Healthcare Realty Trust 10K 2003 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

		For the fiscal year ended: December 31, 2003

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number: 1-11852

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)


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

3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)

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


		Name of Each Exchange
Title of Each Class		on Which Registered

Common Stock, $.01 par value per share		New York Stock Exchange

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

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

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

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

The aggregate market value of the shares of Common Stock (based upon the closing price of these shares on the New York Stock Exchange, Inc. on June 30, 2003) of the Registrant held by non-affiliates on June 30, 2003 was approximately $1,188,130,301.

As of January 31, 2004, 43,011,215 shares of the Registrant’s Common Stock were outstanding.

TABLE OF CONTENTS


	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Securityholders
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
Ex-10.10 Amendment No. 1
Ex-13 Portions of Annual Report to Shareholders
Ex-21 Subsidiaries of the Registrant
Ex-23 Consent of Ernst & Young LLP
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

TABLE OF CONTENTS


Item 1.	Business	4
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Submission of Matters to a Vote of Securityholders	25
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	25
Item 6.	Selected Financial Data	27
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27
Item 9A.	Controls and Procedures	27
Item 10.	Directors and Executive Officers of the Registrant	28
Item 11.	Executive Compensation	29
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13.	Certain Relationships and Related Transactions	29
Item 14.	Principal Accountants Fees and Services	29
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	29

DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference and the part of Form 10-K into which the document is incorporated:

Portions of the Registrant’s 2003 Annual Report to Shareholders are incorporated into Part II of this Report.

Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 are incorporated into Part III of this Report.

PART I

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth under the section entitled “Cautionary Statements” below, that could significantly affect the Company’s current plans and expectations and future financial condition and results.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports.

Item 1. Business

The Company

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

The Company has investments of approximately $1.7 billion in 218 income-producing real estate properties and mortgages associated with the delivery of healthcare services. As of December 31, 2003, the Company’s real estate portfolio, containing approximately ten million square feet, was comprised of ten major facility types and was operated pursuant to contractual arrangements with 55 healthcare providers. Also, the Company’s mortgage portfolio, containing approximately 1.4 million square feet, was comprised of four major facility types and was operated by nine healthcare providers. At December 31, 2003, the Company provided property management services for 110 healthcare-related properties nationwide, totaling approximately five million square feet. The Company intends to maintain a portfolio of properties that are focused predominantly on the outpatient services and medical office segments of the healthcare industry and are diversified by tenant, geographic location and facility type.

Management believes that the Company is one of the largest fully-integrated real estate companies focused on income-producing real estate properties related to the delivery of healthcare services. The Company believes that its financial capacity and diverse experience with healthcare provider clients make it one of a limited number of companies that can acquire, manage and develop income-producing real estate related to healthcare services on a national scale.

Healthcare Realty’s strategy is to be a full-service provider of integrated real estate solutions to quality healthcare providers. Consistent with this strategy, the Company seeks to provide a broad spectrum of services needed to own, acquire, manage and develop healthcare properties, including:

	•		leasing;

	•		development;

	•		management;

	•		market research;

	•		budgeting;

	•		accounting;

	•		collection;

	•		construction;

	•		tenant coordination; and

	•		financial services.

The Company’s development activities are primarily accomplished through pre-leased build-to-suit projects.

The Company was formed as an independent, unaffiliated healthcare REIT. The Company acquires income-producing real estate properties associated with a diverse group of quality healthcare provider clients in markets where the respective healthcare provider maintains a strong presence. Management believes that the Company has a strategic advantage in providing its services to a more diverse group of healthcare providers because the Company is not affiliated with any of its clients and does not expect to be affiliated with potential clients.

Management believes that client diversification reduces the Company’s potential exposure to unsuccessful healthcare service strategies and to a concentration of credit with any one healthcare provider. The following table identifies the healthcare providers that accounted for more than 10% of the Company’s revenues during the year ended December 31, 2003:


Provider	Percent of Revenues

HealthSouth Corporation		13	%
HCA Inc.		11	%

Approximately 77% of the Company’s real estate investments consist of properties leased to unaffiliated lessees pursuant to long-term net master lease agreements or subject to financial support agreements with the healthcare operators that provide guarantees of the return on the Company’s investment in the properties. Approximately 23% are multi-tenanted properties with occupancy leases, but without other financial support agreements. The Company’s recent real estate acquisitions have not had master lease or property operating agreement financial support arrangements with the health systems on whose campuses the acquired properties are located. Rather, the income from such investments is derived solely from rents paid by the occupying tenants, which include physician practices and hospital operations. Since January 1, 2003, only $10 million in new real estate investments were acquired with property operating agreement financial support arrangements. The Company expects this trend to continue given the highly competitive environment for healthcare real estate acquisitions.

The Company focuses predominantly on outpatient healthcare facilities, which are designed to provide medical services outside of traditional inpatient hospital or nursing home settings. Management believes the outpatient services segment of the healthcare industry provides the most cost-effective delivery setting and, because of increasing cost pressures, this segment of the healthcare-related real estate market offers the greatest potential for future growth. When compelling opportunities are presented, the Company will invest from time to time in properties associated with the senior living and nursing home industries.

The Company acquires existing healthcare facilities, provides property management, leasing and build-to-suit development services, and capital for the construction of build-to-suit developments for qualified healthcare operators. The Company owns a diversified portfolio of healthcare properties, many of which are subject to long-term leases or financial support arrangements to ensure the continuity of revenues and coverage of costs and expenses relating to the properties by the tenants and the related healthcare operators.

Development projects require the Company to provide funding to build facilities on property owned or leased by the Company. In most development transactions, the Company acts as developer and owner and has approval

authority with regard to plans, specifications, budgets and time schedules for the completion of the development of the property.

The master lease and property operating agreements were entered into upon the conveyance to the Company of the facilities, and have initial terms of ten to 20 years with, in some cases, one or more renewal terms exercisable by the healthcare provider of five years each. Most of the agreements are subject to earlier termination upon the occurrence of certain contingencies. As of December 31, 2003, the weighted average remaining lease term pursuant to these agreements was approximately 6.8 years, with expiration dates through 2022. Certain of the agreements also have an option to repurchase the property at specified times during the term of the agreements generally for a price approximately equal to the greater of the fair market value of such property or the Company’s investment in such property. Base rent or support payments vary by agreement taking into consideration various factors, including the credit of the property lessee, the healthcare operator, and the operating performance, location, and physical condition of the property. Many of the property agreements contain provisions for additional rent or support payment increases. The existence and nature of provisions for additional payments in any given agreement relate to, among other factors, the financial strength of the respective property lessee, the healthcare operator, or both, as well as other lease terms.

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

Acquisitions and Dispositions during the Fourth Quarter of 2003

There were no acquisitions of properties during the fourth quarter of 2003. During the fourth quarter of 2003, the Company sold a 19,000 square foot comprehensive ambulatory care center in Navarre, Florida for $2.8 million in net proceeds. Also, a mortgage note receivable on a 41,515 square foot physician clinic in Harlingen, Texas was repaid totaling $0.5 million in net proceeds.

