock Purchase Plan (“Employee Stock Purchase Plan”). The Employee Stock Purchase Plan features a “look-back” provision which enables the employee to purchase a fixed number of shares at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise, with optional purchase dates occurring once each quarter for 27 months.

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

The compensatory nature of the Restricted Stock Plan and the determination of the related compensation expense under the provisions of SFAS No. 123R are consistent with the accounting treatment prescribed by APB Opinion No. 25. However, the look-back feature under the Employee Stock Purchase Plan does not qualify for non-compensatory accounting treatment under SFAS No. 123R as it did under the provisions prescribed by APB Opinion No. 25, and, instead, requires fair value measurement using the Black-Scholes or other pricing model and the recognition of expense over the vesting period. The accounting for the look-back feature associated with the Employee Stock Purchase Plan under SFAS No. 123R is consistent with the accounting prescribed by SFAS No. 123, and as interpreted in FASB Technical Bulletin (“FTB”) 97-1, “Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option.” Therefore, the compensation expense recognized upon adoption of SFAS No. 123R has been determined in the same manner that the pro-forma compensation expense was calculated under SFAS No. 123, using the Black-Scholes model. For the three and nine months ended September 30, 2006, included in general and administrative expenses, the Company recognized approximately $0 and $227,000, respectively, of compensation expense related to the January 1, 2006 grant of options to purchase shares under the Employee Stock Purchase Plan, where such options were immediately vested on the date of grant. The Company grants options under its Employee Stock Purchase Plan once a year, during the first quarter, and thus records compensation expense related to those grants only in that quarter each year.

The following table represents the effect on net income and earnings per share for the three and nine months ended September 30, 2005, as if the Company had applied the fair value-based method and recognition provisions of SFAS No. 123R, as described above:


	Three Months			Nine Months
	Ended			Ended
(Dollars in thousands, except per share data)	Sept. 30, 2005			Sept. 30, 2005
Net income, as reported	$	8,665		$	40,981
Add: Compensation expense for equity-based awards to employees, included in net income		1,062			2,817
Deduct: Compensation expense for equity-based awards to employees under the fair value method		(1,062	)		(3,053	)

Pro-forma net income	$	8,665		$	40,745

Earnings per share, as reported:
Basic	$	0.19		$	0.88
Assuming dilution	$	0.18		$	0.86
Pro-forma earnings per share:
Basic	$	0.19		$	0.88
Assuming dilution	$	0.18		$	0.86

A summary of the Employee Stock Purchase Plan activity and related information for the three and nine months ended September 30, 2006 and 2005 follows:


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
All Options	2006			2005			2006			2005
Outstanding, beginning of period		195,585			230,901			158,026			141,037
Granted		0			0			148,698			119,730
Exercised		(3,684	)		0			(14,507	)		(9,675	)
Forfeited		(7,537	)		(10,909	)		(52,703	)		(31,100	)
Expired		0			0			(55,150	)		0

Outstanding and exercisable at end of period		184,364			219,992			184,364			219,992


Weighted-average fair value of options granted during the period (calculated as of the grant date)		N/A			N/A		$	6.55		$	7.74
Weighted-average exercise price of options exercised during the period	$	28.28			N/A		$	26.95		$	26.38
Weighted-average exercise price of options outstanding (calculated as of September 30)	$	30.11		$	29.41		$	30.11		$	26.38
Range of exercise prices of options outstanding (calculated as of September 30)	$	27.07-$34.60		$	24.86-$34.60		$	27.07-$34.60		$	24.86-$34.60
Weighted-average contractual life of outstanding options (calculated as of September 30, in years)		1.08			0.90			1.08			0.90

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


	2006			2005

Risk-free interest rates		4.41	%		3.08	%
Dividend yields		6.68	%		7.50	%
Expected life (in years)		1.48			1.51
Expected volatility		0.198			0.194
Expected forfeiture rates		76	%		76	%

The Company did not grant any shares of restricted stock to employees during the third quarter of 2006 but granted 30,928 shares of restricted stock to employees under its various benefit plans having a value at the date of grant of approximately $1.0 million during the nine months ended September 30, 2006. The shares have vesting or amortization periods ranging from three to eight years. The amortization period may be shorter than the vesting period for awards to certain officers having employment agreements which allow for accelerated vesting of shares upon retirement.

Each of the Company’s non-employee directors is automatically granted shares of restricted stock at the conclusion of each annual meeting of shareholders. As such, during the second quarter of 2006, the Company granted a total of 16,000 shares of restricted stock to its outside directors (2,000 shares to each director), which had a total value at the date of grant of approximately $0.6 million and have a vesting period of 3 years.

During the second quarter of 2006, the Company withheld 12,757 shares of common stock from one of its officers to pay estimated withholding taxes related to restricted stock that vested in the quarter. The shares were immediately retired.

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, 2005. The plans are unfunded and benefits will be paid from earnings of the Company. The following table sets forth the benefit obligations for the three and nine months ended September 30, 2006 and 2005.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2006			2005			2006			2005

Benefit obligation, beginning of period	$	10,397		$	7,139		$	8,345		$	6,615
Service costs		236			149			707			449
Interest costs		178			102			533			306
Other		104			8			314			27
Actuarial gain		508			1			1,524			5

Benefit obligation, end of period		11,423			7,399			11,423			7,402
Unrecognized net actuarial gain		(2,971	)		(1,044	)		(2,971	)		(1,047	)

Net pension liability in accrued liabilities	$	8,452		$	6,355		$	8,452		$	6,355

Variable Interest Entities

In accordance with FASB Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities (“VIEs”) an Interpretation of Accounting Research Bulletin No. 51,” the Company has included in its Condensed Consolidated Financial Statements six VIEs in which the Company has concluded that it is the primary beneficiary. The Company’s VIEs are discussed in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

New Pronouncements

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, “Accounting for Income Taxes,” (“FIN No. 48”) which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 will be effective for the Company beginning January 1, 2007. The Company has determined that FIN No. 48 currently has no material impact on the Company’s results of operations and its cash flows.

