Edgar Filing: HEALTHCARE REALTY TRUST INC

HR-12.31.12-10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

Form 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: December 31, 2012



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

Commission File Number: 001-11852

__________________________________________________

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)



Maryland		62-1507028
(State or other jurisdiction of Incorporation or organization)		(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, $0.01 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. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the Registrant (1) has filed all reports required 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. Yes ý No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b -2 of the Exchange Act. (Check one):



	Large accelerated filer	ý	Accelerated filer	¨

	Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting company)

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

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, 2012) of the Registrant held by non-affiliates on June 30, 2012 was approximately $1,827,173,892.

As of January 31, 2013, 88,846,951 shares of the Registrant’s common stock were outstanding.

________________________________

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 14, 2013 are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS



		Page
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	15
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	84
Item 9A.	Controls and Procedures	84
Item 9B.	Other Information	86
Item 10.	Directors, Executive Officers and Corporate Governance	86
Item 11.	Executive Compensation	87
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	87
Item 13.	Certain Relationships and Related Transactions, and Director Independence	87
Item 14.	Principal Accountant Fees and Services	87
Item 15.	Exhibits and Financial Statement Schedules	88
SIGNATURES		91

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PART I

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 real estate investment trust (“REIT”) that owns, acquires, manages, finances and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company focuses its portfolio on outpatient-related facilities located on or near the campuses of large acute care hospitals and associated with leading health systems because management views these facilities as stable, lower-risk real estate investments. In addition to consistent growth in demand for outpatient services, management believes that the Company's diversity of tenants, which includes over 30 physician specialties, as well as surgery, imaging, and diagnostic centers, lowers the Company's overall financial and operational risk.

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 stockholders. See "Risk Factors" in Item 1A for a discussion of risks associated with qualifying as a REIT.

Real Estate Properties

The Company had investments of approximately $3.0 billion in 207 real estate properties and mortgages at December 31, 2012. The Company provided property management services for 147 healthcare-related properties nationwide, totaling approximately 10.1 million square feet as of December 31, 2012. The Company’s real estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements.



	Number of Investments	Gross Investment				Square Feet
(Dollars and Square Feet in thousands)	Number of Investments	Amount		%		Footage	%
Owned properties:
Multi-tenant leases
Medical office/outpatient	146	$	1,770,468	59.1	%	9,631	70.8	%
Medical office—stabilization in progress	12	405,941		13.6	%	1,283	9.4	%
Other	2	19,950		0.7	%	256	1.9	%
	160	2,196,359		73.4	%	11,170	82.1	%
Single-tenant net leases
Medical office/outpatient	19	200,533		6.7	%	1,026	7.5	%
Inpatient	15	368,144		12.3	%	1,169	8.6	%
Other	8	26,440		0.9	%	243	1.8	%
	42	595,117		19.9	%	2,438	17.9	%

Construction in progress	—	—		—		—	—
Land held for development	—	25,171		0.8	%	—	—
Corporate property	—	15,037		0.5	%	—	—
	—	40,208		1.3	%	—	—
Total owned properties	202	2,831,684		94.6	%	13,608	100.0	%

Mortgage notes receivable:
Medical office/outpatient	2	60,592		2.0	%	—	—
Inpatient	1	61,599		2.1	%	—	—
Other	1	40,000		1.3	%	—	—
	4	162,191		5.4	%	—	—
Unconsolidated joint venture:
Other	1	1,266		—		—	—
	1	1,266		—		—	—
Total real estate investments	207	$	2,995,141	100.0	%	13,608	100.0	%

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The following table details occupancy of the Company’s owned properties by facility type as of December 31, 2012 and 2011.



	Investment at Dec. 31, 2012 (1) (in thousands)		Percentage of Square Feet (1)		Occupancy (1)
	Investment at Dec. 31, 2012 (1) (in thousands)		Percentage of Square Feet (1)		2012		2011
Medical office/outpatient	$	2,376,942	87.7	%	86.5	%	86.0	%
Inpatient	368,144		8.6	%	100.0	%	100.0	%
Other	46,390		3.7	%	83.4	%	76.2	%
Total	$	2,791,476	100.0	%	87.7	%	87.0	%

(1)

The investment and percentage of square feet columns include all owned real estate properties, but exclude land held for development and corporate property. The occupancy columns represent the percentage of total rentable square feet leased (including month-to-month and holdover leases), excluding 12 and 10 properties, respectively, in stabilization, and 1 and 15 properties, respectively, classified as held for sale as of December 31, 2012 and 2011. Properties under property operating or single-tenant net lease agreements are included at 100% occupancy. Upon expiration of these agreements, occupancy reflects underlying tenant leases in the building.

As of December 31, 2012, the weighted average remaining years to maturity pursuant to the Company’s long-term single-tenant net leases, property operating agreements, and multi-tenant occupancy leases was approximately 6.8 years, with expirations through 2032. The table below details the Company’s lease maturities as of December 31, 2012, excluding one property classified as held for sale.



	Annualized Minimum Rents (1) (in thousands)		Number of Leases		Average Percentage of Revenues		Total Square Feet
			Multi-Tenant Properties	Single-Tenant Net Lease Properties
Expiration Year			Multi-Tenant Properties	Single-Tenant Net Lease Properties
2013	$	49,118	443	6	18.8	%	1,858,239
2014	46,217		399	10	17.7	%	1,864,567
2015	29,003		286	—	11.1	%	1,139,552
2016	24,976		207	5	9.6	%	929,068
2017	28,810		183	5	11.0	%	1,246,360
2018	14,250		106	—	5.5	%	649,530
2019	9,178		50	1	3.5	%	315,690
2020	11,289		38	1	4.3	%	419,451
2021	9,199		42	3	3.5	%	405,025
2022	13,447		48	3	5.2	%	557,061
Thereafter	25,294		46	8	9.8	%	900,512


(1)	Represents the annualized minimum rents on leases in-place as of December 31, 2012, excluding the impact of potential lease renewals, future increases in rent, shortfall income under property operating agreements and straight-line rent that may be recognized relating to the leases.

Mortgage Notes Receivable

All of the Company’s $162.2 million of mortgage notes receivable are classified as held-for-investment based on management’s intent and ability to hold the notes until maturity. As such, the loans are carried at amortized cost. Also, all of the Company’s mortgage notes receivable are secured by existing buildings or buildings under construction. See Note 3 to the Consolidated Financial Statements for details of these mortgage notes.

Business Strategy

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the campuses of large, acute care hospitals and associated with leading health systems because management views these facilities as more stable and lower-risk over time. Management also seeks to lower the Company's overall financial and operational risk not only by owning properties in diverse geographic locations but also through the diversity of its tenants, which include over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.

