Good day, ladies and gentlemen and welcome to the Healthcare Realty Trust third quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions would be given at that time. (Operator Instructions) I'll now like to turn the conference to your host for today, Mr. David Emery. Mr. Emery, you may begin.

Thank you. Good morning, everyone. Joining us today on the call are Scott Holmes, Chief Financial Officer, Doug Whitman, Chief Operating Officer and Bethany Mancini and Gabrielle Andres in Communications. I will ask Ms. Andres to now read the disclaimer.

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2007 and the Form 10-Q filed with the SEC for the quarter ended September 30, 2008. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. Matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share, funds available for distribution, FAD or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the company's earnings press release for the third quarter ended September 30, 2008. The company's earnings press release, supplemental information, Forms 10-Q and 10-K, are available on the company's website. David?

Thank you. First a few general comments. Over the last several months the heightened market volatility and financial turmoil have certainly created an environment where REITs are finding it more difficult and expensive to access the debt funding. Healthcare Realty is fortunate in its conservative capital position, liquidity and market valuation place the company in a good position to execute its business plan and to fund commitments. The company has no 2009 maturities. $400 million revolver matures in 2010 and its $300 million 8 1/8% notes mature in May of 2011. At quarter end the company's leverage ratio was just 37%, with available borrowing capacity of $332 million on its unsecured credit facility. Despite the looming recession, Healthcare REIT valuations have lead all REIT sectors during this year, as the investors have sought equities that are historically immune to declining economic activity. Given the expansion of cap rates in the past month, some healthcare REITs are still able to make accretive investments with their relative cost of equity. Given all of the uncertainty and outlook for the economy, I think it's important to be mindful of the positive real estate fundamentals that drive Healthcare Realty's core investment strategy. Over 75% of the company's outpatient facilities are located on or adjacent to hospital campuses and our physician tenants provide patient services that drive the majority of hospitals inpatient admissions. Historically, 118 people per thousand are admitted to the hospital each year, a number which has remained relatively constant over the last six decades. With the reality per or the average person now visiting his or her physician 3.3 times per year, physicians and diagnostic practices are at the front gate of these statistics. Almost every business is affected by recession. Physician practices and clinical services have historically seen less impact during…

Thank you, David. With rising uncertainty in the economy, the usual increase in the number of negative healthcare headlines has begun to taint the public view of recent hospital company earnings, despite mostly stable earnings report for the third quarter. Public hospital companies have largely reported earnings in line with expectations and even with seasonal pressure on admissions and continued high bad debt expense, hospital operations and earnings have not shown signs of a negative downward trend for the sector. The most recent release of data from the American Hospital Association showed that US community hospitals enjoyed record profits in 2007, posting $43 billion more in revenue than expenses and creating the largest single-year jump in profit margins in at least 15 years. Operating revenue at community hospitals topped $600 billion for the first time, increasing 6%. The Bureau of Labor Statistics reported last week that while non-farm payrolls continue to fall in 2008, healthcare employment expanded by 26,000 jobs last month and by 348,000 jobs over the past 12 months. We would expect that even with some impact on operations as a result of the recession, healthcare will remain a profitable, largely-need driven business, an essential part of our economy, as evidenced by its stability over time and throughout numerous economic cycles and rising federal budget deficits. However, the outlook for community hospitals access to the municipal bond market has turned negative with the uncertainty in the debt market and the higher cost of financing. Combined with losses to investment portfolios but not-for-profits have previously relied on for cash reserves. Healthcare Realty's capital may prove more attractive as an alternative source for well-managed health systems to fund capital projects and expansion initiatives. It has been our experience that physician demand for office space on or near hospital campus is…

Thank you, Bethany. Now on to Scott, for some discussion about the numbers.

