Healthcare Realty Trust 10-K 2005 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: December 31, 2005

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____ to ______

Commission File Number: 1-11852

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

     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. Yesþ 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large accelerated filerþ                 Accelerated filero                 Non-accelerated filero

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     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, 2005) of the Registrant held by non-affiliates on June 30, 2005 was approximately $1,783,279,568.

     As of January 31, 2006, 47,768,148 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s 2005 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 9, 2006 are incorporated into Part III of this Report.

TABLE OF CONTENTS

	Page
Item 1. Business		3
Item 1A. Risk Factors		19
Item 1B. Unresolved Staff Comments		21
Item 2. Properties		21
Item 3. Legal Proceedings		21
Item 4. Submission of Matters to a Vote of Securityholders		22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		22
Item 6. Selected Financial Data		23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		23
Item 8. Financial Statements and Supplementary Data		23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		23
Item 9A. Controls and Procedures		23
Item 9B. Other Information		23
Item 10. Directors and Executive Officers of the Registrant		24
Item 11. Executive Compensation		25
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		25
Item 13. Certain Relationships and Related Transactions		25
Item 14. Principal Accountant Fees and Services		25
Item 15. Exhibits and Financial Statement Schedules		25
SIGNATURES		29
EX-13 PORTIONS OF THE COMPANY'S ANNUAL REPORT
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23 CONSENT OF BDO SEIDMAN, 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

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PART I

Disclosure Regarding Forward-Looking Statements

     This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, that could significantly affect the Company’s current plans and expectations and future financial condition and results.

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

     Such risks and uncertainties include, among other things, the following risks including those described in more detail under the heading “Risk Factors,” beginning on page 19 of this report:

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

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

• A failure to pay dividends at current levels;

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

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

• Business and general economic conditions;

• The federal, state and local regulatory environment;

• The possibility of underinsured or uninsured losses; and

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

Item 1.Business

Overview

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

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

     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 focused primarily on medical office buildings and outpatient facilities. As of December 31, 2005, the Company had invested in real estate properties, including an investment in an unconsolidated limited liability company (“LLC”), as shown in the table below (dollars and square feet in thousands):

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	Number of
	Investments		Investment Amounts				Square Feet
Owned properties:
Long-term net master leases
Medical office/outpatient facilities		56	$	331,557	16.78	%		2,143
Assisted living facilities		26		127,678	6.46	%		887
Skilled nursing facilities		29		145,115	7.35	%		974
Inpatient Rehab facilities		9		156,495	7.92	%		726
Independent living facilities		7		63,299	3.20	%		643
Other inpatient facilities		3		32,569	1.65	%		216
		130		856,713	43.36	%		5,589
Financial support agreements
Medical office/outpatient facilities		17		165,569	8.38	%		1,184
		17		165,569	8.38	%		1,184
Multi-tenanted with occupancy leases
Medical office/outpatient facilities		87		797,584	40.37	%		5,681
		87		797,584	40.37	%		5,681
Corporate property		—		13,175	0.67	%		—
		—		13,175	0.67	%		—
Total owned properties, excluding assets held for sale		234		1,833,041	92.78	%		12,454
Assets held for sale
Medical office/outpatient facilities		3		26,108	1.32	%		138
		3		26,108	1.32	%		138
Total owned properties		237		1,859,149	94.10	%		12,592
Mortgage loans:
Assisted living facilities		8		59,826	3.03	%
Skilled nursing facilities		3		39,969	2.03	%
Independent living facility		1		6,000	0.30	%
		12		105,795	5.36	%
Unconsolidated LLC investment:
Medical office/outpatient facilities		1		10,720	0.54	%
		1		10,720	0.54	%
Total real estate investments		250	$	1,975,664	100.00	%

     At December 31, 2005, the Company provided property management services for 138 healthcare-related properties nationwide, totaling approximately 7.3 million square feet. The Company intends to maintain a portfolio of properties and mortgage notes receivable that are focused predominantly on the outpatient services and medical office segments of the healthcare industry, which are diversified by tenant, geographic location and facility type.

     As of December 31, 2005, the weighted average remaining lease term pursuant to the long-term master leases, financial support agreements, and multi-tenanted occupancy leases was approximately 5.93 years, with expiration dates ranging from 2006 to 2022.

     As of December 31, 2005, the weighted average remaining maturity of the mortgage notes receivable portfolio was approximately 1.84 years with expiration dates ranging from 2006 to 2009. Interest rates on the mortgage notes receivable at December 31, 2005 ranged from 9.83% to 13.29%. Most of the mortgage notes receivable interest rates are increased annually by a flat rate increase or by

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increases in the Consumer Price Index or LIBOR rates. The mortgage notes receivable portfolio increased, net, approximately $65.5 million, or 162%, from December 31, 2004 to December 31, 2005. This increase was the result of the Company’s reinvestment of proceeds from properties sold during 2005 pursuant to purchase options.

Business Strategy

     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, finance and develop healthcare properties, including: leasing, construction, property management, market research, tenant coordination and financial services.