Contractual Obligations

As of December 31, 2003, the Company had contractual obligations of approximately $749.9 million. For a more detailed description of these contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – LIQUIDITY AND CAPITAL RESOURCES – Contractual Obligations,” which is incorporated by reference into Item 7 of this Annual Report from Exhibit 13 hereto.

Mortgage Portfolio

As of December 31, 2003, the Company’s mortgage portfolio totaled $91.8 million. Approximately 35% of the mortgage notes receivable are secured by assisted living facilities, 25% are secured by independent living facilities, and 22% are secured by skilled nursing facilities. The 14 mortgages in the portfolio at December 31, 2003 represent nine operators.

As of December 31, 2003, the weighted average maturity of the mortgage portfolio was approximately 3.2 years, with maturity dates through October 2013. Interest rates ranged from 8.68% to 17.26% and are generally adjustable each year to reflect increases in the Consumer Price Index. Substantially all mortgages are subject to a prepayment penalty or exit fee.

Competition

The Company competes for property acquisitions with, among others:

	•		Investors;

	•		Healthcare providers;

	•		Other healthcare-related REITs;

	•		Real estate partnerships; and

	•		Financial institutions.

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

The business of providing services relating to the day-to-day management and leasing of multi-tenanted healthcare properties and to the supervision of the development of new healthcare facilities is highly competitive and is subject to price, personnel cost and other competitive pressures upon its profitability. The Company will compete for management contracts and development agreements with respect to properties owned or to be developed by the Company.

Government Regulation

The investments made by the Company are with active participants in the healthcare industry. The healthcare industry is undergoing substantial changes due to rising costs in the delivery of healthcare services, rising competition for patients, and constant evaluation of reimbursement levels by private and governmental payors. Further, the healthcare industry is faced with increased scrutiny by federal and state legislative and administrative authorities, thus presenting the industry and its individual participants with significant uncertainty. The Company believes that these changes and uncertainties present significant opportunities for the Company to assist in providing solutions to some of these pressures; however, these various changes can affect the economic performance of some or all of its tenants and clients. The Company cannot predict the degree to which these changes may affect the economic performance of the Company, positively or negatively.

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

The provisions of the Social Security Act addressing illegal remuneration (the “Anti-Kickback Statute”) prohibit providers and others from, among other things, soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a service or item covered by a federal or state healthcare program or ordering or arranging for or recommending the order of any covered service or item. Violations of this statute may be punished by a fine of up to $50,000 or imprisonment for each violation and damages up to three times the total amount of remuneration.

The federal physician self-referral law, commonly known as Stark II (the “Stark Law”), prohibits certain types of practitioners (including a medical doctor, doctor of osteopathy, optometrist, dentist or podiatrist) from making referrals for certain designated health services paid in whole or in part by Medicare and Medicaid to entities with which the practitioner or a member of the practitioner’s immediate family has a financial relationship, unless the financial relationship fits within an applicable exception to the Stark Law. The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may

incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in Medicare and Medicaid.

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

A significant portion of the revenue of healthcare operators is derived from government reimbursement programs, such as Medicare and Medicaid. Although lease payments to the Company are not directly affected by the level of government reimbursement, to the extent that changes in these programs adversely affect healthcare operators, such changes could have an impact on their ability to make lease payments to the Company. The Medicare program is highly regulated and subject to frequent and substantial changes. In recent years, fundamental changes in the Medicare program (including the implementation of a prospective payment system for outpatient and skilled nursing services in which facilities are reimbursed generally a flat or fixed amount) have resulted in reduced levels of payment for a substantial portion of healthcare services.

Considerable uncertainties surround the future determination of payment levels under government reimbursement programs. In addition, governmental budgetary concerns may significantly reduce future payments made to healthcare operators. It is possible that future payment rates will not be sufficient to cover cost increases in providing services to patients. Reductions in payments pursuant to government healthcare programs could have an adverse impact on a healthcare operator’s financial condition and, therefore, could adversely affect the ability of such operator to make rental payments.

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

Legislative Developments

Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. Among the proposals under consideration are cost controls on state Medicaid reimbursements, healthcare provider cost-containment initiatives by public and private payors, healthcare coverage for the uninsured, increased scrutiny of medical errors, limits on damages claimed in physician malpractice lawsuits, and a “Patient Bill of Rights” to increase the liability of insurance companies as well as the ability of patients to sue in the event of a wrongful denial of claim. The Company cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, such proposals would have on the Company’s business.

Environmental Matters

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

A property can also be negatively impacted either through physical contamination or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties. Certain of the properties owned by the Company or managed or developed by its property management subsidiary are adjacent to or near properties that contain underground storage tanks or that have released petroleum products or other hazardous or toxic materials into the soils or groundwater.

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

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

Insurance

Under their leases or financial support agreements, the healthcare operators are required to maintain, at their expense, certain insurance coverages relating to their operations at the leased facilities. In addition, the Company maintains appropriate liability and casualty insurance on its assets and operations. The Company has also obtained title insurance with respect to each of the properties it owns in amounts equal to their respective purchase prices, insuring that the Company holds title to each of the properties free and clear of all liens and encumbrances except those approved by the Company. In the opinion of management of the Company, each of the properties owned by the Company is adequately covered by hazard, liability and business interruption rent insurance.

Employees

As of February 1, 2004, the Company employed 159 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.

Federal Income Tax Information

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

Introduction

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

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

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

Taxation of the Company

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

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

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

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

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

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

	•		If the Company should fail to satisfy either the 75% or 95% gross income test (as discussed below), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test.

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

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

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

Requirements for Qualification as a REIT

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

Organizational Requirements and Share Ownership Tests

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

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

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

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

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

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

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

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

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

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

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

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

Income Tests

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

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

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

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

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

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

If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as “rents from real property.” Generally, this 15% test is applied separately to each lease. The portion of rental income treated as attributable to personal property is determined according to the ratio of the fair market value of the personal property to the total fair market value of the property that is rented. The determination of what fixtures and other property constitute personal property for federal tax purposes is difficult and imprecise. The Company does not have 15% by value of any of its properties classified as personal property. If, however, rent payments do not qualify, for reasons discussed above, as rents from real property for purposes of Section 856 of the Code, it will be more difficult for the Company to meet the 95% and 75% gross income tests and continue to qualify as a REIT.

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

If the Company were to fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions would generally be available if the Company’s failure to meet such test or tests was due to reasonable cause and not to willful neglect, if the Company attaches a schedule of the sources of its income to its return, and if any incorrect information on the schedule was not due to fraud with an intent to evade tax. It is not possible, however, to know whether the Company would be entitled to the benefit of these relief provisions since the application of the relief provisions is dependent on future facts and circumstances. If these provisions were to apply, the Company would be subjected to tax equal to 100% of the net income attributable to the greater of the amount by which the Company failed either of the 75% or the 95% gross income tests. The Company has analyzed its gross income through December 31, 2003 and determined that it has met the 75% and 95% gross income tests for 2003 and preceding years.