According to the Centers for Medicare & Medicaid Services, the nation's overall healthcare spending in 2011 was $2.7 trillion, representing 17.9% of the nation's gross domestic product (“GDP”). Total healthcare spending is expected to grow and could reach an estimated 19.6% of GDP by 2021. Historically, more than half of the nation's healthcare spending has been received by outpatient-related facility tenants. The aging population is a key driver of healthcare utilization in the U.S., with the population cohort over the age of 65 expected to increase from 13.3% of the population in 2011 to 16.1% by 2020. According to the US Census Bureau, those over 65 years of age visit physician offices 6.9 times each year, compared to 2.3 times for those under 45 years old. As a result of these spending and utilization pressures, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”) was enacted, in part, to shift more care from higher-cost, inpatient settings to lower-cost, outpatient settings. The Company, with its portfolio of outpatient properties, stands to benefit from this continuing shift of healthcare delivery settings.

The Company plans to continue to meet its liquidity needs, including funding investments, paying dividends, repaying maturing debt and funding other debt service, with:


•	available cash on hand;


•	cash flows from operations;


•	borrowings under its $700 million unsecured credit facility due 2017 (the “Unsecured Credit Facility”);


•	proceeds from mortgage notes receivable repayments;


•	proceeds from the sale of real estate assets; and


•	capital market transactions.

See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Item 7 and “Risk Factors” in Item 1A of this report for more discussion of the Company's liquidity and capital resources.

Acquisitions and Dispositions

2012 Acquisitions and Dispositions

The Company acquired seven properties in 2012 for a total purchase price of approximately $104.6 million, including assumed mortgage notes payable of $4.9 million. The $10.7 million purchase price for one property was offset by the repayment of a $9.9 million construction mortgage note receivable provided by the Company to fund the development of the property prior to 2012.

The Company also sold 19 real estate properties in 2012 for a total sales price of approximately $91.5 million, generating net proceeds of approximately $74.8 million and seller-financed mortgage notes of approximately $11.2 million, $7.5 million of which were repaid as of December 31, 2012. The Company recognized approximately $10.9 million in gains and approximately $11.1 million in impairments from the sale of the properties.

Six mortgage notes receivable totaling approximately $24.7 million were repaid in 2012, including the $9.9 million construction mortgage note receivable and the $7.5 million of seller-financed mortgage notes, both described above.

See Note 4 to the Consolidated Financial Statements for more information on these acquisitions and dispositions.

2013 Acquisition

In January 2013, the Company purchased a 52,225 square foot medical office building in Tennessee for a purchase price of $16.2 million. See Note 4 to the Consolidated Financial Statements for more information on this acquisition.

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Development Activity

As of December 31, 2012, the Company had two construction mortgage loans under which the Company had funded $118.4 million as of December 31, 2012 and 12 properties in the process of stabilization subsequent to construction in which the Company had a $405.9 million investment. See Note 14 to the Consolidated Financial Statements for more detail on these projects.

Contractual Obligations

As of December 31, 2012, the Company had long-term contractual obligations of approximately $2.0 billion, consisting primarily of $1.3 billion of long-term debt obligations and $0.4 million of related interest. 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,” in Item 7 of this report.

Competition

The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other REITs, real estate partnerships and financial institutions, among others. The business of acquiring and developing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures. Some of the Company's competitors are larger than the Company and have lower costs of capital.

The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using or referring patients to the healthcare facility, healthcare employment, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state health insurance programs and other laws and regulations may also have an 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 facilities owned by the Company are utilized by medical tenants which are required to comply with extensive regulation at the federal, state, and local levels, including laws intended to combat fraud and waste such as the Anti-Kickback Statute, Stark Law, False Claims Act, and Health Insurance Portability and Accountability Act of 1996. These laws and regulations establish, among other things, requirements for state licensure and criteria for medical tenants to participate in government-sponsored reimbursement programs, such as the Medicare and Medicaid programs. The Company's leases generally require the tenant to comply with all applicable laws relating to the tenant's use and occupation of the leased premises. Although lease payments to the Company are not directly affected by these laws and regulations, changes in these programs or the loss by a tenant of its license or ability to participate in government-sponsored reimbursement programs would have a material adverse effect on the tenant's ability to make lease payments and could impact facility revenues to the Company.

The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. Government healthcare spending has increased over time; however, changes from year to year in reimbursement methodology, rates and other regulatory requirements have resulted in a challenging operating environment for healthcare providers. Aggregate spending on government reimbursement programs for healthcare services is expected to continue to rise significantly over the next 20 years with population growth and the anticipated expansion of public insurance programs for the uninsured and senior populations. However, the profitability of providing care to the rising number of Medicare and Medicaid patients may decline, which could adversely affect tenants' ability to make lease payments to the Company.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”) was signed into law to provide for comprehensive reform of the United States' healthcare system and extend health insurance benefits to the uninsured population, with the potential to alleviate high uncompensated care expense to healthcare providers. However, the law also increases regulatory scrutiny of providers by federal and state administrative authorities; lowers annual increases in Medicare payment rates; and will gradually implement significant cost-saving measures to lower the growth of healthcare spending, while also requiring improved access and quality of care, thus presenting the industry and its individual participants with uncertainty. On June 28, 2012, the United States Supreme Court upheld the constitutionality of most of the Health Reform Law; however, legal challenges to certain items remain ongoing. The implementation of the law, in whole or in part, could affect the economic performance of some or all of

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the Company's tenants and borrowers. The Company cannot predict the degree to which these changes may affect indirectly the economic performance of the Company, positively or negatively.

On January 2, 2013, the passage of the American Taxpayer Relief Act of 2012 (the "Relief Act”) delayed for two months the federal deficit reduction measures that were to be implemented according to the Budget Control Act of 2011, which required an automatic budget sequestration with across-the-board cuts in federal spending totaling $1.2 trillion, including up to 2% cuts to Medicare and other federal healthcare programs. The Relief Act also delayed for one year a scheduled cut in Medicare payment rates for physician and outpatient services. During the first quarter of 2013, Congress must legislate further deficit reduction measures, beyond the budget sequestration and physician Medicare requirements, in order to accommodate federal debt ceiling limitations, which the Relief Act did not address. If these measures or other federal budget negotiations ultimately require cuts to Medicare and other federal healthcare programs, lower provider reimbursement rates could affect the economic performance of some or all of the Company's tenants.