     The Company acquires or develops income-producing real estate properties associated with a large group of diverse healthcare providers 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 diverse group of healthcare providers because the Company is not and does not expect to be affiliated with any healthcare provider. Management believes that diversification reduces the Company’s potential exposure to unsuccessful healthcare service strategies and to a concentration of credit risk with any one healthcare provider. Only one healthcare provider (HealthSouth Corporation at 10%) accounted for 10% or more of the Company’s revenues during the year ended December 31, 2005.

     As of December 31, 2005, approximately 53% of the Company’s real estate investments consisted of properties leased to unaffiliated lessees pursuant to long-term net master lease agreements or financial support agreements. Approximately 40% were multi-tenanted properties with occupancy leases, but without other financial support agreements. The Company’s master leases and financial support agreements are generally designed to ensure the continuity of revenues and coverage of costs and expenses relating to the properties by the tenants and the sponsoring healthcare operators. The Company’s recent medical office real estate acquisitions have not had master lease or 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 tenant, which include physician practices and hospital outpatient operations under leases of varying terms. While such arrangements do not provide the Company with the ability to seek recourse from a healthcare sponsor, they generally allow the Company to manage rents more profitably. The Company expects this trend to continue.

     The Company focuses predominantly on outpatient healthcare facilities, which are designed to provide medical services outside of traditional inpatient hospital settings. Management believes the outpatient services segment of the healthcare industry provides the most cost-effective delivery setting and, because of increasing cost pressures, along with technological advances and a heightened focus on preventive medicine, this segment of the healthcare-related real estate market offers the greatest potential for future growth. The Company also invests selectively in properties associated with the senior living and nursing home industries and will continue to selectively invest in properties in that healthcare sector. During 2005, 22% of the Company’s real property investments were in senior living properties and this trend is likely to continue in 2006.

     Where the Company engages in construction projects, it must provide funding to build facilities on property owned or leased by the Company. In most construction 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 construction of the property.

Purchase Options

     A sponsor under a property operating agreement and a lessee had given notice to the Company of their intent to purchase three properties under a property operating agreement and one property under a lease with the Company, respectively, which had not yet closed as of December 31, 2005. The three properties under the property operating agreement, which the Company had a $9.7 million ($8.0 million, net) investment as of December 31, 2005 were purchased by the sponsor in January 2006. The remaining property under a lease, in which the Company had a $16.4 million ($13.4 million, net) investment as of December 31, 2005, is scheduled to close during the second quarter of 2006. See Note 3 to the Consolidated Financial Statements, incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K, for more details.

     As of December 31, 2005, the Company had a gross investment of approximately $205.0 million in real estate properties that were subject to outstanding, exercisable contractual options to purchase, with various conditions and terms, by the respective operators and lessees that had not been exercised. The majority of the outstanding purchase options have been exercisable for a number of years prior to 2005, but have not been exercised. Historically, the Company had not experienced many purchase option exercises, but with the historically low interest rate environment during 2005, several operators exercised their options. On a probability-weighted measure, the Company estimates that approximately $34.0 million of the options exercisable at December 31, 2005 may be exercised in the future. During 2006, additional purchase options become exercisable on properties in which the Company has a gross

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investment of approximately $15.7 million. The Company anticipates, on a probability-weighted measure, that approximately $4.6 million of these additional options may also be exercised in the future. Although other properties may have purchase options exercisable in 2007 and beyond, the Company does not believe it can reasonably estimate the probability of exercise on these purchase options.

Acquisitions, Dispositions and Mortgage Repayments during 2005

   2005 Acquisitions

     During 2005, the Company acquired eight senior living facilities for $47.1 million, invested $11.1 million in a limited liability company which acquired three medical office buildings, and acquired or originated $72.0 million in six mortgage notes receivable.

   2005 Dispositions

     During 2005, the Company disposed of 17 properties and a land parcel for net proceeds totaling approximately $133.3 million and two mortgage notes receivable were repaid for net proceeds totaling approximately $4.2 million.

     The proceeds from the dispositions were used mainly to fund the acquisitions during the year. See Note 4 to the Consolidated Financial Statements, incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K, for more details on the Company’s acquisition and disposition activity during 2005.

Contractual Obligations

     As of December 31, 2005, the Company had long-term contractual obligations of approximately $1.4 billion. For a more detailed description of these contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Obligations,” incorporated by reference to Exhibit 13 to this Annual Report on Form 10-K.

Competition

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

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

Government Regulation

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

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

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

     A significant portion of the revenue of healthcare providers is derived from government reimbursement programs, such as the federal Medicare program and the joint federal and state Medicaid program. Although lease payments to the Company are not directly affected by the level of government reimbursement, to the extent that changes in these programs adversely affect healthcare providers, 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 evaluation and change. Fundamental changes in the Medicare program have resulted in a challenging operating environment for healthcare providers. Despite changes in Medicare reimbursement and other regulatory requirements from year to year, the Company expects healthcare providers to continue to adjust to new operating challenges, as they have in the past, by increasing operating efficiency and modifying their strategies for profitable operations and growth.