Asset Tests

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

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

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

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

	•		Of the investments included in the 25% asset class, except for TRS, the value of any one issuer’s securities owned by the Company may not exceed 5% of the value of the Company’s total assets, and the Company may not own more than 10% of any one issuer’s outstanding voting securities. Securities issued by affiliated qualified REIT subsidiaries (“QRS”), which are corporations wholly owned by the Company, either directly or indirectly, that are not TRS, are not subject to the 25% of total assets limit, the 5% of total assets limit or the 10% of a single issuer’s voting securities limit. The existence of QRS are ignored, and the assets, income, gain, loss and other attributes of the QRS are treated as being owned or generated by the Company, for federal income tax purposes. The Company currently has 47 subsidiaries and other affiliates that it employs in the conduct of its business.

If the Company meets the 25% requirement at the close of any quarter, it will not lose its status as a REIT because of a change in value of its assets unless the discrepancy exists immediately after the acquisition of any security or other property that is wholly or partly the result of an acquisition during such quarter. Where a failure to satisfy the 25% asset test results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of such quarter. The Company maintains adequate records of the value of its assets to maintain compliance with the 25% asset test and to take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter.

Distribution Requirement

In order to qualify as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount equal to or greater than the excess of (a) the sum of (i) 90% of the Company’s “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and the Company’s net capital gain) and (ii) 90% of the net income (after tax), if any, from foreclosure property, over (b) the sum of certain non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). These requirements may be waived by the Internal Revenue Service (“IRS”) if the Company establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax described below. To the extent that the Company does not distribute all of its net long-term capital gain and all of its “real estate investment trust taxable income,” it will be subject to tax thereon. In addition, the Company will be subject to a 4% excise tax to the extent it fails within a calendar year to make “required distributions” to its shareholders of 85% of its ordinary income and 95% of its capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for such preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of the taxable income of the Company for the taxable year (without regard to the deduction for dividends paid) and all amounts from earlier years that are not treated as having been distributed under the provision. Dividends declared in the last quarter of the year and paid during the following January will be treated as having been paid and received on December 31 of such earlier year. The Company’s distributions for 2003 were adequate to satisfy its distribution requirement.

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

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

Federal Income Tax Treatment of Leases

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

Other Issues

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

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

Subject to a safe harbor exception for annual sales of up to seven properties (or properties with a basis of up to 10% of the REIT’s assets) that have been held for at least four years, gain from sales of property held for sale to

customers in the ordinary course of business is subject to a 100% tax. The simultaneous exercise of options to acquire leased property that may be granted to certain tenants or other events could result in sales of properties by the Company that exceed this safe harbor. However, the Company believes that in such event, it will not have held such properties for sale to customers in the ordinary course of business.

Depreciation of Properties

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

Failure to Qualify as a REIT

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

Taxation of Tax-Exempt Shareholders

The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a tax-exempt employees’ pension trust do not constitute “unrelated business taxable income,” even though the REIT may have financed certain of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and are subject to revocation or modification by the IRS, based upon the revenue ruling and the analysis therein, distributions made by the Company to a U.S. shareholder that is a tax-exempt entity (such as an individual retirement account (“IRA”) or a 401(k) plan) should not constitute unrelated business taxable income unless such tax-exempt U.S. shareholder has financed the acquisition of its shares with “acquisition indebtedness” within the meaning of the Code, or the shares are otherwise used in an unrelated trade or business conducted by such U.S. shareholder.

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

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

Taxation of Non-U.S. Shareholders

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

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

Ordinary Dividends

Distributions made by the Company that are not attributable to gain from the sale or exchange by the Company of United States real property interests and that are not designated by the Company as capital gain dividends will be treated as ordinary income dividends to the extent made out of current or accumulated earnings and profits of the Company. Generally, such ordinary income dividends will be subject to United States withholding tax at the rate of 30% on the gross amount of the dividend paid unless reduced or eliminated by an applicable United States income tax treaty. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S. Shareholder has filed an IRS Form 1001 with the Company, certifying the Non-U.S. Shareholder’s entitlement to treaty benefits.

Non-Dividend Distributions

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

Capital Gain Dividends

As long as the Company continues to qualify as a REIT, distributions made by the Company that are attributable to gain from the sale or exchange by the Company of any United States real property interests (“USRPI”) will be taxed to a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder as if such distributions were gains “effectively connected” with the conduct of a trade or business in the United States. Accordingly, a Non-U.S. Shareholder will be taxed on such distributions at the same capital gain rates applicable to U.S. Shareholders (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the case of a corporate Non-U.S. Shareholder that is not entitled to treaty relief or exemption. The Company will be required to withhold tax from any distribution to a Non-U.S. Shareholder that could be designated by the Company as a USRPI capital gain dividend in an amount equal to 35% of the gross distribution. The amount of tax withheld is fully creditable against the Non-U.S. Shareholder’s FIRPTA tax liability, and if such amount exceeds the Non-U.S.

Shareholder’s federal income tax liability for the applicable taxable year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In addition, if the Company designates prior distributions as capital gain dividends, subsequent distributions, up to the amount of such prior distributions, will be treated as capital gain dividends for purposes of withholding.

Disposition of Stock of the Company

Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of stock of the Company generally will not be subject to United States taxation unless such stock constitutes a USRPI within the meaning of FIRPTA. The stock of the Company will not constitute a USRPI so long as the Company is a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT in which at all times during a specified testing period less than 50% in value of its stock or beneficial interests are held directly or indirectly by Non-U.S. Shareholders. The Company believes that it will be a “domestically controlled REIT,” and therefore that the sale of stock of the Company will not be subject to taxation under FIRPTA. However, because the stock of the Company is publicly traded, no assurance can be given that the Company is or will continue to be a “domestically controlled REIT.” Notwithstanding the foregoing, gain from the sale or exchange of stock of the Company that is not otherwise subject to FIRPTA will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States. In such case, the nonresident alien individual will be subject to a 30% United States withholding tax on the amount of such individual’s gain.

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

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

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

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

Information Reporting Requirements and Backup Withholding Tax

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

•

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

•

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

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

State and Local Taxes

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

Real Estate Investment Trust Tax Proposals

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

Other Tax Proposals and Legislation

On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. This new tax legislation reduces the maximum individual tax rate for long-term capital gains generally from 20% to 15% (for sales occurring after May 6, 2003 through December 31, 2008) and for dividends generally from 38.6% to 15% (for tax years from 2003 through 2008). Without future congressional action, the maximum tax rate on long-term capital gains will return to 20% in 2009, and the maximum rate on dividends will move to 35% in 2009 and 39.6% in 2011. Because a REIT is not generally subject to federal income tax on the portion of its REIT taxable income or capital gains distributed to its shareholders, distributions of dividends by a REIT are generally not eligible for the new 15% tax rate on dividends. As a result the Company’s ordinary REIT dividends will continue to be taxed at the higher tax rates (currently, a maximum of 35%) applicable to ordinary income.