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. Furthermore, under comprehensive healthcare reform, the Company could benefit from higher demand for medical office space as the newly insured population would require additional healthcare providers and facilities.

Legislative Developments

Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are enacted by government agencies. These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Examples of significant legislation currently under consideration, recently enacted or in the process of implementation include:


•	the Health Reform Law;


•	proposals to repeal certain measures within the Health Reform Law;


•	proposals by individual states to opt out of the Health Reform Law in whole or in part;


•	cost-saving measures by federal and state governments to reduce budget deficits and lower Medicare and Medicaid spending growth, including federal budget-wide cuts of 2% currently planned for March 2013, and to address the requirements of the federal debt ceiling and resolve the federal budget for 2013, among other initiatives of fiscal austerity;

•

quality control, cost containment, and payment system reforms for Medicaid, Medicare and other public funding, such as expansion of pay-for-performance criteria and value-based purchasing programs, bundled provider payments, accountable care organizations, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions;


•	creation of state health insurance exchanges and the implementation of regulations governing their operation, whether run by the state or by the federal government, and whereby individuals and small businesses will purchase health insurance, including government-funded plans;

•

reform of the Medicare physician fee-for-service reimbursement formula that dictates annual updates in Medicare payment rates for physician services, which in recent years has called for significant reductions in its “Sustainable Growth Rate.” As part of the Relief Act, Congress continued its practice of extending physician Medicare rates, currently through December 31, 2013, with some members of Congress calling for a more long-term solution prior to 2014;


•	prohibitions on additional types of contractual relationships between physicians and the healthcare facilities and providers to which they refer or in which they have an ownership interest, and related information-collection activities;


•	efforts to increase transparency with respect to pricing and financial relationships among healthcare providers and drug/device manufacturers;


•	heightened health information technology security standards for healthcare providers;


•	increased government scrutiny of medical errors and conditions acquired inside health facilities;


•	patient and drug safety initiatives;

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•	re-importation of pharmaceuticals;


•	pharmaceutical drug pricing and compliance activities under Medicare part D;


•	tax law changes affecting non-profit providers;


•	immigration reform and related healthcare mandates;


•	modifications to increase requirements for facility accessibility by persons with disabilities; and


•	facility requirements related to earthquakes and other disasters, including structural retrofitting.

The Company cannot predict whether any proposals will be fully implemented, adopted, repealed, or amended, or what effect, whether positive or negative, such proposals would have on the Company's business.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under, or disposed of in connection with such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and injuries to persons and adjacent property). Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil, and criminal fines and penalties upon violators. Such laws often impose liability, without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances, and may be imposed on the owner in connection with the activities of a tenant or 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 that 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 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. While it is the Company’s policy to seek indemnification relating to environmental liabilities or conditions, even where leases and sale and purchase agreements do contain such provisions, there can be no assurances that the tenant or 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

The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties, including those held under long-term ground leases. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. 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.

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Employees

At December 31, 2012, the Company employed 244 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.

Available Information

The Company makes available to the public free of charge through its internet website the Company’s Proxy Statement, 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 SEC. The Company’s internet website address is 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 Principles

The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.

Committee Charters

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

Executive Officers

Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference.

ITEM 1A. RISK FACTORS

The following are some of the risks and uncertainties that could negatively affect the Company’s financial condition, results of operations, business and prospects. These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Legislative Developments,” and “Environmental Matters,” and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements” should be carefully considered before making an investment decision regarding the Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of or that the Company currently considers not likely to have a significant impact. If any of the events underlying 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.

The Company's expected results may not be achieved.

The Company's expected results may not be achieved, and actual results may differ materially from expectations. This may be the result of various factors, including, but not limited to: changes in the economy; the availability and cost of capital at favorable rates; changes to facility-related healthcare regulations; changes in interest rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent and repay loans; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to re-lease space at similar rates as vacancies occur; the Company's ability to timely reinvest proceeds from the sale of assets at similar yields; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; and other legal and operational matters.

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The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future.

As of December 31, 2012, the Company had approximately $1.3 billion of outstanding indebtedness and the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was 43.3%. Covenants under the Unsecured Credit Facility and the indenture governing the Company’s senior notes permit the Company to incur substantial, additional debt, and the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness would require the Company to dedicate a substantial portion of its cash flow from operations to the payment of indebtedness, thereby reducing the funds available to implement the Company’s business strategy and to make distributions to stockholders. A high level of indebtedness could also:


•	limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries;


•	impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund obligations and carry out its business strategy; and


•	result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would increase the costs of borrowing under the Unsecured Credit Facility and the cost of issuance of new debt securities, among other things.

In addition, from time to time the Company mortgages properties to secure payment of indebtedness. If the Company is unable to meet its mortgage payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of our properties could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity.

A REIT is required by IRS regulations to make dividend distributions, thereby retaining less of its capital for growth. As a result, a REIT typically grows through steady investments of new capital in real estate assets. However, there may be times when the Company will have limited access to capital from the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. In recent years, the capital and credit markets have experienced volatility and at times have limited the availability of funds. The Company’s ability to access the capital and credit markets may be limited by these or other factors, which could have an impact on its ability to refinance maturing debt, fund dividend payments and operations, acquire healthcare properties and complete construction projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying any of its debts or honoring its debt covenants, it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would otherwise receive.

The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity.

The Company receives a significant portion of its revenues by leasing its assets under long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A significant portion of the Company’s debt may be from time to time subject to floating rates, based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Increases in interest rates could make the financing of any acquisition or investment activity more costly. Rising interest rates could limit the Company’s ability to refinance existing debt when it matures or cause the Company to pay higher rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could limit the Company’s ability to sell assets at times when it might be advantageous to do so.

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The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold.

The Company had approximately $206.3 million, or 7.3% of the Company’s real estate property investments, that were subject to purchase options held by lessees or sponsoring health systems under property operating agreements that were exercisable as of December 31, 2012 or could become exercisable in 2013. The two Mercy Health properties that the Company is currently developing have purchase options that could become exercisable in 2013. Other properties have purchase options that will become exercisable in future periods. The exercise of these purchase options exposes the Company to reinvestment risk. Certain properties subject to purchase options are producing returns above the rates of return the Company expects to achieve with new investments. If the Company is unable to reinvest the proceeds of sale at rates of return equal to the return received on the properties that are sold, it may experience a decline in lease revenues and a corresponding material adverse effect on the Company’s business and financial condition, the Company’s ability to make distributions to its stockholders, and the market price of its common stock.

Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s financial condition and results of operations.