     Considerable uncertainties surround the future growth of payment levels under government reimbursement programs. Medicaid growth rates have been lowered in some states with budgetary concerns, and the policy for federal contributions to states will undergo reform in 2006 and 2007, which is expected to reduce future federal Medicaid spending growth. On February 13, 2006, the President signed into law the Deficit Reduction Act of 2005 (the “Deficit Reduction Act”). The Deficit Reduction Act is expected to result in a reduction of $4.7 billion in Medicaid spending growth over the next five years, including reductions in Medicaid pharmacy reimbursement, tightened asset transfer rules that determine eligibility for long-term care, and additional flexibility for states to raise beneficiary co-payments or reduce benefits. The Deficit Reduction Act also is expected to result in a reduction of $6.4 billion in Medicare spending growth over the next five years, in the form of reimbursement changes to ambulatory surgery centers and diagnostic imaging providers, no inflation update for home health providers in 2006, and the adoption of a risk-adjustment payment policy for Medicare managed care payers. However, the Deficit Reduction Act will prevent a cut in Medicare payment rates to physicians and extend the implementation date of stricter admissions criteria for Medicare patients in inpatient rehabilitation facilities. In addition, the Deficit Reduction Act will not reduce the inflationary increases in annual Medicare reimbursement rates for acute care, skilled nursing, inpatient rehabilitation and select other providers through 2007, as were originally enacted by the Medicare Modernization Act of 2003. Congress may amend this policy if pressured to curb high rates of growth in Medicare spending (versus GDP growth), and if the Medicare operating margins of healthcare providers are deemed high enough to absorb a lower rate of growth.

     The Company believes that based on historical Medicare spending data, there is no direct correlation between high federal budget deficits and lower rates of growth in Medicare reimbursement to healthcare providers. Rather, Medicare spending growth seems to be more closely related to hospital profit margins. The highest increases in Medicare spending have occurred in years of low hospital profit margins, which have also happened to be years of high federal deficits. The Company believes that there could be a reversion back to smaller increases, which would allow significant Medicare savings while still providing increases in Medicare funding for healthcare providers. It is possible that future payment rates will not be sufficient to cover cost increases in providing services to patients. Reductions in the growth of government payments could have an adverse impact on healthcare providers’ financial condition and, therefore, could adversely affect the ability of providers to make rental payments.

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

   Legislative Developments

     Each year, legislative proposals are introduced in Congress and in some state legislatures that could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Among the proposals under consideration are cost controls on state and federal Medicaid and Medicare reimbursements, healthcare provider cost-containment and quality-control initiatives by public and private payors, the implementation of refinements to Medicare payment rates for skilled nursing facilities, the implementation of heightened restrictions on admissions to inpatient rehabilitation facilities, a permanent moratorium on physician ownership of new specialty hospitals, healthcare coverage for the uninsured, increased scrutiny of medical errors, tax credits for Health Savings Accounts, re-importation of pharmaceutical drugs, improvements in healthcare information technology, and limits on damages claimed in physician malpractice lawsuits. The Company cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, such proposals would have on the Company’s business.

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Environmental Matters

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

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

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

Insurance

     Under their leases, the Company’s tenants 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, 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 December 31, 2005, the Company employed 215 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.

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Federal Income Tax Information

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

   Introduction

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

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

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

   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.

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

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

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

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

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

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

   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”);

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

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

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

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

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

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

   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

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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 or through a TRS unless (i) the Company is performing services that are usually or customarily furnished or rendered in connection with the rental of space for occupancy only and the services are of the sort that a tax-exempt organization could perform without being considered in receipt of unrelated business taxable income or (ii) the income earned by the Company for other services furnished or rendered by the Company to tenants of a property or for the management or operation of the property does not exceed a de minimis threshold generally equal to 1% of the income from such property. The Company self-manages some of its properties, but does not believe it provides services to tenants that are outside the exception. Should the Company want to provide additional services other than through an independent contractor, it could use a TRS entity and not jeopardize its REIT status.

     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.

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

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

   Asset Tests

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

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

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

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

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

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

   Distribution Requirement

     In order to qualify as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount equal to or greater than the excess of (a) the sum of (i) 90% of the Company’s “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and the Company’s net capital gain) and (ii) 90% of the net income (after tax on such income), if any, from foreclosure property, over (b) the sum of certain non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). These requirements may be waived by the IRS if the Company establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax described below. To the extent that the Company does not distribute all of its net long-term capital gain and all of its “real estate investment trust taxable income,” it will be subject to tax thereon. In addition, the Company will be subject to a 4% excise tax to the extent it fails within a calendar year to make “required distributions” to its shareholders of 85% of its ordinary income and 95% of its capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for such preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of the taxable income of the Company for the taxable year (without regard to the deduction for dividends paid) and all amounts from earlier years that are not treated as having been distributed under the provision. Dividends declared in the last quarter of the year and paid during the following January will be treated as having been paid and received on December 31 of such earlier year. The Company’s distributions for 2005 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

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“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 qualified dividend income, including, presumably, subject to the 15%

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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 (including income from activities financed with “acquisition indebtedness”), to the REIT’s gross income (less direct expenses related thereto) from all sources. The special rules will not require a pension fund to recharacterize a portion of its dividends as unrelated business taxable income unless the percentage computed is at least 5%.