ERISA Considerations

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

A fiduciary making the decision to invest in stock of the Company on behalf of a prospective purchaser which is an ERISA plan, a tax-qualified retirement plan, an IRA or other employee benefit plan is advised to consult its own

legal advisor regarding the specific considerations arising under ERISA, Section 4975 of the Code, and (to the extent not preempted) state law with respect to the purchase, ownership or sale of stock by such plan or IRA.

Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs

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

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

Status of the Company under ERISA

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

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

Under the Regulations, a “publicly-offered security” is a security that is (i) freely transferable, (ii) part of a class of securities that is widely-held and (iii) either (a) part of a class of securities that is registered under section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or (b) sold to a Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such longer period allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. Whether a security is considered “freely transferable” depends on the facts and circumstances of each case. Generally, if the security is part of an offering in which the minimum investment is $10,000 or less, any restriction on or prohibition against any transfer or assignment of such security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not of itself prevent the security from being considered freely transferable. A class of securities is considered “widely-held” if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another.

The Company believes that the stock of the Company will meet the criteria of the publicly-offered securities exception to the look-through rule in that the stock of the Company is freely transferable, the minimum investment

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

Available Information

The Company makes available to the public free of charge through its internet website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission. The Company’s internet website address ishttp://www.healthcarerealty.com. The Company is not including the information contained on the Company’s website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

Corporate Governance Guidelines

The Company has adopted Corporate Governance Guidelines. The Corporate Governance Guidelines are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any shareholder who requests a copy.

Committee Charters

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

Cautionary Statements

This Annual Report on Form 10-K 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” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, that could significantly affect the Company’s current plans and expectations and future financial condition and results.

Such risks and uncertainties include, among other things, the following risks including those described in more detail below:

•

Changes in the financial condition or corporate strategy of the Company’s primary tenants and in particular those in the senior living assets sector;

	•		Business conditions and the general economy;

	•		The availability of debt and equity capital with favorable terms and conditions;

	•		The federal, state and local regulatory environment; and

	•		The ability of the Company to maintain its qualification as a REIT.

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

The United States Department of Justice and Securities and Exchange Commission have accused HealthSouth Corporation and several of its officers, including its former Chief Executive Officer, of overstating earnings and assets included in HealthSouth’s financial statements. The case is still under investigation. HealthSouth hired a firm of forensic accountants to assist it in investigating the allegations.

On August 28, 2003, HealthSouth publicly announced that its lending banks had waived a payment blockage to allow HealthSouth to pay $117 million in past due interest to the holders of its subordinated indebtedness. On January 16, 2004, HealthSouth publicly announced that it had refinanced its convertible subordinated debentures due April 1, 2003 from the net proceeds of a $355 million, seven-year maturity, senior subordinated term loan. HealthSouth stated that it is current on all outstanding principal and interest payments due under HealthSouth’s various borrowing agreements.

The Company owns 27 facilities that are operated by HealthSouth, of which 25 are master leased and two are multi-tenanted facilities in which HealthSouth is a tenant providing surgery, diagnostic and related services. The Company’s total investment in these facilities was $267.7 million, or approximately 16.3% of its total investments, at December 31, 2003. Approximately 15% of the Company’s 2003 revenues were related to these properties. Since the public announcement of the case against HealthSouth in March 2003, the Company has received all material amounts due from HealthSouth. The Company can give no assurance that receipt of such amounts will continue.

Tenet Healthcare Corporation and its subsidiaries are subject to several federal and state civil and criminal enforcement actions and several related civil lawsuits. These claims involve allegations against Tenet and several of its hospitals of illegal kickbacks to induce referrals to the hospitals, improper Medicare coding practices, including on Medicare cost reports non-reimbursable costs related to physicians’ practices, improper outlier payments, and inflating charges for medical services, pharmaceutical supplies and prescription drugs. On August 4, 2003, Tenet reached a settlement in the amount of $54 million with the United States and the State of California arising out of claims that two physicians who had privileges at one of Tenet’s hospitals performed unnecessary invasive cardiac procedures at the hospital.

Tenet has stated in its public filings with the SEC that its financial statements do not reflect all potential liabilities that may ultimately arise from these matters, that such liabilities individually or in the aggregate could be material, and that if and when recognized, the effect of such liabilities could have a material adverse effect on Tenet’s liquidity, financial position and results of operations.

The Company owns 13 facilities that are operated by Tenet, of which six are master leased, six are subject to financial support agreements whereby Tenet guarantees the Company a certain return on its investments, and one is a multi-tenanted facility in which Tenet is a tenant. The Company’s total investment in these facilities was $109.0 million, or approximately 6.5% of its total investments, at December 31, 2003. Approximately 11% of the Company’s 2003 revenues were related to these properties. The Company has received no indication from Tenet that it will be unable to continue paying amounts owed to the Company under its current leases and financial support agreements, but the Company can give no assurance that receipt of such amounts will continue.

Adverse trends in the financial condition and corporate strategy of healthcare providers can negatively affect the lease revenues and values of the Company’s investments.

The healthcare service industry is currently experiencing:

	•		Substantial changes in the method of delivery of healthcare services;

	•		Intense competition among healthcare providers for patients;

	•		Increased expense for uninsured patients;

	•		Continuing pressure by private and governmental payors; and

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

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

Two healthcare providers account for 28% of the Company’s portfolio, which would magnify the negative effect on the Company if a larger provider were to suffer financial hardships.

Currently, approximately 28% of the Company’s real estate portfolio, including mortgages, is leased to, or supported by its two largest healthcare provider clients. To varying degrees, these providers have experienced the pressures listed above. Any financial problems experienced by these providers would negatively impact the support arrangements that the Company has with these providers and require the Company to rely solely upon rental revenue from occupant tenants in the event that the providers’ financial problems significantly deteriorated their earnings and ability to meet support commitments. If the Company is required to rely solely upon tenant occupants with respect to one or more properties, it will experience the typical risks associated with real estate investments enjoying no supplemental credit support, including competition for individual tenants and the renewal or roll-over of existing leases. Conversely, if the inpatient occupancy rate at a hospital near a Company facility deteriorated to a level at which operating cash flows would be insufficient to cover the payments to the Company, the Company would have to rely upon the general credit of the provider or the related guarantor, if any.

The highly competitive environment for healthcare real estate is expected to result in a reduction of financial support agreements, which could result in higher vacancy rates and is likely to result in increased management expenses.

Approximately 77% of the Company’s real estate investments consist of properties leased pursuant to long-term net master lease agreements or subject to financial support agreements. Approximately 23% are multi-tenanted properties with occupancy leases, but without other financial support agreements. The Company’s recent acquisitions have not had master lease or financial support arrangements, and the Company expects this trend to continue given the highly competitive environment for healthcare real estate acquisitions. This trend could result in higher vacancy rates in the Company’s properties and, because the occupancy leases with multi tenants require more management than master leases, is likely to result in increased management expenses.

Operators of senior living assets continue to experience financial pressure which may affect their ability to meet their obligations to the Company.