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132(R),” (“SFAS No. 158”). SFAS No. 158 requires the recognition of the funded status of a Company’s benefit plans as a net liability or asset, which requires an offsetting adjustment to accumulated other comprehensive income in stockholders’ equity. SFAS No. 158 further requires a Company to measure its benefit obligations as of the balance sheet date. The Company must adopt the recognition and disclosure provisions of SFAS No. 158 effective for the fiscal year ended after December 15, 2006, and the measurement provisions of SFAS No. 158 effective for the fiscal year ended after December 15, 2008. Upon adoption of the recognition and disclosure provisions as of December 31, 2006, there may be an impact on the recorded benefit obligation and accumulated other comprehensive income, a component of Stockholders’ Equity. The Company is currently evaluating the impact of applying the provisions of SFAS No. 158 but does not believe it will have a material impact on its financial position or results of operations.

Note 2. Real Estate and Mortgage Notes Receivable Investments

The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and development services, and capital for the construction of new facilities as well as for the acquisition of existing properties. These activities constitute a single business segment as defined by the SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As of September 30, 2006, the Company had investments of approximately $2.0 billion in 248 real estate properties and mortgage notes receivable, including investments in three unconsolidated limited liability companies (carried in “Other assets” on the Company’s Condensed Consolidated Balance Sheet). The Company’s 235 owned real estate properties, located in 27 states, totaled approximately 12.7 million square feet. See the table below for more detail on the Company’s real estate and mortgage notes receivable investments:


	Number of		Investment Amounts				Square Feet
	Investments		(in thousands)				(in thousands)

Owned properties:
Long-term net master leases
Medical office/outpatient facilities		60	$	347,075	18.5	%		2,302
Assisted living facilities		26		128,688	6.4	%		887
Skilled nursing facilities		29		145,262	6.0	%		974
Inpatient rehabilitation facilities		9		156,495	7.8	%		643
Independent living facilities		7		64,123	3.2	%		726
Other inpatient facilities		4		75,976	3.8	%		334

		135		917,619	45.7	%		5,866

Financial support agreements
Medical office/outpatient facilities		17		168,665	8.4	%		1,184

		17		168,665	8.4	%		1,184

Multi-tenanted with occupancy leases
Medical office/outpatient facilities		83		813,194	40.5	%		5,680

		83		813,194	40.5	%		5,680

Corporate property		—		14,135	0.7	%		—


Total owned properties		235		1,913,613	95.3	%		12,730


Mortgage notes receivable:
Assisted living facilities		6		48,631	2.4	%		N/A
Skilled nursing facilities		1		3,927	0.2	%		N/A
Medical office/outpatient facilities		2		16,904	0.8	%		N/A
Independent living facilities		1		6,000	0.3	%		N/A

		10		75,462	3.7	%		N/A

Unconsolidated LLC investments, net:
Medical office/outpatient facilities		2		13,521	0.7	%		N/A
Assisted living facilities		1		6,627	0.3	%		N/A

		3		20,148	1.0	%		N/A

Total real estate investments		248	$	2,009,223	100.0	%		12,730

Asset Acquisitions

During the third quarter of 2006, the Company acquired an 11-acre site in Texas for $8.3 million. The land is in the vicinity of two hospitals currently under construction. During the third quarter of 2006, the Company also received a $2.0 million mortgage note receivable related to the sale of one of its medical office buildings in Texas. See Asset Dispositions below for more details on this transaction.

During the second quarter of 2006, the Company acquired a 58,474 square foot medical office building and an adjoining 117,525 square foot orthopaedic hospital in Indiana for $65.0 million. These properties operate under absolute net master lease agreements. The Company also invested $3.9 million in one mortgage note receivable, which is secured by six senior living facilities in Michigan. Additionally, the Company fully financed the sale of one of its owned ancillary hospital facilities in

California, in which the Company had a $16.4 million gross investment ($13.4 million, net). In the transaction, the Company received a $14.9 million mortgage note receivable, which is secured by the 87,000 square foot facility. As required by SFAS No. 66, “Accounting for Sales of Real Estate,” the Company has deferred the recognition of the gain on sale of approximately $1.5 million until such time that recognition is allowed under SFAS No. 66.

During the first quarter of 2006, the Company invested $16.0 million in one mortgage, which is secured by a group of assisted living facilities. Also, during the first quarter of 2006, the Company acquired for $2.4 million a 50% non-managing member interest in a limited liability company (“LLC”) which acquired one medical office building in Oregon, and acquired for $6.6 million a 10% non-managing member interest in an LLC which acquired six senior living facilities in Utah. The Company accounts for its interests in these LLCs under the equity method. These investments are carried in “Other assets” on the Company’s Condensed Consolidated Balance Sheets.

Asset Dispositions

During the third quarter of 2006, the Company financed the sale of one of its medical office buildings in Texas, in which the Company had a $2.4 million gross investment ($2.2 million, net). In the sale, the Company received $0.4 million in cash and a $2.0 million mortgage note receivable which, in total, approximated the Company’s carrying value of its investment in the building. In addition, during the third quarter of 2006, two mortgage notes receivable were repaid totaling $28.3 million. The Company received a $1.0 million prepayment penalty fee from one of these mortgage repayments, which is included in “Other operating income” on the Company’s Condensed Consolidated Income Statements.

During the second quarter of 2006, the Company sold three medical office buildings in Alabama, in which the Company had a gross investment totaling $26.3 million ($21.1 million, net) and other related assets totaling approximately $0.6 million. The purchase price totaled $21.7 million and provided for the repayment of three mortgage notes payable totaling $7.1 million, which were secured by the properties. The Company recognized an immaterial gain on the transaction. Additionally, pursuant to a purchase option exercised in 2005, the Company sold an 87,000 square foot medical office building in California and financed the sale transaction. (See “Asset Acquisitions” for more details.) Finally, in the second quarter, two mortgage notes receivable were repaid totaling $10.9 million. The Company received a $1.1 million prepayment penalty from these repayments, which is included in “Other operating income” on the Company’s Condensed Consolidated Statement of Income.