Thank you, David. Before addressing operating results for the third quarter, I would like to note that the company's Form 10-Q which contains financial statements and related footnotes and managements discussion and analysis of results of operations, liquidity, capital resources, and other matters was filed yesterday afternoon. At the same time, information was furnished on Form 8-K to supplement the Form 10-Q disclosures specifically regarding real estate investments, construction and progress and developments, lease maturities , joint venture investments, same facility growth and other corporate information. FFO per diluted share for the third quarter was $0.38 even with the previous quarter before a one-time $765,000 charge related to a litigation expense settlement. After the charge, FFO as reported was $0.36 per diluted share. Operating results for the third quarter of 2008 include three other items of note. First, the company recognized $2 million in gains resulting from the repurchase of the company's senior unsecured notes. Secondly, the company recorded a non-cash impairment charge of $1.6 million on a non-core patient accounts receivable asset which the company acquired in 2005 in the releasing and debt restructuring of a facility. This impairment charge essentially eliminates any remaining balance of the patient receivable asset. In the end, the company received more in cash collections than it paid in cash in 2005 to obtain the patient receivables. Lastly, property operating expenses were elevated in the third quarter by seasonal increases in utility expenses which increased by nearly $900,000 over the second quarter of 2008, excluding new properties acquired during the quarter. FAD per diluted share for the third quarter was $0.44, as compared to $0.43 in the second quarter of 2008. A reconciliation of all items included in the FAD calculation and a reconciliation of FFO can be found on the last page of…

All right. Thank you, Scott. Now, to Mr. Whitman, to talk about development activity and acquisitions. Doug?

Thank you, David. Before I provide an update on our development and acquisition activity, I would like to comment on the operations of our existing portfolio. Our portfolio of outpatient medical facilities has shown stability and even growth amid the economic turmoil. The occupancy for our stabilized properties remains steady this quarter at 91%. Compared to the third quarter of 2007, our same-store NOI for master lease properties increased by 3.3% and by 2.4% for our owned and managed facilities. The weighted average rental rate for our owned and managed properties increased for the fourth straight quarter, with rent on existing leases increasing 3% and on renewing leases by 6%. While leases maturing in 2009 represent 22% of revenues, this expiration bulge is comprised of over 425 leases, each averaging only 4400 square feet. The expirations are related to the many acquisitions we did in 2004 like Baylor, Ascension and MedStar, and the five-year leases that were signed at the time. Nearly three-fourths of 2009 expiring leases are in our owned and managed portfolio. We feel confident that the vast majority of those leases will renew at favorable rates because 85% of them are in on-campus properties or 72% of them are with hospital tenants like Baylor or Ascension. The characteristics of the aspiring leases in terms of tenant makeup and location of properties should provide security that our core portfolio operations will remain stable. We continue to believe that developing quality properties on or adjacent to acute care hospitals and growing markets will be a key component of our ongoing investment activity. With the completion of our project in Colorado Springs, we now have five buildings in the lease-up phase. The three properties that we opened in 2007 all on Baylor campuses continue to lease in line with our…

Thank you, Doug. Now Operator, I think we are ready to begin the question-and-answer period.

(Operator Instructions). Our first question comes from Jerry Doctrow of Stifel Nicolaus. Your line is open.

Thanks. Well, good morning, everybody.

Good morning.

I just had a couple things. What was the litigation that was in the quarter?

That's the one that's been going on for a number of years regarding the HealthSouth derivative lawsuit kind of thing.

Okay.

Going on, and it was just a difference in insurance reimbursement with the insurance coverage.

Lease-up, I think, Doug touched on this, but, we didn't see much movement in the lease-up percentages second quarter and third quarter. You're comfortable things are on track and it's just sort of lumpy leases or?

Jerry, it's, after all these years it's not necessarily quarter-to-quarter. Just when you suspect that you're not making much traction, something comes up. As long as you have the good location and you've got the compelling kind of force behind it, in the end it works out. I don't think it's -- it is will that ever lease the system, usually a matter of time.

You're comfortable with the progress that your target dates are fully leased-up?

We've not seen anything to give us any indication that there's any slow up in interest or activity.

Okay. And then, just a couple questions about sort of capital. I think if I understood what Doug was saying, you've got kind of $190 million of kind of acquisitions pending, some of which have assumed debt and then there's the 162, I think it is for Carolina, and Scott was saying that, since later in '09, you'll have 280 still available on the line, that 280 takes into account all of those acquisitions that Doug was talking about, as well as your asset sales?

That's correct.

That 190 Jerry, we've already closed on a number of those so that's not future funding. Some of those have already been funded.