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

   Taxation of Non-U.S. Shareholders

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

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

   Ordinary Dividends

     Distributions made by the Company that are not attributable to gain from the sale or exchange by the Company of United States real property interests 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

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or eliminated by an applicable United States income tax treaty. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate applies and the Non-U.S. Shareholder has filed an IRS Form W-8BEN with the Company, certifying the Non-U.S. Shareholder’s entitlement to treaty benefits.

   Non-Dividend Distributions

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

   Capital Gain Dividends

     As long as the Company continues to qualify as a REIT, distributions made by the Company after December 31, 2004, that are attributable to gain from the sale or exchange by the Company of any United States real property interests (“USRPI”) will not be treated as effectively connected with the conduct of a trade or business in the United States. Instead, such distributions will be treated as REIT dividends that are not capital gains and will not be subject to the branch profits tax as long as the Non-U.S. Shareholder does not hold greater than 5% of the stock of the Company at any time during the taxable year in which the distribution is received. Non-U.S. Shareholders who hold more than 5% of the stock of the Company will be treated as if such gains were effectively connected with the conduct of a trade or business in the United States and generally subject to the same capital gains rates applicable to U.S. Shareholders. In addition, corporate Non-U.S. Shareholders may also be subject to the 30% branch profits tax and to withholding at the rate of 35% of the gross distribution.

   Disposition of Stock of the Company

     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 the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). The stock of the Company will not constitute a USRPI so long as the Company is a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT in which at all times during a specified testing period less than 50% in value of its stock or beneficial interests are held directly or indirectly by Non-U.S. Shareholders. The Company believes that it will be a “domestically controlled REIT,” and therefore that the sale of stock of the Company will 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.”

     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.

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   Information Reporting Requirements and Backup Withholding Tax

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

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

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

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

   State and Local Taxes

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

   Real Estate Investment Trust Tax Proposals

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

   Other Legislation

     The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual tax rate for long-term capital gains generally from 20% to 15% (for sales occurring after May 6, 2003 through December 31, 2008) and for dividends generally from 38.6% to 15% (for tax years from 2003 through 2008). 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.

     Additionally, the American Jobs Creation Act of 2004 significantly affected REITs by providing for additional safe harbors and tests should a REIT determine that it is not in compliance with certain REIT qualification requirements. This act made it easier for a REIT to maintain REIT status should there be any current qualification issues as of a specific test date.

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

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transaction provisions of Section 4975 of the Code, and governmental plans and church plans that are exempt from ERISA and Section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances.

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

   Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs

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

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

   Status of the Company under ERISA

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

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

     Under the Regulations, a “publicly-offered security” is a security that is (i) freely transferable, (ii) part of a class of securities that is widely-held and (iii) either (a) part of a class of securities that is registered under section 12(b) or 12(g) of the Securities 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

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effective registration statement under the Securities Act and will be registered under the Exchange Act within 120 days after the end of the fiscal year of the Company during which an offering of such securities to the public occurs. Accordingly, the Company believes that if a Plan purchases stock of the Company, the Company’s assets should not be deemed to be Plan assets and, therefore, that any person who exercises authority or control with respect to the Company’s assets should not be treated as a Plan fiduciary for purposes of the prohibited transaction rules of ERISA and Section 4975 of the Code.

Available Information

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

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

   Corporate Governance 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.

Item 1A.Risk Factors

     The following are some of the risks and uncertainties that could cause the Company’s actual financial condition, results of operations, business and prospects to differ materially from those contemplated by the forward-looking statements contained in this report or the Company’s other filings with the SEC. If any of the following risks actually occurred, the Company’s business, financial condition and operating results could suffer, and the trading price of its Common Stock could decline.

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

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

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

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

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A reduction in the Company’s dividends could reduce the market price of its stock.

     The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow and to make accretive new investments. In addition, the Company is subject to financial covenant restrictions with its lenders that limit dividend payments. Although it has historically increased the dividend each quarter, the Company decided to maintain the quarterly dividend for the third and fourth quarters of 2005 at the same level as the second quarter. There can be no assurance that the Company will be able to resume its practice of increasing quarterly dividends or that it will be able to maintain dividend payments.

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

     Management of the Company determined that internal control over financial reporting was ineffective as of December 31, 2004, because material weaknesses in the Company’s system of internal control over financial reporting existed as of such date. The Company has taken remedial measures to correct these material weaknesses and has concluded that its internal control over financial reporting was effective as of December 31, 2005. However, the Company can give no assurance that it will not have material weaknesses or significant deficiencies in its internal control over financial reporting in the future and it cannot be sure the remedial measures it has taken to correct the material weaknesses it identified in 2004 will ensure that the Company maintains adequate controls over its financial reporting processes in the future. An ineffective control environment, if not remedied, could result in a misstatement of the Company’s financial statements that could cause a delay in periodic filings with the SEC and such delay could cause a violation of debt covenants.

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

     The healthcare service industry is currently experiencing:

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

• Competition among healthcare providers for patients;

• Increased expense for uninsured patients;

• Increased liability insurance expense;

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

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

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

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

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

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

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

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

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

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

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

     In recent years, two of the Company’s larger clients (HealthSouth Corporation and Tenet Healthcare Corporation) have been subject to several federal and state civil and criminal enforcement actions and several related civil lawsuits. The Company has received all material amounts due from both HealthSouth and Tenet and has received no indication from either company that it will be unable to continue paying amounts owed to the Company under its current leases and financial support agreements. However, the Company can give no assurance that receipt of such amounts will continue or that other lessees will not have similar problems.