During the first quarter of 2006, a sponsor under a financial support arrangement exercised a purchase option and purchased two properties, providing net proceeds to the Company totaling $11.2 million. The Company recognized a $3.3 million gain from the sale of these properties. Also, mortgage notes receivable (including interest receivables) were repaid providing net proceeds to the Company totaling $28.0 million.

Impairment

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

In connection with a lease termination and related troubled debt restructuring during the fourth quarter of 2005, the Company obtained patient accounts receivable assets from a healthcare provider (the

“Acquired Receivables”). The Company initially valued the Acquired Receivables at $9.1 million. Management has monitored the collections of these Acquired Receivables and determined during the third quarter of 2006 that the estimated future collections, based on past collections, were projected to be less than the remaining Acquired Receivable balance. As such, during the third quarter, management recorded an impairment loss on the Acquired Receivables in the amount of $2.3 million, so that the remaining balance of approximately $4.7 million represents management’s estimate of the discounted future collections on the Acquired Receivables.

These impairment charges, totaling approximately $3.8 million, are included in “Impairment” on the Company’s Condensed Consolidated Statements of Income.

Purchase Options

As discussed in “Asset Dispositions” above, the Company sold two properties in the first quarter of 2006 pursuant to contractual purchase options exercised by the operator and sold one property in the second quarter of 2006 pursuant to an option exercised by the tenant in late 2005. As of September 30, 2006, the Company had a gross investment of approximately $263.8 million in real estate properties for which the tenant or financial support agreement sponsor had outstanding and exercisable contractual options to purchase the properties, subject to various conditions and terms. The majority of these purchase options have been exercisable for a number of years prior to 2006, but have not been exercised. The Company estimates that approximately $44.0 million of these exercisable options may be exercised in the future. Additionally, in October 2006, the Company received notice from an operator that it may exercise its purchase option in 2007 relating to a building in Tennessee. The Company’s net book value on the building was approximately $1.9 million at September 30, 2006.

Prepayments on Mortgage Notes Receivable

As of September 30, 2006, the Company had been notified by a borrower of its intent to prepay a $2.5 million mortgage note receivable during the fourth quarter of 2006. The note bore interest of 11.29% and was repaid in October 2006.

Note 3. Notes and Bonds Payable

Notes and bonds payable consisted of the following (in thousands):


	September 30,		December 31,
	2006		2005

Unsecured Credit Facility due 2009	$	160,000	$	0
Unsecured Credit Facility due 2006		0		73,000
Senior Notes due 2006		0		29,400
Senior Notes due 2011, net		301,134		306,629
Senior Notes due 2014, net		298,805		298,708
Mortgage notes payable		60,913		70,709

	$	820,852	$	778,446

At September 30, 2006, the Company was in compliance with the covenant requirements under its various debt instruments.

Unsecured Credit Facility due 2009

In January 2006, the Company entered into a $400.0 million credit facility (the “Unsecured Credit Facility due 2009”) with a syndicate of 12 banks. The facility may be increased to $650.0 million during the first two years at the Company’s option, subject to it obtaining additional capital commitments from the banks. The credit facility matures in January 2009, but the term may be extended one additional year.

Loans outstanding under the Unsecured Credit Facility due 2009 (other than swing line loans and competitive bid advances) will bear interest at a rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate and the Federal Funds rate plus 0.50%) plus (y) a margin ranging from 0.60% to 1.20% (currently 0.90%), based upon the Company’s unsecured debt ratings. The weighted-average rate on the borrowings outstanding as of September 30, 2006 was 6.23%. Additionally, the Company will pay a facility fee per annum on the aggregate amount of commitments. The facility fee may range from 0.15% to 0.30% per annum (currently 0.20%), based on the Company’s unsecured debt ratings. The Credit Facility due 2009 contains certain representations, warranties, and financial and other covenants customary in such loan agreements. The Company had borrowing capacity remaining of $240.0 million under the facility as of September 30, 2006.

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. Rates for borrowings under the Unsecured Credit Facility due 2006 were, 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. In addition, the Company incurred an annual facility fee of 0.35% on the commitment. In January 2006, the Unsecured Credit Facility due 2006 was repaid with proceeds from the Unsecured Credit Facility due 2009.

Senior Notes due 2006

In 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 bore interest at 9.49% and were fully repaid on April 3, 2006.

Senior Notes due 2011

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


	September 30,		December 31,
	2006		2005

Senior Notes due 2011 face value	$	300,000	$	300,000
Unamortized net gain (net of discount)		1,134		12,226
Fair value of interest rate swaps		0		(5,597	)

Senior Notes due 2011 carrying amount	$	301,134	$	306,629

Senior Notes due 2014

On March 30, 2004, the Company publicly issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125%, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.5 million, yielding a 5.19% interest rate per annum. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets (in thousands):


	September 30,			December 31,
	2006			2005

Senior Notes due 2014 face value	$	300,000		$	300,000
Unamortized discount		(1,195	)		(1,292	)

Senior Notes due 2014 carrying amount	$	298,805		$	298,708

Mortgage Notes Payable

At September 30, 2006, the Company had outstanding 10 non-recourse mortgage notes payable, with related collateral, as follows (dollars in millions):


											Investment in
			Effective					Number			Collateral at		Contractual Balance at
	Original		Interest			Maturity		of Notes		(5)	Sept. 30,		Sept. 30,		Dec. 31,
	Balance		Rate			Date		Payable		Collateral	2006		2006		2005

Life Insurance Co. (1)	$	23.3		7.765	%		7/26		1	MOB	$	46.1	$	20.5	$	20.8
Life Insurance Co. (2)		4.7		7.765	%		1/17		1	MOB		11.0		3.3		3.4
Commercial Bank (3)		23.4		7.220	%		5/11		5	7 MOBs		53.6		13.1		22.2
Commercial Bank (1)		5.3		5.550	%		4/31		1	SNF		10.3		5.1		5.2
Commercial Bank (1)		4.0		8.000	%		4/32		1	SNF		8.2		3.9		4.0
Life Insurance Co. (4)		15.1		5.490	%		1/16		1	MOB		32.5		15.0		15.1

									10		$	161.7	$	60.9	$	70.7


(1)		Payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due at maturity.