Okay.

No, the fundings that Scott gave you was the ins and outs and all of those things. We tried to do that to give everybody kind of a final number on the in because there are a lot of moving pieces.

I was just trying to make sure that we got everything in there, we do.

Sure.

Obviously you extend the line. You don't have maturities until 11. Scott, I think, was saying that you would pursue equity offerings potentially through 2010 to fund a piece of that. I was just trying to clarify, you actually then made a comment, or is that JV sales or are you just sort of making a general statement that assuming the market would come back, you would prefer to do equity.

Well, I think Scott can comment, but I think it's a general sense that you have to have a general view of the way you think what things are going to unfold and I think from the standpoint of incremental equity, we're talking about small aftermarket kind of offerings or those kind of things to kind of match fund that. Obviously if that doesn't play out that way, then we have other alternatives of mortgage debt or otherwise. Scott?

No, that's correct. We can be a little more flexible with market conditions and equity offerings with respect to development funding since they do take place over a period of time.

So you don't need an equity offering. It's just that would be your game plan to sort of go forward?

Yes. That's just the overall game plan.

Okay. One last question and I'll jump off. In this environment, assuming you found sort of a juicy acquisition that was a couple hundred million dollars, would you be comfortable sort of running the line up further or would you do, you would do more or putting on a little more debt on mortgage? I was trying to figure out just what your appetite is?

Well, based on the market the last two or three days, I think we would probably be somewhat renaissance to do much of anything, but I think if there's some normalcy in the equity market, it all kind of depends upon what it is, where it is, how important it is to our strategy, those kind of things. I think we would probably air on the side of not doing anything unless it's overly compelling until there is a clearer picture regarding the debt markets and the equity markets. It's just not enough benefit to take capital and funding risk at this point in time. I guess to some degree we hope that there's not one of those as you describe it juicy opportunities, at least in the near term until we get more into '09. As you've heard me say, I do expect in late '09 and '10, as Doug alluded to, there are a lot of what we consider to be maturities related to acquisitions that have occurred over the last two to three years, and so we have some sense that the market is only going to improve for us and those acquisitions in '09 and '010. So the Carolinas acquisition is not something just because of its availability is I think you know enough about the intricate nature of our strategy. The Carolinas acquisition is very similar to Baylor that we did several years ago and any time you have an opportunity to affiliate yourself with an organization such as Carolinas and for the future businesses that for tends, then that's something that you obviously want to do. I think we were fortunate in that there had been enough recession of the interest from the leverage buyer that it leads us basically acquire this at a fairly beneficial accretion.

One last one, Doug I think mentioned the rent increases on roles that you've been getting is about 6%, on some of the stuff upcoming do you think that's sort of a good number to assume?

We don't have anything to indicate otherwise, Jerry, but quarter-to-quarter that jumps up and down. It's run 4%, 5%.

It will generally range between 4.5% to 6%, the last couple quarters we've been at the upper end of the range.

Okay. Thanks.

That's not to say next quarter it won't be 4% or 3.5%, but it's positive and in this environment, that's good.

Okay. Thanks.

Thank you. Our next question comes from Chris Haley of Wachovia. Your line is open.

Good morning.

Good morning.

David, you mentioned that one of the projects in the CHS deal was a development project. Could you offer the size of that project?

Doug, what is it?

It's about 140,000 square feet, so it's doing final TI build-out. I mean CHS will complete the development. I mean the core and shell is done and they are just doing interior space and they will take occupancy in December.

And the dollar amount, Doug?

For that particular asset? I don't have it with me. I can get back to that.

We can probably do that I guess.

So that project you think will be initially purchased, so basically a pre-sale that will not be capitalizing any costs associated with that when you close? I'm trying to estimate and calculate what income is driven impact there will be from the $190 million from CHS and whether or not some of that is related to an unstabilized asset that will include capitalization.

Well, I think the build-out is underway and I think the incremental business, there will be some TI out over the next, I don't know, 12 months or 24 months for the rest of the space. But in the main, I think they are going to take something like nearly 60%, 70% of the building.

It's substantially leased. It's not a speck building by any means.

I'm sorry what was the square footage?