Due to a variety of factors, operators of senior living facilities continue to experience financial pressure. These factors include the implementation of cost-containment initiatives by private and governmental payors as well as increased liability insurance expense. As a result of the acquisition of Capstone Capital Corporation in 1998, the Company’s portfolio of senior living facilities increased substantially and constituted approximately 28.5% of its investments at December 31, 2003. Since the Capstone acquisition, several senior living facility operators have declared bankruptcy. These operators were mainly large, publicly-traded companies which comprised a relatively

small percentage of the overall senior living industry. The Company cannot be certain that additional operator failures in this sector will not occur.

A failure to reinvest cash available to it could adversely affect the Company’s future revenues and its ability to increase dividends to shareholders; there is considerable competition in the Company’s market for attractive investments.

From time to time, the Company will have cash available from (1) the proceeds of sales of shares of its securities, (2) principal payments on its mortgage investments, and (3) the sale of its properties, including non-elective dispositions, under the terms of master leases or similar financial support arrangements. The Company must re-invest these proceeds, on a timely basis, in another healthcare investment or in a qualified short-term investment. The Company competes for real estate investments with a broad variety of potential investors. This competition for attractive investments negatively affects the Company’s ability to make timely investments on acceptable terms. Delays in acquiring properties will negatively impact revenues and perhaps the Company’s ability to increase its distributions to shareholders.

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

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

A failure to maintain or increase the Company’s dividend could reduce the market price of its stock.

The Company has raised its quarterly dividend each consecutive quarter since its initial public offering. The ability to maintain or raise its dividend is dependent, to a large part, on growth of funds from operations. This growth in turn depends upon increased revenues from additional investments, rental increases and income from administrative and management services.

If a provider lost its licensure or certification, the Company would have to obtain another provider for the affected facility.

Healthcare providers are subject to federal and state laws and regulations, which govern financial and other arrangements between healthcare operators. While the Company’s management services provide guidance for compliance with fraud and abuse statutes, the Company has no direct control over its tenants’ ability to meet the numerous state and federal regulatory requirements. If a tenant does not continue to meet all regulatory requirements, such tenant may lose its ability to provide or bill for healthcare services. If the Company could not attract another healthcare provider on a timely basis or on acceptable terms, the Company’s revenues would suffer. In addition, many of the Company’s properties are special-purpose facilities that may not be easily adaptable to uses unrelated to healthcare. Transfers of operations of healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.

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

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

Item 2. Properties

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

The Company’s headquarters, located in offices at 3310 West End Avenue in Nashville, Tennessee, are leased from an unrelated third party. The Company’s current lease agreement, which commenced on November 1, 2003, covers approximately 24,969 square feet of rented space and expires on October 31, 2010, with two five-year renewal options. Annual base rent is approximately $450,000 in the first lease year and is increased approximately 3.25% annually.

Item 3. Legal Proceedings

On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation, “Capstone”), a wholly-owned affiliate of the Company, was served with the Third Amended Verified Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit alleges that certain officers and directors of HealthSouth, who were also officers and directors of Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties back to HealthSouth at artificially high values, in violation of their fiduciary obligations to HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the Capstone officers and directors remained in their positions following the Company’s acquisition of Capstone. The complaint seeks an accounting and disgorgement of monies obtained by the allegedly wrongful conduct and other unspecified damages. The Company does not believe that these claims have merit and has filed a motion to dismiss the case asserting various defenses, including the statute of limitations.

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

Item 4. Submission of Matters to a Vote of Securityholders

No matter was submitted to a vote of shareholders during the fourth quarter of 2003.

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Shares of the Company’s common stock are traded on The New York Stock Exchange under the symbol “HR.” As of December 31, 2003, there were approximately 1,908 shareholders of record. The following table sets forth the high and low sales prices per common share and the distributions declared per common share in the periods indicated.


					Distributions
					Declared
	High		Low		per Share

2003
First Quarter	$	29.93	$	22.96	$	0.610
Second Quarter		31.24		24.42		0.615
Third Quarter		33.00		29.17		0.620
Fourth Quarter		36.74		31.86		0.625
2002
First Quarter	$	30.94	$	27.15	$	0.590
Second Quarter		32.10		27.50		0.595
Third Quarter		32.35		23.75		0.600
Fourth Quarter		32.34		27.25		0.605

On January 27, 2004, the Company declared an increase in its quarterly common stock dividend from $0.625 per share ($2.50 annualized) to $0.630 per share ($2.52 annualized) payable to shareholders of record as of February 13, 2004. This dividend will be paid on March 4, 2004. While the Company has no present plans to change its quarterly common stock dividend policy, the dividend policy is reviewed each quarter by the Board of Directors. Future distributions will be declared and paid at the discretion of the Board of Directors and will depend upon cash generated by operating activities, the Company’s financial condition, relevant financing instruments, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant.

Equity Compensation Plan Information

The following table provides information about the Company’s Common Stock that may be issued upon grants of restricted stock and the exercise of options, warrants and rights under all of the Company’s existing compensation plans as of December 31, 2003, including the 1993 Employees Stock Incentive Plan, the 2003 Employees Restricted Stock Incentive Plan, the 2000 Employee Stock Purchase Plan, the 1994 Dividend Reinvestment Plan, and the 1995 Restricted Stock Plan for Non-Employee Directors. The 1993 Employees Stock Incentive Plan expired in 2002, and no further grants will be made under this plan (although pre-existing restricted stock grants remain outstanding and continue to be subject to the terms of the plan).


						Number of securities remaining
		Number of securities to		Weighted-average		available for future issuance under
		be issued upon exercise		exercise price of		equity compensation plans (excluding
		of outstanding options,		outstanding options,		securities reflected in the first
Plan category		warrants and rights(1)		warrants and rights(1)		column)(2)

Equity compensation plans approved by security holders			324,854		—		1,508,138	(2	)
Equity compensation plans not approved by security holders			0		—		2,089,657	(3	)

	Total		324,854		—		3,597,795

(1)

The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of Common Stock may be purchased at a per share price equal to 85% of the fair market value of the Common Stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.

(2)		Includes securities available for future issuance under the 2000 Employee Stock Purchase Plan, the 1994 Dividend Reinvestment Plan, and the 1995 Restricted Stock Plan for Non-Employee Directors. No securities are available for future issuance under the 1993 Employees Stock Incentive Plan.

(3)		Includes securities available for future issuance under the 2003 Employees Restricted Stock Incentive Plan.

All of the Company’s equity compensation plans were approved by the shareholders, except the 2003 Employees Restricted Stock Incentive Plan, which provides for awards of restricted shares of the Company’s Common Stock to full-time salaried employees of the Company or its subsidiaries and affiliates on such terms and conditions, and subject to such restrictions, as the Compensation Committee may determine. Such conditions may be based on continuing employment or achievement of pre-established financial objectives or both.