(2)		Payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due at maturity.

(3)		Payable in fully amortizing monthly installments of principal and interest due at maturity. Originally, the Company had 8 mortgage notes totaling $35.0 million on 10 MOBs. Three of the mortgage notes, originally totaling $11.6 million, were defeased during the second quarter of 2006.

(4)		Payable in monthly installments of principal and interest based on a 10-year amortization with the final payment due at maturity.

(5)		MOB-Medical office building; SNF-Skilled nursing facility

The contractual interest rates for the 10 outstanding mortgage notes ranged from 5.49% to 8.50% at September 30, 2006. Three mortgage notes payable totaling approximately $7.1 million were repaid in April 2006 related to the sale of three medical office buildings which secured the mortgage notes.

Other Long-Term Debt Information

Future maturities of the Company’s notes and bonds payable as of September 30, 2006 were as follows (dollars in thousands):


2006	$	871	0.1	%
2007		3,646	0.4	%
2008		3,922	0.5	%
2009 (1)		164,224	20.0	%
2010		4,549	0.6	%
2011 and thereafter		643,640	78.4	%

	$	820,852	100.0	%

(1) Includes $160,000 outstanding on the Unsecured Credit Facility due 2009.

The Company paid interest and capitalized interest as follows (dollars in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Interest paid	$	3,997	$	1,668	$	31,390	$	26,409
Interest capitalized	$	238	$	317	$	914	$	1,241

In its 1998 acquisition of Capstone Capital Corporation (“Capstone”), the Company 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 offsetting swaps. The remaining liability as of September 30, 2006 and 2005 was approximately $265,000 and $445,000, respectively.

Note 4. Commitments and Contingencies

Construction in Progress

As of September 30, 2006, the Company had three medical office buildings under construction. The Company’s investment in these buildings as of September 30, 2006, was approximately $17.5 million with a total remaining funding commitment of approximately $45.3 million. The Company anticipates completion of these buildings in 2007. The Company is also in the pre-development stages on one building in Hawaii. As of September 30, 2006, the Company had invested $7.6 million in the Hawaii land and site preparation, on which the Company anticipates it will begin construction of a medical office building during 2007. The Company anticipates that the development in Hawaii will total approximately $70.0 million and will be completed in 2008.

Other Construction Commitments

Construction has begun on a 61,000 square foot, $20.1 million medical office building in the state of Washington. The project is being developed by a joint venture in which the Company holds a 75% equity interest. Construction of the building will be funded by mortgage debt of approximately $15.0 million and by partnership capital of approximately $5.1 million, of which the Company will contribute $3.8 million. As of September 30, 2006, the Company had funded approximately $1.3 million of its capital contribution. The Company anticipates completion of the building in the second quarter of 2007.

The Company also had various remaining first-generation tenant improvement obligations totaling approximately $6.7 million as of September 30, 2006 related to properties that were developed by the Company.

Legal Proceedings

On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the Capstone officers and directors remained in their positions following the Company’s acquisition of Capstone. The complaint seeks an accounting and disgorgement of monies obtained by the allegedly wrongful conduct and other unspecified compensatory and punitive damages. There is currently a stay on discovery in the case. The plaintiff and certain defendants in the case reached an agreement in September 2006 to settle a portion of the claims, subject to various conditions, including court approval. This proposed settlement does not include the Company or several other defendants. The Company will defend itself vigorously and believes that the claims brought by the plaintiff are not meritorious.

In May, 2006, Methodist Health System Foundation, Inc. (“the Foundation”) filed suit against a wholly-owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana. The Foundation is the sponsor under financial support agreements which support the Company’s ownership and operation of two medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an affiliate of Universal Health Services, Inc. in 2003. The Foundation’s assets and income are not primarily dependent upon the operations of Methodist Hospital, which has remained closed since Hurricane Katrina struck in August 2005. The Foundation’s suit alleges that Hurricane Katrina and its aftermath should relieve the Foundation of its obligations under the financial support agreements. The agreements do not contain any express provision allowing for termination upon a casualty event. The Company believes the Foundation’s claims are not meritorious and will vigorously defend the enforceability of the financial support agreements. There have been no material procedural or substantive developments in the case since its filing.

The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s financial condition or results of operations.

Purchase Contracts

The Company has executed a purchase agreement to acquire a skilled nursing facility in Tennessee for approximately $7.3 million, which is expected to close during the fourth quarter of 2006.

Note 5. Stockholders’ Equity

Earnings per share

The table below sets forth the computation of basic and diluted earnings per share as required by SFAS No. 128, “Earnings Per Share” for the three and nine months ended September 30, 2006 and 2005 (dollars in thousands, except per share data).