About 140,000 square feet.

Okay. In the purchase and sale agreement, as part of your 10-Q, there is some information but maybe you could help me clarify. They offer a base rent with an operating expense reimbursement figure, which would translate to a little over an 8% yield based upon per square foot numbers. In your comments you mentioned that this would be purchased at an under a 7% rate which I would assume to be a cash base number, not a GAAP based number.

It is cash based and it's based upon the fact that you still have some vacancy in some properties and more directly in the new building that's being finished in December.

On your under 7% yield is your denominator in that calculation, the 190 million?

The 162 million.

162 million., are the rents being paid by the non-CHS and its affiliates tenants lower than the rent being paid by CHS?

In some instances and some buildings yes and in some buildings no, there are non-CHS tenants scattered throughout the majority of the buildings in the portfolio, so we're inheriting or taking assignment of some existing leases and CHS will sign new leases at market in some of the other properties.

Related to that when you think about capital allocation given the commitments you've got for your development pipeline plus the acquisitions made, and you've also re purchased some of your debt and continue to do so in the fourth quarter, how do you think about the relative returns of those allocations and the magnitude of those allocations?

Well, I think in general, on the last one regarding the debt, I think that's just been something where from time to time, there's been small parcels over the years that we have been offered where you get yields that are 8% and in some cases have been 10.5%. We don't have any particular program or initiative particularly as you say in light of the capital markets to aggressively buy any of that. I don't even know that we have anything in the offering or we are even looking at it. Secondly, as far as development, I think as Doug said, we don't feel it's prudent to execute any additional activities in that area, although we are constantly making ourselves aware of opportunities. Probably it would be my expectation on development that we will see in a capital constrained market for the hospital systems more opportunities for on-campus development. Anything that we would probably do on the development front would have to take into view the capital markets and take into view kind of the shall we say lease up time or accretion of that development opportunity. As far as acquisitions, I just refer you to what I said to Jerry that we probably are more inclined not to be buying additional properties unless there's some kind of compelling fundamental story and we feel like that it's accretive on a long-term perspective with the cost of equity kind of being the guide there rather than the incremental cost of debt.

Thank you. Last question has to do with the decision to issue a small amount of restricted shares this month?

Yes.

Could you offer some color behind that decision?

That release is part of basically over the last four years and it's basically every year, all of the officer s have what we refer to as just a memo account, and to some degree, from time to time, we have made releases from that, but this release is the first one that we've had in four years, and it's a composite of employee retention and just the progress the company has made over thousand four years, etcetera. There's no other particular triggering event.

These are helping the dispersion of these shares.

Just among the officers.

Okay. Thank you.

Our next question comes from Steve Swett of KBW. Your line is open.

Hi, David. How are you?

Good morning.

Scott, maybe these questions are for you. The litigation expense in the quarter, is that resolve the issue now, so that essentially, that cost will be gone going forward?

We think so. If you'll go to footnote 6 in the Q, footnote 6 of the financial statement there's a discussion about this event which I would refer you to, but for now we have an agreement in place that this should put an end to it and there shouldn't be anymore going forward.

Okay, and then on the land gain, I think that was referenced, is that something that you think gets booked in the fourth quarter?

That was in the third quarter.

It was actually in the third quarter.

Yes.

Then on the acquisition?

Footnote.

Sorry.

I guess that hasn't closed yet. I guess that will be in the fourth quarter.

Okay.

Yes, it's disclosed but it's a fourth quarter event not a third quarter event.

The utility expenses, you mentioned I think about $900,000 in the third quarter, so that essentially gets backed out as you go into fourth quarter?

No, I certainly hope so.

Okay.

Usually, those things are seasonal up and down from time to time. Sometimes there's catch ups and reconciliations and so on and so fourth. We don't have any broad kind of thing and all of a sudden utilities are going through the roof right now.

One final question on the acquisitions to make sure I have the number right. Scott, you said 237 of net acquisitions pending and I guess that includes the 162 which leaves 75 million, and I'm having trouble with the deals that were itemized coming up with which 75 million those may be.

There's also the matter of how much of the acquisition is the assumption of debt and how much is cash to be paid out. My approach, my numbers are reflecting cash since we're talking about cash flows.