Shares of Common Stock will be issued upon attaining the financial objectives. Subject to the risk of forfeiture and transfer restrictions, eligible employees shall have all rights as shareholders with respect to the shares issued pursuant to the plan, including the right to vote and receive dividends or other distributions on such shares. Upon certain merger, change in control, or liquidation events involving the Company, all shares covered by outstanding awards under the plan will immediately vest, unless provisions are made in connection with such transaction for the continuance of the plan. Moreover, all shares covered by outstanding awards will immediately vest if a participant retires or his employment with the Company is terminated without cause.

Item 6. Selected Financial Data

The Company’s selected financial data, set forth in its 2003 Annual Report to Shareholders under the caption “Selected Financial Information,” is incorporated herein by reference.

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

The Company’s information relating to management’s discussion and analysis of financial condition, set forth in the Company’s 2003 Annual Report to Shareholders under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

See “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in the Company’s 2003 Annual Report to Shareholders.

Item 8. Financial Statements and Supplementary Data

The Company’s financial statements and the related notes, together with the report of Ernst & Young LLP thereon, set forth in the Company’s 2003 Annual Report to Shareholders, are incorporated herein by reference.

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

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting: The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fourth fiscal quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the Company’s fourth fiscal quarter.

In the fourth quarter of 2003, the Company engaged Protiviti, an independent risk consulting and internal audit firm, to assist the Company in evaluating and documenting the Company’s controls and procedures.

Part III

Item 10. Directors and Executive Officers of the Registrant

Directors

Information with respect to directors, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Election of Directors,” is incorporated herein by reference.

Executive Officers

The executive officers of the Company are:


Name	Age		Position

David R. Emery		59	Chairman of the Board & Chief Executive Officer
Scott W. Holmes		49	Senior Vice President & Chief Financial Officer
J. D. Carter Steele		55	Senior Vice President & Chief Operating Officer
John M. Bryant, Jr.		37	Senior Vice President & General Counsel

Mr. Emery formed the Company and has held his current positions since May 1992. Prior to 1992, Mr. Emery was engaged in the development and management of commercial real estate in Nashville, Tennessee. Mr. Emery has been active in the real estate industry for 30 years.

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

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

Mr. Bryant became the Company’s Senior Vice President and General Counsel on November 1, 2003. From April 22, 2002 until November 1, 2003, Mr. Bryant was Vice President and Assistant General Counsel, prior to which he was in the private practice of law since 1992.

Each of the Executive Officers has entered into an employment agreement with the Company. Information with respect to the terms of office of the Executive Officers is set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Executive Compensation – Employment Contracts and Change-In-Control Arrangements,” and is incorporated herein by reference.

Code of Ethics

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

Section 16(a) Compliance

Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Security Ownership of Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference.

Item 11. Executive Compensation

Information relating to executive compensation, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Executive Compensation,” is incorporated herein by reference. The Comparative Performance Graph and the Compensation Committee Report on Executive Compensation also included in the Proxy Statement are expressly not incorporated herein by reference.

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

Information relating to the security ownership of management and certain beneficial owners, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.

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

Item 13. Certain Relationships and Related Transactions

Information relating to certain relationships and related transactions, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Certain Relationships and Related Transactions,” is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information relating to the fees paid to the Company’s accountant, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 11, 2004 under the caption “Audit Committee – Audit and Non-Audit Fees,” is incorporated herein by reference.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

Index to Historical Financial Statements, Financial Statement Schedules and Exhibits

(1)

Financial Statements:


	The following financial statements of Healthcare Realty Trust Incorporated are incorporated by reference in Item 8 of this Report from the 2003 Annual Report to Shareholders:

Audited Consolidated Financial Statements

	•		Report of Independent Auditors.

	•		Consolidated Balance Sheets – December 31, 2003 and 2002.

	•		Consolidated Statements of Income for the years ended December 31, 2003, December 31, 2002 and December 31, 2001.

	•		Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, December 31, 2002 and December 31, 2001.

	•		Consolidated Statements of Cash Flows for the years ended December 31, 2003, December 31, 2002 and December 31, 2001.

	•		Notes to Consolidated Financial Statements.

(2)

Financial Statement Schedules:


Schedule II — Valuation and Qualifying Accounts at December 31, 2003			S-1
Schedule III — Real Estate and Accumulated Depreciation at December 31, 2003			S-2
Schedule IV — Mortgage Loans on Real Estate at December 31, 2003			S-3

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

(3)

Exhibits:


Exhibit		Description
Number		of Exhibits

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

3.2	—	Amended and Restated Bylaws of the Registrant.(4)

4.1	—	Specimen stock certificate.(1)

4.2	—	Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee.(7)

4.3	—	First Supplemental Indenture, dated as of May 15, 2001, by the Company to First Union National Bank, as Trustee.(7)

4.4	—	Form of 8.125% Senior Note Due 2011.(7)

10.1	—	1993 Employees Stock Incentive Plan.(1)

10.2	—	1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(3)

10.3	—	Executive Retirement Plan, as amended.(5)

10.4	—	Retirement Plan for Outside Directors.(1)

10.5	—	Non-Qualified Deferred Compensation Plan.(5)

10.6	—	Executive Variable Incentive Compensation Plan. (5)

10.7	—	2000 Employee Stock Purchase Plan.(5)

10.8	—	Dividend Reinvestment Plan.(2)

10.9	—	2003 Employees Restricted Stock Incentive Plan. (8)

10.10	—	Amendment No. 1 to 2003 Employee Restricted Stock Incentive Plan (filed herewith).

10.11	—	Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated. (9)

10.12	—	Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated. (10)

10.13	—	Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated. (9)

10.14	—	Employment Agreement by and between J.D. Carter Steele and Healthcare Realty Trust Incorporated. (9)


Exhibit		Description
Number		of Exhibits

10.15	—	Form of Note Purchase Agreement, dated as of March 1, 2000, pertaining to $70,000,000 aggregate principal amount of 9.49% Senior Notes due April 1, 2006.(6)

10.16	—	Credit Agreement, dated as of October 24, 2003, among the Company; Bank of America, N.A.; Fleet National Bank; USB Loan Finance LLC; Wachovia Bank, National Association; Credit Lyonnais New York Branch; Key Bank, National Association; LaSalle Bank, National Association; SunTrust Bank; Union Planters Bank; and Banc of America Securities LLC. (10)

10.17	—	Retirement Agreement, dated December 31, 2002, between Healthcare Realty Trust Incorporated and Timothy G. Wallace. (9)

10.18	—	Amended and Restated Executive Retirement Plan. (8)

11	—	Statement re computation of per share earnings (contained in Note 10 to the Notes to the Consolidated Financial Statement in the Annual Report to Shareholders for the year ended December 31, 2003 filed herewith as Exhibit 13).

13	—	Certain portions of the Company’s Annual Report to Shareholders for the year ended December 31, 2003 (filed herewith).

21	—	Subsidiaries of the Registrant (filed herewith).

23	—	Consent of Ernst & Young LLP, independent auditors (filed herewith).

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

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

32	—	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (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 Registration Statement on Form S-11 (Registration No. 33-72860) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.

(3)		Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1995 and hereby incorporated by reference.