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005

Weighted Average Shares
Weighted Average Shares Outstanding		47,812,395			47,758,528			47,801,686			47,742,312
Unvested Restricted Stock Shares		(1,267,110	)		(1,274,118	)		(1,278,747	)		(1,284,934	)

Weighted Average Shares – Basic		46,545,285			46,484,410			46,522,939			46,457,378

Weighted Average Shares – Basic		46,545,285			46,484,410			46,522,939			46,457,378
Dilutive effect of Restricted Stock Shares		912,699			909,071			910,976			891,934
Dilutive effect of Employee Stock Purchase Plan		33,401			50,223			39,823			50,071

Weighted Average Shares – Diluted		47,491,385			47,443,704			47,473,738			47,399,383

Net Income
Income from Continuing Operations	$	8,223		$	7,562		$	27,850		$	25,411
Discontinued operations		(160	)		1,103			4,214			15,570

Net income	$	8,063		$	8,665		$	32,064		$	40,981


Basic Earnings per Common Share
Income from Continuing Operations per common share	$	0.18		$	0.16		$	0.60		$	0.55
Discontinued Operations per common share	$	(0.01	)	$	0.03		$	0.09		$	0.33

Net income per common share	$	0.17		$	0.19		$	0.69		$	0.88


Diluted Earnings per Common Share
Income from Continuing Operations per common share	$	0.17		$	0.16		$	0.59		$	0.54
Discontinued Operations per common share	$	0.00		$	0.02		$	0.09		$	0.32

Net income per common share	$	0.17		$	0.18		$	0.68		$	0.86

Authorization to Repurchase Common Stock

On July 25, 2006, the Company’s Board of Directors authorized the repurchase of up to 3,000,000 shares of the Company’s common stock. The Company may elect, from time to time, to repurchase shares either when market conditions are appropriate or as a means to reinvest excess cash flows from investing activities. Such purchases, if any, may be made either in the open market or through privately negotiated transactions. As of September 30, 2006, the Company had not repurchased any shares.

Note 6. Subsequent Events

Common Stock Dividend

On October 24, 2006, the Company’s Board of Directors declared a quarterly common stock cash dividend in the amount of $0.660 per share ($2.64 annualized) payable on December 1, 2006 to shareholders of record on November 15, 2006.

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, 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 over time.

Substantially all of the Company’s revenues are derived from rentals on its healthcare real estate properties, from interest earned on mortgage loans, and from revenues from the operations of six senior living facilities consolidated by the Company as variable interest entities (“VIEs”). The Company typically incurs operating and administrative expenses, including compensation-related expenses, 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, depreciation and amortization expense on its real estate portfolio, and reports operating expenses of the six consolidated VIEs.

Executive Overview

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

Based on market transactions during the last few quarters, management continues to see high valuations in both the medical office and senior living sectors. Though management believes that the valuations of buildings in the medical office sector have somewhat stabilized, the market is still highly competitive for these assets. The Company continues to pursue property investments. Conversely, the Company may, from time to time, consider divestiture of certain facilities or property types.

Given the difficult environment for acquisitions, the Company has increased its focus on developing properties, which management believes offers higher returns and long-term growth potential. While the time required to construct and lease some of these developments can take several years, management believes that the Company’s ability to efficiently manage and lease these properties will lead to improved results over the long-term.

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

The Company has six projects underway – three with Baylor Health Care System in Texas, and one each in Colorado, Washington state, and Hawaii – totaling 750,000 square feet and with budgets totaling $175 million. With the exception of the Colorado and Hawaii projects, these projects will open in 2007.

Beyond those six projects, there are another 23 in various stages of pre-development. Of those 23 projects, four are considered “probable,” seven are in advanced discussions, and twelve are in the exploratory phase. Management expects this development pipeline, plus selective acquisitions, could result in new investments of $150 – $200 million annually.

To fund its investment activity, the Company continues to be well-positioned from a capital structure and liquidity viewpoint. At September 30, 2006, the Company had $160.0 million of indebtedness outstanding and had borrowing capacity remaining of $240.0 million under its Unsecured Credit Facility due 2009 and its debt-to-book capitalization ratio was 49.0%. Also, 78.4% of the Company’s existing debt portfolio had maturity dates after 2010 (approximately 90% of the debt due prior to 2010 is related to the Unsecured Credit Facility due 2009).

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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 are some of the factors and trends that management believes may impact future operations of the Company.

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.” Impairments are not added back to net income to measure FFO.

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 and amortization 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 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, 2006 and 2005.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2006		2005		2006			2005

Net income	$	8,063	$	8,665	$	32,064		$	40,981
Gain on sales of real estate properties, net		0		6		(3,275	)		(7,483	)
Real estate depreciation and amortization		15,726		17,889		47,474			47,721

Total adjustments		15,726		17,895		44,199			40,238

Funds From Operations — Basic and Diluted	$	23,789	$	26,560	$	76,263		$	81,219

Funds From Operations Per Common Share – Basic	$	0.51	$	0.57	$	1.64		$	1.75

Funds From Operations Per Common Share – Diluted	$	0.50	$	0.56	$	1.61		$	1.71

Weighted Average Common Shares Outstanding – Basic		46,545,285		46,484,410		46,522,939			46,457,378

Weighted Average Common Shares Outstanding – Diluted		47,491,385		47,443,704		47,473,738			47,399,383

Results of Operations

Third Quarter 2006 Compared to Third Quarter 2005

Net income for the quarter ended September 30, 2006 totaled $8.1 million, or $0.17 per basic and diluted common share, on total revenues from continuing operations of $68.1 million. This compares with net income of $8.7 million, or $0.19 per basic common share ($0.18 per diluted common share), on total revenues from continuing operations of $65.7 million for the quarter ended September 30, 2005. FFO was $23.8 million, or $0.50 per diluted common share for the three months ended September 30, 2006 compared to $26.6 million, or $0.56 per diluted common share for the same period in 2005. FFO and FFO per diluted common share decreased in 2006 compared to 2005 due to several factors, including impairment charges totaling $3.8 million recorded on two of the Company’s assets (discussed further in Note 2 to the Condensed Consolidated Financial Statements), partially offset by a $1.0 million mortgage note prepayment penalty fee received in the third quarter of 2006.

Total revenues from continuing operations for the quarter ended September 30, 2006 increased $2.4 million, or 3.6%, compared to the same period in 2005, mainly for the reasons discussed below:

• Master lease rental income increased $3.8 million, or 21.3%, due mainly to the acquisition of a medical office building and an adjoining orthopaedic hospital in June 2006, resulting in revenue of approximately $1.3 million for the third quarter of 2006, contractual rent increases throughout the master lease portfolio of approximately $0.5 million, and $1.6 million related to properties, now under master lease arrangements, whose operations were previously included in property operating income and property operating expenses on the Company’s Condensed Consolidated Statements of Income.