The terms of the Unsecured Credit Facility, the indentures governing the Company’s outstanding senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. These provisions include, among other things: a limitation on the incurrence of additional indebtedness; limitations on mergers, investments, acquisitions, redemptions of capital stock, transactions with affiliates; and maintenance of specified financial ratios. The Company’s continued ability to incur debt and operate its business is subject to compliance with these covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied. Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s stock.

The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow, to make accretive new investments and to access capital. There can be no assurance that the Company will continue to pay dividends at current amounts, or at all. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s stock.

If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s financial position would be negatively impacted.

Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations, financial condition and ability to meet its obligations, including the payment of dividends to stockholders.

Owning real estate and indirect interests in real estate is subject to inherent risks.

The Company’s operating performance and the value of its real estate assets are subject to the risk that if its properties do not generate revenues sufficient to meet its operating expenses, including debt service, the Company’s cash flow and ability to pay dividends to shareholders will be adversely affected.

The Company may incur impairment charges on its real estate properties or other assets.

The Company performs an annual impairment review on its real estate properties in the third quarter of every fiscal year. In addition, the Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. The decision to sell a property also requires the Company to assess the potential for impairment. At some future date, the Company may determine that an impairment has occurred in the value of one or more of its real estate properties or other assets. In such an event, the Company may be required to recognize an impairment loss which could have a material adverse effect on the Company’s financial condition and results of operations.

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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 a facility, the Company would have to obtain another tenant for the affected facility.

If the Company loses a tenant or sponsor health system and is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer. 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.

If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected.

A portion of the Company’s leases will expire over the course of any year. For more specific information concerning the Company’s expiring leases, see "Trends and Matters Impacting Operating Results" beginning on page 20 of this report. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company may be required to make significant capital expenditures to renovate or reconfigure space to attract new tenants. If it is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates, or if the Company is required to undertake significant capital expenditures in connection with re-letting units, the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock may be materially and adversely affected.

Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses.

Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result may have a material adverse effect on the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to its stockholders, and the market price of the Company’s common stock.

The Company has, and may have more in the future, exposure to fixed rent escalators, which could impact its growth and profitability.

The Company receives a significant portion of its revenues by leasing assets in which the rental rate is generally fixed with annual escalations. Most of these annual increases are based upon fixed percentage increases while some are based on increases in the Consumer Price Index. If the fixed percentage increases begin to lag behind inflation, the Company's growth and profitability would be negatively impacted.

The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition.

Because real estate investments are relatively illiquid, the Company’s ability to adjust its portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including debt service (if any), real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result in reduced earnings and could have an adverse effect on the Company’s financial condition. In addition, the Company may not be able to sell properties targeted for disposition, including properties held for sale, due to adverse market conditions. This may negatively affect, among other things, the Company’s ability to sell properties on favorable terms, execute its operating strategy, repay debt or pay dividends.

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The Company is subject to risks associated with the development of properties.

As of December 31, 2012, the Company had approximately $524.4 million invested in construction mortgage loans and properties in stabilization. The Company’s estimated remaining funding obligations on the construction mortgage loans was $84.2 million as of December 31, 2012, and the Company expects to fund up to an additional $35 million to $45 million for tenant improvements on properties in stabilization. The Company is subject to certain risks associated with the development of properties including the following:


•	The construction of properties generally requires various government and other approvals that may not be received when expected, or at all, which could delay or preclude commencement of construction;


•	Development opportunities that the Company pursued but later abandoned could result in the expensing of pursuit costs, which could impact the Company’s results of operations;


•	Construction costs could exceed original estimates, which could impact the building’s profitability to the Company;


•	Operating expenses could be higher than forecasted;


•	Time required to initiate and complete the construction of a property and to lease up a completed development property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;


•	Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and


•	Favorable capital sources to fund the Company’s development activities may not be available when needed.From time to time the Company may make material acquisitions and developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations.

The Company regularly pursues potential transactions to acquire or develop additional assets in order to grow stockholder value. Future acquisitions could require the Company to issue equity securities, incur debt or other contingent liabilities or amortize expenses related to other intangible assets, any of which could adversely impact the Company’s consolidated financial condition or results of operations. In addition, equity or debt financing required for such acquisitions may not be available at favorable times or rates.

The Company’s acquired, developed and existing real estate properties may not perform in accordance with management’s expectations because of many factors including the following:


•	The Company’s purchase price for acquired facilities may be based upon a series of market or building-specific judgments which may be incorrect;


•	The costs of any maintenance or improvements for properties might exceed estimated costs;


•	The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and


•	Leasing of real estate properties may not occur within expected time frames or at expected rental rates.

Further, the Company can give no assurance that acquisition and development opportunities that meet management’s investment criteria will be available when needed or anticipated.

The Company is exposed to risks associated with entering new geographic markets.

The Company’s acquisition and development activities may involve entering geographic markets where the Company has not previously had a presence. The construction and/or acquisition of properties in new geographic areas involves risks, including the risk that the property will not perform as anticipated and the risk that any actual costs for site development and improvements identified in the pre-construction or pre-acquisition due diligence process will exceed estimates. There is, and it is expected that there will continue to be, significant competition for investment opportunities that meet management’s investment criteria, as well as risks associated with obtaining financing for acquisition activities, if necessary.

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The Company’s expiring long-term single-tenant net leases may not be extended.

Long-term single-tenant net leases that are expiring may not be extended. To the extent these properties have vacancies or subleases at lower rates upon expiration, income may decline if the Company is not able to re-let the properties at rental rates that are as high as the former rates. For more specific information concerning the Company’s expiring long-term single-tenant net leases, see “Single-Tenant Net Leases” on page 22 of this report.

The Company’s revenues depend on the ability of its tenants and sponsoring health systems under its leases and property operating agreements to generate sufficient income from their operations to make rent, loan and shortfall payments to the Company.

The Company’s revenues are subject to the financial strength of its tenants and sponsoring health systems. The Company has no operational control over the business of these tenants and sponsoring health systems who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. The slowdown in the economy, decline in the availability of financing from the capital markets, and changes in healthcare regulations have affected, or may in the future adversely affect, the businesses of the Company’s tenants and sponsoring health systems to varying degrees. Such conditions may further impact such tenants’ and sponsoring health systems’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings, disruptions, or bankruptcies of such tenants and sponsoring health systems. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations.

Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties.

As of December 31, 2012, the Company had 99 properties, representing an aggregate net investment of approximately $1.1 billion, that were held under ground leases. The Company’s ground lease agreements with hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit tenants from providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or assignment of the Company’s leasehold interest, including rights of first offer and first refusal in favor of the lessor. These ground lease provisions may limit the Company’s ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of the ground lease, which may have a material adverse effect on the Company’s business, consolidated financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock.