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

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

Item 1B.Unresolved Staff Comments

     None.

Item 2.Properties

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

     The Company’s headquarters, located in offices at 3310 West End Avenue in Nashville, Tennessee, are leased from an unrelated third party. The Company’s current lease agreement, which commenced on November 1, 2003, covers approximately 30,934 square feet of rented space and expires on October 31, 2010, with two five-year renewal options. Annual base rent was approximately $549,000 in 2005 and increases approximately 3.25% annually thereafter.

Item 3.Legal Proceedings

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

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

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Item 4.Submission of Matters to a Vote of Securityholders

     No matter was submitted to a vote of shareholders during the fourth quarter of 2005.

PART II

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

     Shares of the Company’s Common Stock are traded on The New York Stock Exchange under the symbol “HR.” As of December 31, 2005, there were approximately 1,908 shareholders of record. The following table sets forth the high and low sales prices per share of Common Stock and the distributions declared and paid per share of Common Stock during the periods indicated.

					Distributions
					Declared and Paid per
	High		Low		Share
2005
First Quarter	$	41.03	$	35.25	$	0.650
Second Quarter		39.91		35.83		0.655
Third Quarter		41.36		37.36		0.660
Fourth Quarter		40.19		31.01		0.660
2004
First Quarter	$	43.15	$	35.16	$	0.630
Second Quarter		44.03		32.45		0.635
Third Quarter		40.03		35.47		0.640
Fourth Quarter		42.11		38.40		0.645

     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 as of December 31, 2005 about the Company’s Common Stock that may be issued upon grants of restricted stock and the exercise of options, warrants and rights under all of the Company’s existing compensation plans including the 2003 Employees Restricted Stock Incentive Plan, the 2000 Employee Stock Purchase Plan, the 1994 Dividend Reinvestment Plan, and the 1995 Restricted Stock Plan for Non-Employee Directors.

					Number of Securities
					Remaining Available for
	Number of Securities to		Weighted-Average		Future Issuance Under Equity
	Be Issued upon Exercise of		Exercise Price of		Compensation Plans
	Outstanding Options,		Outstanding Options,		(Excluding Securities Reflected
Plan Category	Warrants and Rights(1)		Warrants and Rights(1)		in the First Column)
Equity compensation plans approved by security holders		158,026		—		1,387,776	(2)
Equity compensation plans not approved by security holders		0		—		2,031,384	(3)
Total		158,026		—		3,419,160

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

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

Item 6. Selected Financial Data

     The Company’s selected financial data, set forth in its 2005 Annual Report to Shareholders under the caption “Selected Financial Information,” is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

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

     The Company’s information relating to management’s discussion and analysis of financial condition and results of operations set forth in the Company’s 2005 Annual Report to Shareholders under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     See “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in the Company’s 2005 Annual Report to Shareholders, which is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 8. Financial Statements and Supplementary Data

     The Company’s financial statements and the related notes, together with the report of BDO Seidman, LLP thereon, set forth in the Company’s 2005 Annual Report to Shareholders, are incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

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

     None.

Item 9A. Controls and Procedures

     Disclosure Controls and Procedures:

     The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure.

      The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

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

     In the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2004, because of the material weaknesses identified in its Annual Report on Internal Control over Financial Reporting as of December 31, 2004. During the fourth quarter of 2005, the Company completed its remediation efforts with respect to those material weaknesses. During the second quarter of 2005, the Company hired a Certified Public Accountant (“CPA”) with approximately 13 years of experience to fill a senior accounting manager vacancy and perform the duties of the Controller, which includes an enhanced oversight of the accounting functions, financial statement preparation, and reconciliations. Also, during the fourth quarter of 2005, the Company hired a CPA with approximately 11 years of experience to serve as the Company’s Principal Accounting Officer (“PAO”), who became a permanent member of the Investment Committee, which reviews and approves all mortgage and real estate investments, dispositions, restructurings, and other real estate-related transactions. The PAO will ensure and document that each unusual, complicated, or non-routine transaction is reviewed in detail for compliance with all applicable accounting literature, and is the person to whom all accounting functions report. The PAO performs a review of the financial statements, footnotes, and filings with the Securities and Exchange Commission (“SEC”) for compliance with applicable accounting literature and SEC reporting requirements. The Company believes that the addition of these two positions provided the Company with the resources necessary to maintain effective internal control over financial reporting as of December 31, 2005.

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

     Management’s Annual Report on Internal Control Over Financial Reporting, set forth in the Company’s 2005 Annual Report to Shareholders, is incorporated herein by reference to Exhibit 13 to this Annual Report on Form 10-K.

Item 9B.Other Information

     None.

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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 9, 2006 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		61	Chairman of the Board & Chief Executive Officer
Scott W. Holmes		51	Senior Vice President & Chief Financial Officer
J. D. Carter Steele		57	Senior Vice President & Chief Operating Officer
John M. Bryant, Jr.		39	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 more than 35 years.