• Property operating income decreased $4.0 million, or 11.2%, partially attributable to a change in the classification of revenues totaling $1.8 million related to a group of properties, previously included in property operating income and expense, now under a master lease arrangement. Also, in the third quarter of 2005, the Company received and recorded a $2.0 million lease termination fee.

• Other operating income increased $2.0 million, or 21.6%, due largely to a $1.0 million mortgage note prepayment penalty fee received related to the prepayment of two mortgages during the third quarter of 2006, a $0.6 million increase due to a property substitution deferral fee earned during the third quarter of 2006, and a $0.3 million distribution received during the third quarter of 2006 related to a bankruptcy claim.

Total expenses for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005 increased $1.7 million, or 3.0%, mainly for the reasons discussed below:

• Property operating expense decreased $1.3 million, or 6.8%, due mainly to a change in estimate related to a real estate tax accrual. The Company’s original estimate was adjusted by $1.3 million, which was based on the actual tax bill received.

• An impairment charge of $3.8 million was recognized during the third quarter of 2006 related to two assets. The Company recorded an impairment loss of $1.5 million on a building to decrease its carrying value to its estimated fair value and recorded an impairment loss of $2.3 million related to receivables acquired by the Company in 2005. See Note 2 to the Condensed Consolidated Financial Statements for more information about the impairment charge.

• Interest expense increased $1.9 million, or 15.3%, as compared to the same period in 2005. The increase is comprised mainly of a $2.2 million increase attributable to higher interest rates and a higher average outstanding balance in 2006 than in 2005 on the Company’s unsecured credit facilities, offset by a decrease of approximately $0.7 million relating to principal repayments made during 2005 and 2006 on the senior notes due 2006.

• Depreciation expense decreased $1.5 million, or 10.4%, due mainly to casualty losses of $2.7 million which were recorded related to Hurricane Katrina in the third quarter of 2005, offset by additional depreciation expense of approximately $1.2 million related to the acquisition of $84.5 million of real estate properties since the second quarter of 2005, as well as various building and tenant improvements.

• Amortization expense decreased $0.6 million, or 19.2%, mainly due to a decrease in total amortization expense related to the lease intangibles recorded as part of our acquisitions during 2003 and 2004, some of which have been fully amortized.

Income (loss) from discontinued operations totaled ($0.1) million and $1.1 million, respectively, for the three months ended September 30, 2006 and 2005, which includes the results of operations and gains or impairments related to property disposals during 2006 and 2005, as well as the results of operations related to assets classified as held for sale. As of September 30, 2006, the Company had no properties classified as held for sale. Three properties were classified as held for sale as of September 30, 2005.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Net income for the nine months ended September 30, 2006 totaled $32.1 million, or $0.69 per basic common share ($0.68 per diluted common share), on total revenues from continuing operations of $199.1 million. This compares with net income of $41.0 million, or $0.88 per basic common share ($0.86 per diluted common share), on total revenues from continuing operations of $185.6 million for the nine months ended September 30, 2005. FFO was $76.3 million, or $1.61 per diluted common share for the nine months ended September 30, 2006 compared to $81.2 million, or $1.71 per diluted common share for the same period in 2005. FFO and net income were lower in 2006 compared to 2005 due partly to the impairment charges totaling $3.8 million recorded in the third quarter of 2006 on two of the Company’s assets (discussed further in Note 2 to the Condensed Consolidated Financial Statements), as well as for several other reasons, as described in the following paragraphs.

Total revenues from continuing operations for the nine months ended September 30, 2006 increased $13.5 million, or 7.3%, compared to the same period in 2005, mainly for the reasons discussed below:

• Master lease rental income increased $9.2 million, or 17.5%, due mainly to acquisitions of properties during 2005 and 2006 resulting in approximately $3.7 million of revenue, contractual rent increases throughout the master lease portfolio of $1.2 million, and approximately $4.2 million related to

the reclassification of a group of properties, previously included in property operating income and expense, now under a master lease arrangement.

• Property operating income decreased $6.3 million, or 6.3%, partially attributable to the reclassification of revenues totaling $5.5 million related to a group of properties, previously included in property operating income and expense, now under a master lease arrangement. Also, during the third quarter of 2005, the Company received a lease termination fee of approximately $2.0 million. Furthermore, property operating income increased approximately $0.7 million related to one medical office building previously under construction which commenced operations during 2005.

• Straight-line rent increased $3.4 million due mainly to a $2.0 million reversal in the second quarter of 2005 of straight line rent receivables due to the restructuring of three leases with an operator, as well as adjustments totaling $0.6 million relating to lease term extensions or renewals.

• Mortgage interest income increased $2.8 million, or 44.9%, due mainly to additional investments during 2005 and 2006 increasing interest income by approximately $4.5 million, offset partially by the repayment during 2005 and 2006 of certain mortgage notes decreasing interest income by approximately $1.9 million.

• Other operating income increased $4.4 million, or 16.7%, due largely to $2.2 million in prepayment penalty fees received from the prepayment of mortgage notes receivable in 2006, a $1.2 million increase due to a property substitution deferral fee earned during 2006, and an increase in financial support guaranty accruals totaling approximately $0.8 million related mainly to the business disruption of two of the Company’s properties, located in New Orleans, caused by Hurricane Katrina.

Total expenses for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 increased $11.1 million, or 6.9%, mainly for the reasons discussed below:

• General and administrative expenses increased $1.0 million, or 8.3%, for the nine months ended September 30, 2006 compared to the same period in 2005. General and administrative expenses approximated 6.5% of total revenues for both the nine months ended September 30, 2006 and 2005. The nine months of 2006, however, were higher mainly due to the adoption and implementation of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” resulting in additional compensation expense in the first quarter of 2006 of $0.2 million and an increase in the liability and expense related to the Company’s pension plan of approximately $0.8 million. See Note 1 to the Condensed Consolidated Financial Statements for more details.