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 may be affected by the following:


•	trends in the method of delivery of healthcare services;


•	competition among healthcare providers;


•	lower reimbursement rates from government and commercial payors, pay-for-performance, high uncompensated care expense, investment losses and limited admissions growth pressuring operating profit margins for healthcare providers;


•	availability of capital;


•	credit downgrades;


•	liability insurance expense;


•	regulatory and government reimbursement uncertainty resulting from the Health Reform Law;


•	health reform initiatives to address healthcare costs through expanded value-based purchasing programs, bundled provider payments, accountable care organizations, state health insurance exchanges, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions;

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•	federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering healthcare provider Medicare and Medicaid payment rates, while requiring increased patient access to care;


•	congressional efforts to reform the Medicare physician fee-for-service formula that dictates annual updates in payment rates for physician services, including significant reductions in the Sustainable Growth Rate, whether through a short-term fix or a more long-term solution;


•	scrutiny and formal investigations by federal and state authorities of contractual relationships between physicians and the healthcare facilities and providers to which they refer, and related information-collection activities;


•	efforts to increase transparency with respect to pricing and financial relationships among healthcare providers and drug/device manufacturers;


•	increased regulation to limit medical errors and conditions acquired inside health facilities and improve patient safety;


•	heightened health information technology security standards for healthcare providers;


•	potential tax law changes affecting non-profit providers; and


•	enhanced facility requirements related to accessibility by persons with disabilities, as well as structural retrofitting for earthquakes and other disasters.

These changes, among others, can adversely affect the economic performance of some or all of the tenants and sponsoring health systems 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.

If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock.

The Company intends to operate in a manner that will allow it to continue to qualify as a REIT for federal income tax purposes. Although the Company believes that it qualifies as a REIT, it cannot provide any assurance that it will continue to qualify as a REIT for federal income tax purposes. The Company’s continued qualification as a REIT will depend on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the asset tests depends upon the characterization and fair market values of its assets. The Company’s compliance with the REIT income and quarterly asset requirements also depends upon the Company’s ability to successfully manage the composition of the Company’s income and assets on an ongoing basis. Accordingly, there can be no assurance that the Internal Revenue Service (“IRS”) will not contend that the Company has operated in a manner that violates any of the REIT requirements.

If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates and possibly increased state and local taxes (and the Company might need to borrow money or sell assets in order to pay any such tax). Further, dividends paid to the Company’s stockholders would not be deductible by the Company in computing its taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company’s stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Company’s common stock. In addition, in such event the Company would no longer be required to pay dividends to maintain REIT status, which could adversely affect the value of the Company’s common stock. Unless the Company were entitled to relief under certain Internal Revenue Code provisions, the Company also would continue to be disqualified from taxation as a REIT for the four taxable years following the year in which the Company failed to qualify as a REIT.

Even if the Company remains qualified for taxation as a REIT, the Company is subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed taxable income, and state or local income, franchise, property and transfer taxes. These tax liabilities would reduce the Company’s cash flow and could adversely affect the value of the Company’s common stock. For more specific information on state income taxes paid, see Note 15 to the Consolidated Financial Statements on page 82 of this report.

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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The federal tax rate applicable to income from “qualified dividends” payable to certain domestic stockholders that are individuals, trusts and estates is currently the preferential tax rate applicable to long-term capital gains. Dividends payable by REITs, however, are generally not qualified dividends and do not qualify for the preferential tax rate. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including the Company’s common stock.

Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature of its assets, the amounts it distributes to its stockholders and the ownership of its stock. The Company may be unable to pursue investments that would be otherwise advantageous to the Company in order to satisfy the source-of-income, or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make certain attractive investments.

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, the Company’s ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT.

The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could cause the Company to change its investments and commitments and affect the tax considerations of an investment in the Company. There can be no assurance that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with respect to the federal income tax consequences of qualification.

The Company’s Articles of Incorporation contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock.

In order to qualify as a REIT, no more than 50% of the value of the Company’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year. To assist in complying with this REIT requirement, 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. 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 has the right to redeem such stock. These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common stock.

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

The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. 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 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 is subject to cyber security risks.

A cyber-attack that bypasses the Company's information technology ("IT") security systems causing an IT security breach, may lead to a material disruption of the Company's IT business systems and/or the loss of business information resulting in an adverse business impact. Risks may include:


•	future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;


•	operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and/or


•	negative publicity resulting in reputation or brand damage with the Company's tenants, sponsoring health systems or other operators.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

In addition to the properties described under Item 1, “Business,” in Note 2 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space from an unrelated third party for its headquarters, which are located at 3310 West End Avenue in Nashville, Tennessee. The Company’s office lease, which expires on October 31, 2020, covers approximately 30,934 square feet of rented space with base rental escalations of approximately 3.25% annually and an additional base rental increase possible beginning in 2015 conditioned on changes in CPI. The lease also provides the Company with a right of first offer to purchase the building if the current landlord were to decide to sell the property. The Company’s base rent for 2012 was approximately $0.7 million.

ITEM 3. LEGAL PROCEEDINGS

The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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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.” At December 31, 2012, there were approximately 1,220 stockholders of record. The following table sets forth the high and low sales prices per share of common stock and the dividend declared and paid per share of common stock related to the periods indicated.



	High		Low		Dividends Declared and Paid per Share
2012
First Quarter	$	22.52	$	18.52	$	0.30
Second Quarter	23.96		20.71		0.30
Third Quarter	25.16		22.95		0.30
Fourth Quarter (Payable on March 1, 2013)	24.44		22.15		0.30

2011
First Quarter	$	23.73	$	20.24	$	0.30
Second Quarter	23.53		19.92		0.30
Third Quarter	21.29		13.83		0.30
Fourth Quarter	19.39		16.04		0.30

Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds from operations, cash flows, and to make accretive new investments.

Equity Compensation Plan Information

The following table provides information as of December 31, 2012 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 2007 Employees Stock Incentive Plan and the 2000 Employee Stock Purchase Plan.



Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1)	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
Equity compensation plans approved by security holders	433,452	—	982,739
Equity compensation plans not approved by security holders	—	—	—
Total	433,452	—	982,739

(1)

The Company’s outstanding rights relate only to its 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with specificity the number of securities to be used 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.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements of the Company:



	Years Ended December 31,
(Dollars in thousands except per share data)	2012			2011 (1)			2010 (1)			2009 (1)			2008 (1)
Statement of Operations Data:
Total revenues	$	316,350		$	291,592		$	249,997		$	236,461		$	196,531
Total expenses	234,466			217,313			185,149			174,910			148,713
Other income (expense)	(74,072		)	(77,205		)	(63,788		)	(39,245		)	(35,389		)
Income (loss) from continuing operations	$	7,812		$	(2,926	)	$	1,060		$	22,306		$	12,429
Discontinued operations	$	(2,277	)	$	2,742		$	7,187		$	28,842		$	29,331
Net income (loss) attributable to common
stockholders	$	5,465		$	(214	)	$	8,200		$	51,091		$	41,692

Diluted earnings per common share:
Income (loss) from continuing operations	$	0.10		$	(0.04	)	$	0.02		$	0.38		$	0.24
Discontinued operations	$	(0.03	)	$	0.04		$	0.11		$	0.49		$	0.55
Net income attributable to common
stockholders	$	0.07		$	0.00		$	0.13		$	0.87		$	0.79
Weighted average common shares outstanding -
Diluted	80,127,883			72,720,147			62,770,826			59,047,314			52,564,944

Balance Sheet Data (as of the end of the period):
Real estate properties, gross	$	2,831,684		$	2,788,618		$	2,571,605		$	2,225,327		$	2,001,724
Real estate properties, net	$	2,244,959		$	2,271,871		$	2,086,964		$	1,791,693		$	1,634,364
Mortgage notes receivable	$	162,191		$	97,381		$	36,599		$	31,008		$	59,001
Assets held for sale and discontinued
operations, net	$	3,337		$	28,650		$	23,915		$	17,745		$	90,233
Total assets	$	2,539,972		$	2,521,022		$	2,357,309		$	1,935,764		$	1,864,780
Notes and bonds payable	$	1,293,044		$	1,393,537		$	1,407,855		$	1,046,422		$	940,186
Total equity	$	1,120,944		$	1,004,806		$	842,740		$	790,148		$	796,247

Other Data:
Funds from operations - Diluted (2)	$	104,665		$	84,682		$	79,084		$	97,904		$	86,323
Funds from operations per common share - Diluted (2)	$	1.31		$	1.15		$	1.26		$	1.66		$	1.64
Cash flows from operations	$	116,397		$	107,852		$	87,756		$	103,214		$	105,251
Dividends paid	$	96,356		$	89,270		$	75,821		$	91,385		$	81,301
Dividends declared and paid per common share	$	1.20		$	1.20		$	1.20		$	1.54		$	1.54


(1)	The years ended December 31, 2011, 2010, 2009, and 2008 are restated to conform to the discontinued operations presentation for 2012. See Note 5 to the Consolidated Financial Statements for more information on the Company’s discontinued operations as of December 31, 2012.


(2)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for a discussion of funds from operations (“FFO”), including why the Company presents FFO and a reconciliation of net income attributable to common stockholders to FFO.

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ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosure Regarding Forward-Looking Statements

This report and other materials Healthcare Realty has filed or may file with the Securities and Exchange Commission (“SEC”), 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,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could significantly affect the Company’s current plans and expectations and future financial condition and results.

Such risks and uncertainties include, among other things, the following:


•	The Company's expected results may not be achieved;


•	The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future;


•	The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity;


•	The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity;


•	The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold;


•	Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s financial condition and results of operations;


•	A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s stock;


•	If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s financial position would be negatively impacted;


•	Owning real estate and indirect interests in real estate is subject to inherent risks;


•	The Company may incur impairment charges on its real estate properties or other assets;


•	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 a facility, the Company would have to obtain another tenant for the affected facility;


•	If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, financial condition and results of operations would be adversely affected;


•	Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses;


•	The Company has, and may have more in the future, exposure to fixed rent escalators, which could impact its growth and profitability;


•	The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition;


•	The Company is subject to risks associated with the development of properties;

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•	From time to time, the Company may make material acquisitions and developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations;


•	The Company is exposed to risks associated with entering new geographic markets;


•	The Company's expiring long-term single-tenant net leases may not be extended;


•	The Company’s revenues depend on the ability of its tenants and sponsoring health systems under its leases and property operating agreements to generate sufficient income from their operations to make loan, rent and shortfall payments to the Company;


•	Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties;


•	Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the value of its investments;


•	If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock;


•	Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends;


•	Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities;


•	Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code;


•	New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT;


•	The Company's Articles of Incorporation contain limits and restrictions on transferability of the Company's common stock which may have adverse effects on the value of the Company's stock;


•	The Company may experience uninsured or underinsured losses related to casualty or liability; and


•	The Company is subject to cyber security risks.

Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are detailed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time.

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. Stockholders 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, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.

Executive Overview

Healthcare Realty's strategy is to own and operate healthcare properties, primarily medical office buildings and outpatient-related facilities, that produce stable and growing rental income. To execute its strategy of managing and growing its portfolio of healthcare properties, the Company undertakes a broad spectrum of real estate activities including property management, leasing, acquisition, development, financing and disposition. The Company focuses on facilities located on or near the campuses of large, acute-care hospitals and associated with leading health systems because management views these facilities as more stable and lower-risk over time. Management also seeks to lower the Company's overall financial and operational risk by owning properties in diverse geographic locations and through the diversity of its tenants, which include over thirty physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.

Substantially all of the Company's revenues are derived from operating lease rentals on its real estate properties and interest earned on outstanding notes receivable. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs, and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from its unsecured credit facility due 2017 (the “Unsecured Credit Facility”).

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As of December 31, 2012, the Company's leverage ratio [debt divided by (debt plus stockholders' equity less intangible assets plus accumulated depreciation)] was approximately 43.3%; and its borrowings under the Unsecured Credit Facility totaled $110 million, with a borrowing capacity remaining of approximately $590.0 million.

Trends and Matters Impacting Operating Results

Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company.

Portfolio Management

The Company's portfolio continued to exhibit stable cash flows and steady growth in 2012. Occupancy for the same store properties remained steady at 90% to 91% throughout 2012, and the properties acquired in 2012, which are not yet included in same store properties, were 99% occupied. Year-over-year same store NOI grew steadily throughout 2012, ranging from 2.1% to 4.2% in each of the four quarters as a result of consistent revenue growth and effective operating expense management. See page 24 for a discussion and reconciliation of same store NOI.

2012 Acquisitions, Dispositions and Impairment

The acquisition environment for properties that meet the Company's investment criteria improved over the course of 2012. The Company acquired seven properties in 2012 for a total purchase price of $104.6 million, including assumed mortgage notes payable of $4.9 million. The $10.7 million purchase price for one property was offset by the repayment of a $9.9 million construction mortgage note receivable provided by the Company to fund the development of the property prior to 2012. Based on recent market activity, the Company expects the acquisition environment to continue to be attractive in 2013 with capitalization rates ranging from 6.0% to 8.0% for healthcare properties the Company seeks to acquire.