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

(5)		Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1999 and hereby incorporated by reference.

(6)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended March 31, 2000 and hereby incorporated by reference.

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

(8)		Filed as an exhibit to the Company’s Form 10-Q for the quarter ended March 31, 2002 and hereby incorporated by reference.

(9)		Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2002 and hereby incorporated by reference.

(10)

Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2003 and hereby incorporated by reference.

Executive Compensation Plans and Arrangements

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

1.		1993 Employees Stock Incentive Plan of Healthcare Realty Trust Incorporated (filed as Exhibit 10.1)

2.		1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated (filed as Exhibit 10.2)

3.		Executive Retirement Plan, as amended (filed as Exhibit 10.3)

4.		Retirement Plan for Outside Directors (filed as Exhibit 10.4)

5.		Non-Qualified Deferred Compensation Plan (filed as Exhibit 10.5)

6.		Executive Variable Incentive Compensation Plan (filed as Exhibit 10.6)

7.		2000 Employee Stock Purchase Plan (filed as Exhibit 10.7)

8.		2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.9)

9.		Amendment No. 1 to 2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.10)

10.		Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated (filed as Exhibit 10.11)

11.		Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated (filed as Exhibit 10.12)

12.		Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated (filed as Exhibit 10.13)

13.		Employment Agreement by and between J. D. Carter Steele and Healthcare Realty Trust Incorporated (filed as Exhibit 10.14)

(b)

Reports on Form 8-K

The Company furnished in accordance with Regulation FD the following reports on Form 8-K or Form 8-K/A during the fourth quarter of 2003.


Date of Earliest
Event Reported	Date Filed	Items Reported

December 4, 2003	December 3, 2003	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure
October 28, 2003	October 31, 2003	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure
		Item 12. Results of Operations and Financial Condition

	(c)		Exhibits

			The response to this portion of Item 14 is submitted as a separate section of this report. See Item 14(a)(3).

	(d)		Financial Statement Schedules

			The response to this portion of Item 14 is submitted as a separate section of this report. See Item 14(a)(2).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on February 24, 2004.


		HEALTHCARE REALTY TRUST INCORPORATED

		By:		/s/ David R. Emery

				David R. Emery
				Chairman of the Board and Chief Executive Officer

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


Signature	Title	Date

/s/ David R. Emery David R. Emery	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	February 24, 2004

/s/ Scott W. Holmes Scott W. Holmes	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	February 24, 2004

/s/ Leigh Ann Stach Leigh Ann Stach	Vice President, Financial Reporting (Principal Accounting Officer)	February 24, 2004

/s/ Errol L. Biggs, Ph.D. Errol L. Biggs, Ph.D.	Director	February 24, 2004

/s/ Charles Raymond Fernandez, M.D. Charles Raymond Fernandez, M.D.	Director	February 24, 2004

/s/ Batey M. Gresham, Jr. Batey M. Gresham, Jr.	Director	February 24, 2004

/s/ Marliese E. Mooney Marliese E. Mooney	Director	February 24, 2004

/s/ Edwin B. Morris, III Edwin B. Morris, III	Director	February 24, 2004

/s/ John Knox Singleton John Knox Singleton	Director	February 24, 2004

/s/ Dan S. Wilford Dan S. Wilford	Director	February 24, 2004

Schedule II – Valuation and Qualifying Accounts at December 31, 2003
(dollars in thousands)


				Additions

		Balance At		Charged to		Charged to					Balance
		Beginning		Costs and		Other					At End of
Description		of Period		Expenses		Accounts(2)			Deductions(1)		Period

2003	Accounts receivable allowance	$	6,827	$	1,228	$	—		$	6,393	$	1,662
	Preferred stock investment reserve		1,000		—		—			—		1,000

		$	7,827	$	1,228	$	—		$	6,393	$	2,662

2002	Mortgage notes receivable allowance	$	1,421	$	300	$	(1,028	)	$	693	$	—
	Accounts receivable allowance		3,005		3,094		1,028			300		6,827
	Preferred stock investment reserve		1,000		—		—			—		1,000

		$	5,426	$	3,394	$	—		$	993	$	7,827

2001	Mortgage notes receivable allowance	$	1,709	$	200	$	—		$	488	$	1,421
	Accounts receivable allowance		1,718		1,834		—			547		3,005
	Preferred stock investment reserve		1,000		—		—			—		1,000

		$	4,427	$	2,034	$	—		$	1,035	$	5,426

(1)

Write-off of the related receivable accounts.

(2)

Reallocation of Mortgage notes receivable allowance to Accounts receivable allowance in 2002.

Schedule III — Real Estate and Accumulated Depreciation at December 31, 2003
(dollars in thousands)


										Buildings, Improvements,
				Land						Lease Intangibles, and CIP

						Costs						Costs
						Capitalized						Capitalized
						Subsequent						Subsequent
	Number of			Initial		to				Initial		to
Facility Type	Properties		State	Investment		Acquisition		Total		Investment		Acquisition		Total

Ancillary Hospital Facilities		60	AL, AZ, CA, FL, GA, HI, KS, LA, MS, NV, PA, TN, TX, VA, WY	$	46,358	$	1,398	$	47,756	$	456,348	$	28,285	$	484,633
Assisted Living Facilities		30	AL, CT, FL, GA, MO, MS, NC, NJ, OH, PA, TN, TX, VA		8,562		—		8,562		158,344		—		158,344
Comprehensive Ambulatory Care Center		12	AZ, CA, FL, MO, TX		11,948		682		12,630		131,604		8,454		140,058
Independent Living Facilities		4	TX		—		—		—		42,839		829		43,668
Inpatient Rehabilitation Facilities		9	AL, FL, PA, TX		5,835		—		5,835		150,660		—		150,660
Medical Office Buildings		13	FL, PA, TN, TX, VA		9,143		21		9,164		89,255		3,322		92,577
Other Inpatient Facilities		4	CA, MI, PA, TX		9,012		150		9,162		26,296		—		26,296
Other Outpatient Facilities		12	AL, AR, CA, FL, GA, IL, MO, MS, NV, VA		7,090		437		7,527		35,481		190		35,671
Physician Clinics		27	CA, FL, GA, IL, MA, MO, TN, TX, VA		26,654		165		26,819		114,630		2,355		116,985
Skilled Nursing Facilities		33	AZ, CO, FL, IN, KS, MI MO, OK, PA, TN, TX, VA		12,001		276		12,277		167,389		2,343		169,732
Total Real Estate		204			136,603		3,129		139,732		1,372,846		45,778		1,418,624
Corporate Property		—			—		—		—		—		—		—

Total Property		204		$	136,603	$	3,129	$	139,732	$	1,372,846	$	45,778	$	1,418,624

[Continued from above]


			(3)		(1)
	Personal		Total		Accumulated				Date		Date
Facility Type	Property		Assets		Depreciation		Encumbrances		Acquired		Constructed