• Other operating expenses increased $1.1 million, or 9.4%, mainly due to increasing operating expenses of the six VIEs, whose books the Company is required to consolidate.

• An impairment charge of $3.8 million was recognized during the third quarter of 2006 related to two long-lived assets. The Company recorded an impairment loss of $1.5 million on a building to decrease its carrying value to its estimated fair value and recorded an impairment loss of $2.3 million related to receivables acquired by the Company in 2005. See Note 2 to the Condensed Consolidated Financial Statements for more information about the impairment charge.

• Bad debt expense increased $1.1 million due to net increases in the allowance for doubtful accounts on various receivables.

• Interest expense increased $4.2 million, or 11.7%, as compared to the same period in 2005. The increase is comprised mainly of a $5.1 million increase attributable to higher interest rates and a

higher average outstanding balance in 2006 than in 2005 on the Company’s unsecured credit facilities, and additional interest expense recognized of approximately $0.6 million related to a note entered into during 2005, offset by a decrease in interest expense of approximately $1.9 million relating to principal repayments made during 2005 and 2006 on the senior notes due 2006.

• Depreciation expense increased $1.0 million, or 2.8%, due mainly to the acquisition of $129.9 million of real estate properties during 2006 and 2005, as well as various building and tenant improvements resulting in approximately $3.4 million in additional depreciation expense, an additional $0.7 million in casualty losses recorded in the second quarter 2006 related to Hurricane Katrina and Hurricane Rita, partially offset by $2.7 million in casualty losses recorded in the third quarter 2005 related to Hurricane Katrina and Hurricane Rita.

• Amortization expense decreased $1.1 million, or 12.3%, mainly due to a decrease in total amortization expense related to the lease intangibles recorded as part of our acquisitions during 2003 and 2004, some of which have been fully amortized.

Income from discontinued operations totaled $4.2 million and $15.6 million, respectively, for the nine months ended September 30, 2006 and 2005, which includes the results of operations and gains or impairments related to property disposals during 2006 and 2005, as well as the results of operations related to assets classified as held for sale. As of September 30, 2006, the Company had classified no properties as held for sale. Three properties were classified as held for sale as of September 30, 2005.

Liquidity and Capital Resources

Debt Obligations

As discussed in more detail in Note 3 to the Condensed 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

Maturity

Interest

(dollars in thousands)

9/30/06

Date

Rate at 9/30/06

Payments

Principal Payments

Unsecured Credit Facility due 2009

160,000

1/09

LIBOR + 0.90%

Quarterly

At maturity (1)

Senior Notes due 2011, net

301,134

5/11

8.125%

Semi-Annual

At maturity

Senior Notes due 2014, net

298,805

4/14

5.125%

Semi-Annual

At maturity

Mortgage notes payable

60,913

5/11-4/32

5.49%-8.50%

Monthly

Monthly or at maturity

820,852


(1)		The Company pays a quarterly facility fee of 0.20% on the commitment that can change based on the Company’s unsecured credit rating.

As of September 30, 2006, approximately 78.4% of the Company’s outstanding debt balances were due after 2010, with the majority of the debt balances due prior to 2010 relating to the Unsecured Credit Facility due 2009. The Company’s shareholders’ equity at September 30, 2006 totaled approximately $852.8 million and its debt-to-total capitalization ratio, on a book basis, was approximately 0.49 to 1. For the nine months ended September 30, 2006, the Company’s earnings covered fixed charges at a ratio of 1.7 to 1.0. At September 30, 2006, the Company had borrowing capacity of $240.0 million under the Unsecured Credit Facility due 2009 and was in compliance with the covenant requirements under its various debt instruments.

The Company’s senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s, 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 its Senior Notes due 2011. During the first six months of 2006, the Company received an 8.125% fixed rate and paid a variable rate of six-month LIBOR plus 4.12% related to the swap agreements. With the increase in interest rates (six-month LIBOR was 5.59% at June 30, 2006), the Company was in a net-pay position under the swap agreements, which had the effect of increasing the amount of interest expense recorded on the Company’s Condensed Consolidated Statements of Income. Because of the additional interest the Company was paying under the swap agreements and because the Company’s variable rate debt percentage was exceeding its target range of 15% to 30% of total debt, the Company terminated these interest rate swap agreements in June 2006 and paid $10.1 million, equal to the fair value of the interest rate swaps at termination, plus interest due of $0.3 million. (See Note 3 to the Condensed Consolidated Financial Statements for more details.) After the interest rate swaps termination, the Company will pay interest on the Senior Notes due 2011 at the coupon rate of 8.125%, and the effective interest rate on the notes will be 7.896%.

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, where the availability and terms of any such issuance will depend upon market and other conditions. The Company is current on all of its filings with the Securities and Exchange Commission; however, the Company was untimely in filing its Form 10-K for the year ended December 31, 2004 and its Forms 10-Q for 2005. The Company believes it will be eligible to issue securities under a Form S-3 on November 30, 2006, twelve months after the Company became current on its filings with the Securities and Exchange Commission. During that twelve-month period, the Company may not issue securities under its existing registration statements, but it may access the capital markets using other forms of registration statements and through private offerings. When eligible, the Company will have access to approximately $504.1 million of remaining capacity under its registration statements filed on Form S-3.

Security Deposits and Letters of Credit

As of September 30, 2006, the Company had approximately $5.1 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

In the first nine months of 2006, the Company acquired approximately $119.1 million of properties, mortgage notes, or equity interests in unconsolidated limited liability companies. See Note 2 to the Condensed Consolidated Financial Statements for more information on these acquisitions.

Asset Dispositions

In the first nine months of 2006, the Company sold properties or received repayments on mortgage or other notes resulting in net cash proceeds of approximately $102.0 million. See Note 2 to the Condensed Consolidated Financial Statements for more information on these dispositions.