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

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

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

Code of Ethics

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

Section 16(a) Compliance

     Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 9, 2006 under the caption “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference.

24

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 9, 2006 under the caption “Executive Compensation,” is incorporated herein by reference. The Comparative Performance Graph, the Compensation Committee Report on Executive Compensation and the Audit Committee Report 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 9, 2006 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.

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

Item 13.Certain Relationships and Related Transactions

     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 9, 2006 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 accountants, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 9, 2006 under the caption “Selection of Auditors – Audit and Non-Audit Fees,” is incorporated herein by reference.

Item 15.Exhibits and Financial Statement Schedules

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

          (1)Financial Statements:

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

• Consolidated Balance Sheets — December 31, 2005 and 2004.

• Consolidated Statements of Income for the years ended December 31, 2005, December 31, 2004 and December 31, 2003.

• Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, December 31, 2004 and December 31, 2003.

• Consolidated Statements of Cash Flows for the years ended December 31, 2005, December 31, 2004 and December 31, 2003.

• Notes to Consolidated Financial Statements.

          (2)Financial Statement Schedules:

Schedule II — Valuation and Qualifying Accounts at December 31, 2005	S-1
Schedule III — Real Estate and Accumulated Depreciation at December 31, 2005	S-2
Schedule IV — Mortgage Loans on Real Estate at December 31, 2005	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.

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          (3)Exhibits:

Exhibit
Number		Description of Exhibits
3.1	—	Second Articles of Amendment and Restatement of the Registrant.(1)
3.2	—	Amended and Restated Bylaws of the Registrant.(4)
4.1	—	Specimen stock certificate.(1)
4.2	—	Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee).(7)
4.3	—	First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly First Union National Bank, as Trustee).(7)
4.4	—	Form of 8.125% Senior Note Due 2011.(7)
4.5	—	Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee (formerly Wachovia Bank, National Association, as Trustee).(12)
4.6	—	Form of 5.125% Senior Note Due 2014.(12)
10.1	—	1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(3)
10.2	—	Amended and Restated Executive Retirement Plan.(8)
10.3	—	Retirement Plan for Outside Directors.(1)
10.4	—	Executive Variable Incentive Compensation Plan.(5)
10.5	—	2000 Employee Stock Purchase Plan.(5)
10.6	—	Dividend Reinvestment Plan.(2)
10.7	—	2003 Employees Restricted Stock Incentive Plan.(8)
10.8	—	Amendment No. 1 to 2003 Employees Restricted Stock Incentive Plan.(11)
10.9	—	Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated.(13)
10.10	—	Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated.(10)
10.11	—	Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated.(9)
10.12	—	Employment Agreement by and between J.D. Carter Steele and Healthcare Realty Trust Incorporated.(9)
10.13	—	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)
10.14	—	Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named therein.(14)
10.15	—	Retirement Agreement, dated December 31, 2002, between Healthcare Realty Trust Incorporated and Timothy G. Wallace.(9)
11	—	Statement re computation of per share earnings (contained in Note 11 to the Notes to the Consolidated Financial Statements for the year ended December 31, 2005 filed herewith as Exhibit 13).
13	—	Annual Report to Shareholders for the year ended December 31, 2005 (filed herewith).

26

Exhibit
Number		Description of Exhibits
21	—	Subsidiaries of the Registrant (filed herewith).
23	—	Consent of BDO Seidman, LLP, independent auditors (filed herewith).
31.1	—	Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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.
(11)	Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2003 and hereby incorporated by reference.
(12)	Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
(13)	Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2004 and hereby incorporated by reference.
(14)	Filed as an exhibit to the Company’s Form 8-K filed January 26, 2006 and hereby incorporated by reference.

Executive Compensation Plans and Arrangements

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

     1. 1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated (filed as Exhibit 10.1)

     2. Executive Retirement Plan, as amended (filed as Exhibit 10.2)

     3. Retirement Plan for Outside Directors (filed as Exhibit 10.3)

     4. Executive Variable Incentive Compensation Plan (filed as Exhibit 10.4)

     5. 2000 Employee Stock Purchase Plan (filed as Exhibit 10.5)

27

     6. 2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.7)

     7. Amendment No. 1 to 2003 Employees Restricted Stock Incentive Plan (filed as Exhibit 10.8)

     8. Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated (filed as          Exhibit 10.9)

     9. Employment Agreement by and between John M. Bryant, Jr. and Healthcare Realty Trust Incorporated (filed as Exhibit 10.10)

     10. Employment Agreement by and between Scott W. Holmes and Healthcare Realty Trust Incorporated (filed as Exhibit 10.11)

     11. Employment Agreement by and between J. D. Carter Steele and Healthcare Realty Trust Incorporated (filed as Exhibit 10.12)

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on March 1, 2006.