The Company sold 19 real estate properties in 2012 for a total sales price of approximately $91.5 million, generating net proceeds of approximately $74.8 million and seller-financed mortgage notes of approximately $11.2 million, of which $7.5 million was repaid as of December 31, 2012. The Company recognized approximately $10.9 million in gains and approximately $11.1 million in impairments from the sale of the properties. The Company expects that asset dispositions in 2013 will be more in-line with its historical range of $40 to $60 million, excluding the potential exercise of purchase options.

In addition to the $11.1 million in impairments recorded during 2012 from the sales of properties, the Company recorded an additional $3.8 million impairment related to a property classified as held for sale.

See Notes 4 and 5 to the Consolidated Financial Statements for more information on these acquisitions, dispositions and impairments.

Development Activity

In 2012, the Company funded $78.0 million in two construction mortgages related to two development projects for Mercy Health, with budgets totaling $202.6 million. As of December 31, 2012, the Company had funded $118.4 million for these projects, with $84.2 million remaining to be funded through completion which is estimated to occur in July and November 2013. The Company currently recognizes interest income on these construction mortgage loans at a rate of 6.75% per year. Upon substantial completion, the Company will acquire both properties at an initial yield of approximately 8% per year and Mercy Health will lease 100% of both facilities. Mercy Health holds options to purchase these properties, subject to certain triggering conditions, at a significant premium to the Company's development costs.

During 2012, the Company saw steady leasing improvement at its properties categorized as stabilization in progress ("SIP"). These properties were 60% leased and 41% occupied as of December 31, 2012, compared to 40% leased and 21% occupied at the beginning of the year. The Company expects leasing and occupancy momentum for these properties to continue at a similar pace of 3% to 6% each quarter throughout 2013. These properties improved from a net operating loss of $1.2 million in the fourth quarter of 2011 to net operating income ("NOI") of $0.9 million in the fourth quarter of 2012. The Company estimates it will need an incremental investment of approximately $35 million to $45 million for tenant improvements as these properties lease up and stabilize.

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The Company’s ability to complete and stabilize these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, stabilization periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, stabilization periods and rental rates will result in less favorable results of operations and cash flows. The Company’s disclosures regarding projections or estimates of completion dates and leasing may not reflect actual results.

See Note 14 to the Consolidated Financial Statements for more information on the Company’s development activities.

Beyond the current commitments, the Company has no new development starts planned. However, the Company is regularly in discussions with health systems, developers and others that could lead to attractive development opportunities. The Company will consider these projects in light of existing obligations, the acquisition environment, capital availability and cost, and other factors.

2013 Acquisition and Mortgage Note Payable Repayment

Potential Dispositions

As discussed in “Liquidity and Capital Resources,” certain of the Company’s leases include purchase option provisions which, if exercised, could require the Company to sell a property to a lessee or operator, which could have a negative impact on the Company’s future results of operations and cash flows.

The Company received notice in January 2013 that a tenant is exercising purchase options on two inpatient rehabilitation hospitals, one in Florida and one in Alabama, upon the expiration of the current leases on July 15, 2013 and July 31, 2013. The purchase prices will be the greater of fair market value or $11.7 million for the facility in Florida and the greater of fair market value or $17.5 million for the facility in Alabama. The Company's aggregate net investment in the two facilities was approximately $18.7 million, and base rent was approximately $1.0 million per quarter as of December 31, 2012.

The Company is also in discussions with the same tenant on the renewal of its leases on two additional inpatient rehabilitation facilities that expire on September 30, 2013. If the Company and the tenant are unable to come to an agreement on the lease renewals, the Company expects the tenant will exercise its purchase options on the two additional facilities. The purchase price for each of the two additional facilities would be the greater of fair market value or $17.6 million. The Company's aggregate net investment in the two additional facilities was approximately $25.4 million, and base rent was approximately $1.3 million per quarter as of December 31, 2012.

The Company may from time to time sell additional properties and redeploy cash from property sales and mortgage repayments into investments. To the extent revenues related to the properties being sold and the mortgages being repaid exceed income from these investments, the Company’s results of operations and cash flows could be adversely affected.

Multi-Tenant Leases

The Company expects that approximately 15% to 20% of the leases in its multi-tenanted portfolio will expire each year. During 2012, 369 leases in the Company's multi-tenanted portfolio expired, of which approximately 314 were renewed or the tenants continue to occupy the space. In 2013, 393 leases in the Company's multi-tenanted portfolio will expire. Of the leases that expire in 2013, 89% are located in buildings on hospital campuses. In the Company's experience, leases related to on-campus buildings are more likely to renew than leases related to off-campus buildings.

Multi-tenant Rental Rates

The Company continues to experience consistent, sustained revenue growth for its in-place leases. In 2012, the Company experienced average contractual rental rate growth of just over 3% for its in-place leases. This growth is consistent with the non-fungible nature and high occupancy of the Company's principal asset type: on-campus, medical office buildings.

In some instances, physician concerns about potential cuts to Medicare reimbursements caused tenants to request flat rates in the first year of the lease renewal period. In some cases, the Company agreed to waive the first year contractual rent increase in exchange for reduced tenant improvement allowances. As such, in the latter half of 2012, the Company experienced some softening in releasing spreads but anticipates continued contractual rent increases during the lease term. In 2012, quarterly

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weighted average annual rent growth for renewing leases ranged from 0.4% to 1.8%. In 2011, quarterly weighted average rent growth for renewing leases ranged from 1.7% to 2.5%.

Tenant Improvements

In most markets in which the Company does business, the Company may provide a tenant improvement allowance in the lease for the purpose of refurbishing or renovating second generation tenant space. Shorter-term leases (one to two years) generally do not include a tenant improvement allowance. Tenant improvement allowances, including first generation tenant space, totaled approximately $40.0 million in 2012 and $20.4 million in 2011.

If tenants spend more than the allowance, the Company generally offers the tenant the option to either amortize the overage over the lease term, with interest, or reimburse the overage to the Company in a lump sum. In either case, such overage reimbursements are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Statement of Operations and totaled approximately $0.4 million in 2012 and $0.5 million in 2011. The tenant overage amount amortized to rent totaled approximately $3.5 million in 2012 and $2.9 million in 2011.