Purchase Options

The Company sold three properties in the first and second quarters of 2006 pursuant to contractual purchase options exercised by the operator or tenant. As of September 30, 2006, the Company had a gross investment of approximately $263.8 million in real estate properties where the respective operators and lessees had outstanding and exercisable contractual options to purchase the properties, subject to various conditions and terms. The majority of these purchase options have been exercisable for a number of years prior to 2006, but have not been exercised. On a probability-weighted basis, the Company estimates that approximately $44.0 million of these exercisable options may be

exercised in the future. Additionally, in October 2006, the Company received notice from an operator that it may exercise its purchase option relating to a building in Tennessee. The Company’s net book value on the building was approximately $1.9 million at September 30, 2006.

Prepayments on Mortgage Notes Receivable

Construction in Progress

As of September 30, 2006, the Company had construction projects under various stages of development and pre-development. See Note 4 to the Condensed Consolidated Financial Statements for more information on these developments.

	•		Three medical office buildings were under construction. The Company had invested $17.5 million in these developments as of September 30, 2006 and was committed to fund an additional $45.3 million in these projects.

	•		One project was in the stages of pre-development. The Company had invested $7.6 million in the project, including land and land development, and anticipates investing an additional $62.4 million in the project.

	•		Construction also continues on a $20.1 million medical office building. The project is being developed by a joint venture in which the Company holds a 75% equity interest. Construction of the building will be funded by mortgage debt of approximately $15.0 million and by partnership capital of approximately $5.1 million, of which the Company will contribute $3.8 million. As of September 30, 2006, the Company had funded approximately $1.3 million of its capital contribution.

	•		Finally, the Company had various remaining first-generation tenant improvement obligations totaling approximately $6.7 million as of September 30, 2006 related to properties that were developed by the Company.

Purchase Contracts

The Company has executed a purchase agreement to acquire a skilled nursing facility in Tennessee for approximately $7.3 million, which is expected to close during the fourth quarter of 2006.

Dividends

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

Quarterly

Date of

Date Paid

Quarter

Dividend

Declaration

Date of Record

(* Payable)

4^th Quarter 2005

0.66

January 24, 2006

February 15, 2006

March 2, 2006

1^st Quarter 2006

0.66

April 25, 2006

May 15, 2006

June 1, 2006

2^nd Quarter 2006

0.66

July 25, 2006

August 15, 2006

September 1, 2006

3^rd Quarter 2006

0.66

October 24, 2006

November 15, 2006

* December 1, 2006

As described in the Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations, cash flows, and to make accretive new investments.

Liquidity

Net cash provided by operating activities was $91.7 million and $92.1 million for the nine months ended September 30, 2006 and 2005, respectively. Cash flow from operations reflects increased revenues

offset by higher costs and expenses, as well as changes in receivables, payables and accruals. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenant buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.

The Company plans to continue to meet its liquidity needs, including funding additional investments in 2006, paying quarterly dividends, and funding debt service, with cash flows from operations, borrowings under the Unsecured Credit Facility due 2009, proceeds from mortgage notes receivable repayments, and proceeds from sales of real estate investments or additional capital market financings. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will 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, further reducing the risk of any adverse effects of inflation to the Company. Interest payable under the Unsecured Credit Facility due 2009 is calculated at a variable rate; therefore, the amount of interest payable 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. Conversely, 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, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

At September 30, 2006, approximately $660.9 million, or 80.5%, of the Company’s total debt bore interest at fixed rates. Additionally, the Company’s mortgage notes receivable portfolio, totaling $75.5 million, bore interest at fixed rates.

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

Impact on Earnings and Cash Flows

Outstanding

Principal

Calculated

Assuming 10%

Balance as of

Annual Interest

Increase in Market

Decrease in Market

9/30/06

Expense (1)

Interest Rates

Variable Rate Debt:

Unsecured Credit Facility due 2009 ($400 Million)

$ 160,000

9,952

(851

)

851


			Fair Value
					Assuming 10%		Assuming 10%
	Carrying Value at				Increase in Market		Decrease in Market
	9/30/06		9/30/2006		Interest Rates		Interest Rates		12/31/2005 (2)

*Fixed Rate Debt:*
Senior Notes due 2011, net (3)		$ 301,134	$	320,513	$	315,044	$	326,031		$	310,270
Senior Notes due 2014, net		298,805		293,528		285,446		301,876			292,814
Mortgage Notes Payable		60,913		62,579		60,788		64,446			71,383

		$ 660,852	$	676,620	$	661,278	$	692,353		$	674,467


*Fixed Rate Receivables:*
Mortgage Notes Receivable		$ 75,462	$	71,862	$	69,950	$	73,887		$	79,765


(1)		Annual interest expense is calculated using the current market rate and assuming a constant principal balance.

(2)		Except as otherwise noted, fair values as of December 31, 2005 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Management has excluded from its evaluation the effectiveness of the disclosure controls of the variable interest entities (“VIEs”) consolidated by the Company since the Company does not have the contractual right, authority or ability, in practice, to assess the VIEs’ disclosure controls and does not have the ability to dictate or modify those controls. Based on the Company’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition or operating results.

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		Specimen Stock Certificate (1)

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

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

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

Exhibit 4.5		Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4)

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

Exhibit 10.1		Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (5)

Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 5 to the Condensed Consolidated Financial Statements)

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

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

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


(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 January 26, 2006 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 HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee) (3)

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

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

Exhibit 4.5		Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4)

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

Exhibit 10.1		Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (5)

Exhibit 11		Statement re: Computation of per share earnings (filed herewith in Note 5 to the Condensed Consolidated Financial Statements)

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

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

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


(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 January 26, 2006 and hereby incorporated by reference.


	HEALTHCARE REALTY TRUST INCORPORATED

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

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		Page
Part I — Financial Information

Item 1. Financial Statements
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Income		2
Condensed Consolidated Statements of Cash Flows		4
Notes to Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures about Market Risk		27

Item 4. Controls and Procedures		28

Part II — Other Information

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 6. Exhibits		30

Signature		31
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



	/s/ DAVID R. EMERY
	David R. Emery
	Chairman of the Board and Chief Executive Officer