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	Chairman of the Board and	March 1, 2006
David R. Emery	Chief Executive Officer (Principal Executive Officer)
/s/Scott W. Holmes	Senior Vice President and	March 1, 2006
Scott W. Holmes	Chief Financial Officer (Principal Financial Officer)
/s/ Angela R. Hoke	Vice President and
Angela R. Hoke	Chief Accounting Officer (Principal Accounting Officer)	March 1, 2006
/s/Errol L. Biggs, Ph.D
Errol L. Biggs, Ph.D	Director	March 1, 2006
/s/ Charles Raymond Fernandez, M.D.
Charles Raymond Fernandez, M.D.	Director	March 1, 2006
/s/Batey M. Gresham, Jr.
Batey M. Gresham, Jr.	Director	March 1, 2006
/s/Marliese E. Mooney
Marliese E. Mooney	Director	March 1, 2006
/s/Edwin B. Morris, III
Edwin B. Morris, III	Director	March 1, 2006
/s/John Knox Singleton
John Knox Singleton	Director	March 1, 2006
/s/Bruce D. Sullivan
Bruce D. Sullivan	Director	March 1, 2006
/s/ Dan S. Wilford
Dan S. Wilford	Director	March 1, 2006

29

Report of Independent Registered Public Accounting Firm

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

     The audits referred to in our report dated February 28, 2006 relating to the consolidated financial statements of Healthcare Realty Trust Incorporated, which is contained in Item 8 of this Annual Report on Form 10-K included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits.

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

/s/ BDO Seidman, LLP

Memphis, Tennessee
February 28, 2006

Schedule II — Valuation and Qualifying Accounts at December 31, 2005
(Dollars in thousands)

				Additions
		Balance at		Charged to
		Beginning of		costs and			Charged to				Balance at
	Description	Period		expenses			other accounts(2)		Deductions(1)		End of Period
2005	Accounts and notes receivable allowance	$	2,016	$	1,308		$	—	$	1,326	$	1,998
	Preferred stock investment reserve		1,000		—			—		—		1,000
			3,016		1,308			0		1,326		2,998
2004	Accounts and notes receivable allowance (3)		1,864		(212	)		618		254		2,016
	Preferred stock investment reserve		1,000		—			—		—		1,000
			2,864		(212	)		618		254		3,016
2003	Accounts and notes receivable allowance (3)		3,258		627			—		2,021		1,864
	Preferred stock investment reserve		1,000		—			—		—		1,000
		$	4,258	$	627		$	—	$	2,021	$	2,864

(1)	Write-off of related receivable accounts.
(2)	Reserve on accounts receivable acquired in a foreclosure in 2004.
(3)	As disclosed in Note 1 to the Consolidated Financial Statements, certain reclassifications have been made as of and for the years ended December 31, 2004 and 2003 to conform to the 2005 presentation.

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Healthcare Realty Trust, Inc.
Schedule III — Real Estate and Accumulated Depreciation at December 31, 2005
(Dollars in thousands)

				Land						Buildings, Improvements, and CIP
						Costs Capitalized						Costs Capitalized								(1) (4)
	Number of			Initial		Subsequent to				Initial		Subsequent to				Personal		(3) (4)		Accumulated				Date		Date
	Properties		State	Investment		Acquisition		Total		Investment		Acquisition		Total		Property		Total Assets		Depreciation		Encumbrances		Acquired		Constructed
Medical Office / Outpatient Facilities		163	AL, AZ, CA, DC, FL, GA, HI, KS, LA, MD, MS, NV, PA, TN, TX, VA, WY		107,006		3,126		110,132		1,123,667		85,382		1,209,049		1,637		1,320,818		218,108		46,462		1993-2005	1905-2005; 2 Under Const. (2)
Assisted Living Facilities		26	AL, FL, GA, MO, MS, NC, OH, PA, TN, TX, VA		6,192		—		6,192		118,505		300		118,805		2,681		127,678		24,456		—		1998-2005	1972-2000
Independent Living Facilities		7	TN, TX		2,969		7		2,976		58,101		1,420		59,521		802		63,299		10,259		—		1998-2005	1987-1997
Inpatient Rehabilitation Facilities		9	AL, FL, PA, TX		5,835		—		5,835		150,660		—		150,660		—		156,495		31,491		—		1998	1983-1991
Other Inpatient Facilities		3	CA, MI, TX		6,123		150		6,273		26,296		—		26,296		—		32,569		6,786		—		1994-1998	1983-1989
Skilled Nursing Facilities		29	IN, MI, MO, OK, PA, SC, TN, VA		5,550		289		5,839		133,116		2,523		135,639		3,637		145,115		25,860		9,148		1993-2005	1950-1995
Total Real Estate		237			133,675		3,572		137,247		1,610,345		89,625		1,699,970		8,757		1,845,974		316,960		55,610
Corporate Property		—			—		—		—		—		—		—		13,175		13,175		3,527		—
Total Property		237			133,675		3,572		137,247		1,610,345		89,625		1,699,970		21,932		1,859,149		320,487		55,610

(1)	Depreciation is provided on buildings and improvements over average remaining lease life, 7.0, 31.5 or 39.0 years, lease intangibles over average remaining life of leases in place upon acquisition, and personal property over 3.0 or 7.0 years.
(2)	Development at 12/31/05.
(3)	Total assets at 12/31/05 have an estimated aggregate total cost of $1.7 billion for Federal Income Tax Purposes.
(4)	Includes assets held for sale at 12/31/05 of $26.1 million and accumulated depreciation of $4.7 million and at 12/31/04 of $74.9 million and accumulated depreciation of $13.6 million.
(5)	Reconciliation of Total Property and Accumulated Depreciation for the twelve months ended December 31, 2005, 2004, and 2003:

31

	Year to Date Ending 12/31/05 (4)						Year to Date Ending 12/31/04 (4)						Year to Date Ending 12/31/03
	Total			Accumulated			Total			Accumulated			Total			Accumulated
	Property			Depreciation			Property			Depreciation			Property			Depreciation
Beginning Balance	$	1,908,195		$	284,155		$	1,563,859		$	232,536		$	1,479,343		$	192,231
Additions during the period:
Real Estate		82,851			59,352			352,150			54,520			87,688			42,185
Corporate Property		997			1,244			1,268			548			5,316			695
Construction in Progress		6,311			—			5,709			—			12,805			—
Retirements/dispositions:
Real Estate		(139,187	)		(24,247	)		(14,631	)		(3,335	)		(21,022	)		(2,329	)
Corporate Property		(18	)		(17	)		(160	)		(114	)		(271	)		(246	)
Ending Balance	$	1,859,149		$	320,487		$	1,908,195		$	284,155		$	1,563,859		$	232,536

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Schedule IV — Mortgage Loans on Real Estate
As of December 31, 2005
(dollars in thousands)

						Periodic			Original
	Interest			Maturity		Payment			Face		Carrying		Balloon
Description	Rate			Date		Terms			Amount		Amount (1)		Payment
Individual permanent mortgages in excess of 3% of the total carrying amount:
Skilled nursing facility located in Tennessee		10.09	%		11/1/2013		(2	)		12,380		12,635		12,380	(1)(3)
Assisted living facility located in Florida		10.08	%		2/1/2009		(4	)		6,300		5,748		5,365	(5)
Assisted living facility located in Florida		11.66	%		1/1/2008		(4	)		5,825		5,284		5,067	(5)
Assisted living facility located in California		9.83	%		12/1/2005		(4	)		5,300		4,732		4,732	(5)
Assisted living facility located in Arizona		12.05	%		1/1/2007		(4	)		4,805		4,524		4,449	(5)
Group of skilled nursing facilities located in Massachusetts		11.79	%		1/31/2008		(7	)		15,000		15,000		15,000	(8)
Group of assisted living facilities located in various states		10.00	%		6/30/2008		(2	)		10,800		10,800		10,800	(9)
Group of assisted living facilities in various states		10.00	%		2/28/2008		(2	)		21,426		21,426		21,426	(10)
Group of skilled nursing facilities in various states		13.29	%		7/31/2009		(11	)		14,000		12,333		4,000	(12)
Group of independent living facilities located in Indiana		12.00	%		5/7/2009		(13	)		6,000		6,000		6,000	(14)
Group of assisted living facilities in Georgia		12.50	%		10/31/2008		(15	)		4,750		4,750		4,750	(16)
Other mortgages less than 3% of the total carrying amount:
Assisted living facility located in Oregon		11.01	%		2/13/2008		(4	)		2,950		2,563		2,447	(6)
Total Mortgage Notes Receivable											$	105,795

(1)	The Company received notice of the note holder’s intent to prepay this note. The Company expects that the note will be repaid in March 2006.
(2)	Interest only until maturity. Then principal is payable in full.
(3)	Prepayment penalty cannot be determined because future interest rate fluctuations are based on future Consumer Price Index.
(4)	Paid in monthly installments of principal and interest. Principal payable in full at maturity date. Amortized over 300 months.
(5)	Yield Maintenance Amount is defined generally as a percentage of the Principal Amount Being Prepaid x [(Present Value of the principal and Interest payments remaining to maturity at a discount rate) — (Principal Amount outstanding at the time of prepayment)].
(6)	Prepayment may be made 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.
(7)	Interest only until August 2006, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(8)	This note was prepaid in full in February 2006, following a 12-month lockout period on prepayment.
(9)	Prepayment may be made at any time after January 1, 2007 with at least nine months prior written notice.
(10)	Prepayment may not be made without prior written consent.
(11)	Paid in monthly installments of principal and interest. Principal payments based on payment schedule in loan document.
(12)	Lockout on prepayment for 36 months. From months 36 to 48, prepayment in whole, not in part, may be made with a 1% early termination fee. After this period, prepayment may be made without penalty given 15 day notice.
(13)	Interest only until December 2007, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(14)	Lockout on prepayment for 21 months.
(15)	Interest only until February 2007, then principal balance amortized over 25 years. Amortization schedule to be determined at that time.
(16)	Lockout on prepayment for 15 months.

33

	Years Ended December 31,
	2005			2004			2003
Balance at beginning of period	$	40,321		$	91,835		$	102,792
Additions during period:
New or acquired mortgages		71,976			1,260			28,952
		71,976			1,260			28,952
Deductions during period:
Scheduled principal payments		(2,180	)		(562	)		(743	)
Mortgage repayments		(4,073	)		(46,397	)		(20,642	)
Foreclosures and assignments		—			(6,242	)		(18,524	)
Amortization		(249	)		427			—
		(6,502	)		(52,774	)		(39,909	)
Balance at end of period	$	105,795		$	40,321		$	91,835

34