Ancillary Hospital Facilities	$	734	$	533,123	$	79,221	$	43,754		1993-2003	1970-2002 2 under const.(2)
Assisted Living Facilities		1,589		168,495		24,335		—		1998-2001	1989-2000
Comprehensive Ambulatory Care Center		98		152,786		23,722		—		1993-1998	1991-2003
Independent Living Facilities		12		43,680		7,132		—		1998	1997-1998
Inpatient Rehabilitation Facilities		—		156,495		22,735		—		1998	1983-1991
Medical Office Buildings		712		102,453		10,166		3,802		1993-2003	1978-2002
Other Inpatient Facilities		—		35,458		5,235		—		1994-1998	1983-2003
Other Outpatient Facilities		46		43,244		7,976		—		1993-1999	1906-1998
Physician Clinics		51		143,855		19,933		5,856		1993-2001	1905-1999
Skilled Nursing Facilities		1,903		183,912		29,881		—		1993-2003	1950-1998
Total Real Estate		5,145		1,563,501		230,336		53,412
Corporate Property		9,271		9,271		2,427		—

Total Property	$	14,416	$	1,572,772	$	232,763	$	53,412

(1)

Depreciation is provided on land improvements over 15 years, buildings and improvements over 31.5 or 39.0 years, lease intangibles over average remaining life of leases in place upon acquisition, and personal property over 5.0 to 7.0 years.

(2)

Development at 12/31/03.

(3)

Total assets at 12/31/03 have an estimated aggregate total cost of $1.4 billion for Federal Income Tax Purposes.

(4)

Reconciliation of Total Property and Accumulated Depreciation for the twelve months ended December 31, 2003, 2002, and 2001:

(continued on the next page)


		Year to Date Ending 12/31/03						Year to Date Ending 12/31/02						Year to Date Ending 12/31/01

		Total			Accumulated			Total			Accumulated			Total			Accumulated
		Property			Depreciation			Property			Depreciation			Property			Depreciation

Beginning Balance		$	1,484,939		$	192,293		$	1,521,213		$	159,989		$	1,489,863		$	121,376
Additions during the period:
	Real Estate		91,005			42,350			41,697			40,298			33,603			40,112
	Corporate Property		5,316			695			1,094			481			704			378
	Construction in Progress		12,805			—			6,666			—			22,251			—
Retirements/dispositions:
	Real Estate		(21,022	)		(2,329	)		(85,484	)		(8,262	)		(25,183	)		(1,862	)
	Corporate Property		(271	)		(246	)		(247	)		(213	)		(25	)		(15	)

Ending Balance		$	1,572,772		$	232,763		$	1,484,939		$	192,293		$	1,521,213		$	159,989

Schedule IV – Mortgage Loans On Real Estate
As of December 31, 2003
(dollars in thousands)


								Periodic			Original
			Interest			Maturity		Payment			Face		Carrying		Balloon
Description			Rate			Date		Terms			Amount		Amount(5)		Payment

Individual permanent mortgages in excess of 3% of the total carrying amount:
	Independent living facility located in Florida			10.50	%		6/11/2006		(6	)	$	20,971	$	17,727	$	17,176	(9	)
	Specialty hospital located in Arizona			10.39	%		11/1/2004		(1	)		17,800		16,743		16,409	(2	)
	Skilled nursing facility located in Tennessee			10.09	%		10/27/2013		(6	)		12,380		12,700		12,380	(3	)
	Assisted living facility located in Florida			9.50	%		2/1/2009		(1	)		6,300		5,985		5,378	(4	)
	Assisted living facility located in Florida			10.99	%		1/1/2008		(1	)		5,825		5,496		5,075	(4	)
	Independent living facility located in Florida			14.00	%		9/27/2006		(6	)		5,334		5,334		5,334	(10	)
	Assisted living facility located in California			9.26	%		11/1/2005		(1	)		5,300		4,926		4,736	(4	)
	Assisted living facility located in Idaho			13.29	%		10/1/2002		(1	)		4,970		4,733		4,701	(4	)
	Assisted living facility located in Arizona			11.36	%		12/15/2006		(1	)		4,805		4,633		4,452	(4	)
	Skilled nursing facility located in Tennessee			11.38	%		1/1/2003		(1	)		4,000		3,716		3,716	(8	)
	Assisted living facility located in South Carolina			8.68	%		12/1/2005		(1	)		5,273		2,912		2,734	(4	)
	Assisted living facility located in Oregon			10.48	%		2/13/2008		(7	)		2,950		2,761		2,524	(11	)
Other mortgages less than 3% of the total carrying amount:
	Two skilled nursing facilities located in the states of		From			Jan-04								3,059
		Michigan, Tennessee with original face amounts		15.16	%
		of $1.0 million and $1.625 million	to
				17.26	%
	One assisted living facility in Georgia			14.60	%	Jan-04			(1	)		1,125		1,110		1,102	(4	)

Total Mortgage Notes Receivable													$	91,835

Notes:

(1)

Paid in monthly installments of principal and interest. Principal payable in full at maturity date. Amortized over 300 months.

(2)

No prepayment penalty until 4th year, then 3% penalty scaling down 1% annually.

(3)

Prepayment penalty cannot be determined because future interest rate fluctuations are based on future Consumer Price Index.

(4)

Yield Maintenance Amount is defined generally as % of the Principal Amount Being Prepaid x [(Present Value of the principal and Interest payments remaining to maturity at a discount rate) – (Principal Amount outstanding at the time of prepayment)].

(5)

Mortgages acquired in the Capstone merger generally include a purchase adjustment.

(6)

Interest only until maturity. Then principal is payable in full.

(7)

Paid in monthly installments of principal and interest. Amortized over 120 months.

(8)

Prepayment may be made with the following penalties: 1% during first 2 years, 2% during third loan year, 1.5% in fourth loan year, 1% thereafter until maturity.

(9)

Prepayment may be made after 1 year provided that any partial prepayment exceeds $500,000 and partial prepayments cannot reduce principal balance by more than $4 million in any 12 month period.

(10)

Prepayment may be made with the following penalties: 4% during first year, 3% during second loan year, 2% in third loan year, 1% thereafter until maturity.

(11)

Prepayment may be made after 5 years with the following penalties: 5% during sixth year, 4% during seventh loan year, 3% in eighth loan year, 2% during the ninth lease year, and 1% during the tenth lease year. Prepayment may be made after the tenth lease year without prepayment premium.

(continued on next page)


		Years Ended December 31,

		2003			2002			2001

Balance at beginning of period		$	102,792		$	122,074		$	171,006
Additions during period:
	New or acquired mortgages		28,952			3,978			2,962

			28,952			3,978			2,962
Deductions during period:
	Scheduled principal payments		(743	)		(1,032	)		(1,540	)
	Mortgage repayments		(20,642	)		(21,592	)		(20,648	)
	Foreclosures and assignments		(18,524	)		—			—
	Amortization		—			(636	)		(635	)
	Other		—			—			552

			(39,909	)		(23,260	)		(51,894	)

Balance at end of period		$	91,835		$	102,792		$	122,074

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. junior Bad

Healthcare Realty Trust 10-K2003 FY Annual report

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