I'm sorry. The $55 million pending joint venture investment, the $28 million on the contract in Indianapolis and the $18 million buyout of the JV, those are the three other deals that are outstanding; is that right?

That's correct.

Okay. All right, thanks.

Thank you. Our next question comes from Rob Mains of Morgan Keegan. Your line is open.

Thanks. Good morning.

Good morning.

Scott, I got on just as you were wrapping up with the litigation discussion. Did you say the number there is 775,000, did I hear?

765,000

765. If I were to get kind of a normalized FFO number, I would take out that, the gain on the repurchase debt and the impairment?

Yes. I would adjust somewhat for the increase in utilities expense in the third quarter as well.

Was that increase, was that just seasonally because of air-conditioning use or was there something else going on?

No, it's the hot summer months.

Okay.

There was oil at $147 a barrel.

Right.

A combination of the two.

A question on the line, I wrote down there's 103 out on the line now; is that correct?

That's right.

You had 237 of acquisitions and then you have 60 million coming in, so the 280 million figure, that would be the amount that you'd have out on the line at the end of '09, correct?

Or toward the end of '09, yes.

The remaining, the availability would be obviously what's left.

The difference there.

Jerry asked my question on acquisitions. When you look at the same-store NOI growth numbers, the master lease stuff, that was a stronger number than has been in recent quarters. I would assume that that's going to probably be in the high two range long term?

I think we are going to probably average 2.5 to 3.

All right, that's all I had. Thanks.

Thank you.

Our next question comes from Rosemary Pugh of Green Street. Your line is open.

Good morning, everybody.

Good morning.

Regarding the Colorado MOBs placed in service in the third quarter, we understand from industry sources that you are open to leasing space in the building to non-medical office tenants, I am interested in what is driving this decision and how it changes the economics of the project?

We have been approached by a number of non-medical tenants. There are two buildings there, Rosemary, and I think given the fact that there's a lack of available space in that market that it would be prudent for us to not turn away any tenants and the dollars and everything to build a building obviously increases peoples alternative choices so on and so fourth. Anybody that is in the market, it's an opportunity, but that's just we've been asked if we would consider that and the answer is yes.

What would be the difference in the rent you could charge for an office?

Probably no difference, even maybe a little bit more, at least based upon the inquiries we've had.

You have four property operating agreements expiring in the fourth quarter and that represents about $5 million in annual rent. What are the prospects for renewal for these property operating agreements and what is the underlying occupancy of these properties?

The underlying occupancy for the properties is 100%. They're all full. We don't expect to renew those property operating agreements. They are all in the same hospital campus in Southern California and we have, one of the agreements expired earlier this year in the summer and we have been increasing the rental rates on the physicians by 15% to 20%, 25% to bring those up to market and we've been successful in doing so. To the extent those operating agreements expire, we will be increasing rental rates on the actual tenants. We've been successful in doing so. The campus is completely full. There is no other, it's a developed urban area, there are a few alternatives for lack of fund's ability, so I think over time we'll be able to get those properties, the NOI back to where it was.

What is the short-term NOI impact?

I don't have that number off the top of my head. I'd have to get back to you on that.

The amount of income support from the sponsors under the POAs, Rosemary, is in the neighborhood of about 2.8 million or so. We would be working to replace that most immediately in the short run. We expect that until there are leases that are in place renewed, there may be some short-term pain on that but it wouldn't be the full amount of the lease support.

2.8 million is the number you're expecting?

That's my estimate. I don't know the exact number off the top of my head.

Of lost NOI next year.

No, we don't know what the loss will be until we have lease renewals that will offset the 2.8.

Right.

Okay and the hospital is tenants?

Yes.

Okay. Thank you very much.

Thank you. Our next question is a follow-up question from Steve Swett of KBW. Your line is open.

I'm sorry. My question has been answered.

(Operator Instructions). I'm showing no more questions or comments at this time.

All right, very good, operator. We appreciate everyone being on the call and most of us will be around today if there's any need for any follow-up, please give us a call. Have a good day.

Thank you, ladies and gentlemen, for joining today's conference. You may all disconnect and have a wonderful day.