Leasing Commissions

In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company's properties or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases. In 2012 and 2011, the Company paid approximately $6.2 million and $2.0 million, respectively, in leasing commissions which will be amortized against rent over the term of the applicable leases.

Rent Abatements

Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant or renewing tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2012 and 2011 totaled approximately $2.0 million and $1.3 million, respectively.

Single-Tenant Net Leases

Leases on three of the Company's single-tenant net leased properties were scheduled to expire during 2012. Two of the three tenants renewed their leases. The third property was converted to the multi-tenant portfolio. The aggregate net operating income on the three buildings is approximately $0.1 million per quarter lower than under the previous leases.

Six single-tenant net leases are scheduled to expire in 2013. Two of the properties are medical office buildings that the Company anticipates will be vacated by the existing tenants in the third quarter of 2013. One of the two medical office buildings is located on a hospital campus, is 12,000 square feet, and the lease expires August 31, 2013; the other is located off campus, is 110,000 square feet, and the lease expires July 31, 2013. These two properties generated approximately $0.4 million in net operating income during the quarter ended December 31, 2012. At the expiration of the current lease term, the properties will be converted to the multi-tenant portfolio, and the Company is currently working to lease the properties. See "Potential Dispositions" on page 21 for details on the remaining four properties.

Capital Additions

Capital additions are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes or the full replacement of major building systems (exterior façade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency, etc.) and common area improvements (wall and floor coverings for lobbies and corridors, furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages, etc.). These various capital additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital additions specifically do not include (1) recurring maintenance expenses, whether direct or indirect, related to the upkeep and (2) maintenance of major building systems or common area improvements. Capital additions also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement.

As part of the Company's leasing practice, the Company generates a return on capital additions by setting lease rates for each property based on the Company's gross investment, inclusive of any actual or expected capital additions. The Company invested $12.1 million in capital additions in each of 2012 and 2011.

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Discontinued Operations

As discussed in more detail in Note 1 to the Consolidated Financial Statements, a company must present the results of operations of real estate assets disposed of or held for sale as discontinued operations. Therefore, the results of operations from such assets are classified as discontinued operations for the current period, and all prior periods presented are restated to conform to the current period presentation. Readers of the Company’s Consolidated Financial Statements should be aware that each future disposal will result in a change to the presentation of the Company’s operations in the historical Consolidated Statements of Operations as previously filed. Such reclassifications to the Consolidated Statements of Operations will have no impact on previously reported net income attributable to common stockholders.

Equity Issuances

On September 28, 2012, the Company sold 9,200,000 shares of common stock at a gross price of $23.87 per share (net price of $22.85 per share) in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $201.1 million. The proceeds from the offering were used to fund the two build-to-suit healthcare facilities for Mercy Health described above, the acquisition of healthcare properties, and other general corporate purposes, including the repayment of debt.

Since December 2008, the Company has had in place an at-the-market equity offering program to sell shares of the Company’s common stock from time to time in at-the-market sales transactions. The Company sold no shares under this program in 2012. In January 2013, the Company sold 1,599,271 shares of common stock under this program for approximately $39.7 million in net proceeds. On February 17, 2013, the Company terminated the sales agreements under this program, leaving no shares currently available for issuance.

Other Items Impacting Operations

The Company typically has higher general and administrative costs in the first quarter of every year as a result of employee benefit plan expenses, such as the expenses related to the grant of employee stock purchase plan options and healthcare savings accounts. These items will likely increase general and administrative expenses by approximately $0.5 million in the first quarter of 2013.

Non-GAAP Measures

Management considers certain non-GAAP financial measures to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.

The non-GAAP financial measures presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income (determined in accordance with generally accepted accounting principles (“GAAP”)), as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's consolidated historical operating results, these measures should be examined in conjunction with net income as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Form 10-K.

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Same Store Net Operating Income

NOI and same store NOI are non-GAAP financial measures of performance. Management considers same store NOI an important supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results and compare those results to other real estate companies between periods on a consistent basis. The Company defines NOI as operating revenues (property operating revenue, single-tenant net lease revenue, and rental lease guaranty income) less property operating expenses related specifically to the property portfolio. NOI excludes straight-line rent, general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. NOI may also be adjusted for certain expenses that are related to prior periods or are not considered to be part of the operations of the properties. Properties included in the multi-tenant and single-tenant net lease same store analyses are stabilized properties that have been included in operations and were consistently reported as leased and stabilized properties for the duration of the year-over-year comparison period presented. Accordingly, properties that were recently acquired or disposed of, properties classified as held for sale, and properties in stabilization or conversion are excluded from the same store analysis.

The following table reflects the Company's same store NOI for the three months ended December 31, 2012 and 2011.



				Same Store NOI for the
				Three Months Ended December 31,
(Dollars in thousands)	Number of Properties(1)	Investment at December 31, 2012		2012 (2)		2011 (2)
Multi-tenant Properties	124	$	1,586,046	$	31,837	$	30,781
Single-tenant Net Lease Properties	38	518,029		13,275		12,687
Total	162	$	2,104,075	$	45,112	$	43,468


(1)	Includes stabilized properties that have been included in operations and were consistently reported as leased and stabilized for the duration of the year-over-year comparison period presented. Mortgage notes receivable, construction in progress, an investment in one unconsolidated joint venture, corporate property and assets classified as held for sale are excluded.

(2)Reconciliation of same store NOI:



	Three Months Ended December 31,
(Dollars in thousands)	2012			2011
Rental income	$	77,207		$	72,026
Rental lease guaranty income (a)	1,226			1,257
Property operating expense	(30,154		)	(28,217		)
Exclude Straight-line rent revenue	(1,095		)	(1,173		)
NOI	47,184			43,893
NOI not included in same store	(2,072		)	(425		)
Same store NOI	$	45,112		$	43,468
___________
(a) Other operating income reconciliation:
Rental lease guaranty income	$	1,226		$	1,257
Interest income	124			122
Other	92			131
Total consolidated other operating income	$	1,442		$	1,510

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Funds from Operations

Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.”

Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

The comparability of FFO for the year ended December 31, 2012 compared to 2011 was most significantly affected by the various property acquisitions during 2011 and 2012 and the results of operations of the portfolio from period to period, as well as the commencement of operations of properties that were previously under construction and continued leasing of the properties in stabilization. Other items that impacted the comparability of FFO are discussed below in Results of Operations.

The table below reconciles net income (loss) attributable to common stockholders to FFO for each of the three years ended December 31, 2012.



	Year Ended December 31,
(Dollars in thousands, except per share data)	2012			2011			2010
Net income (loss) attributable to common stockholders	$	5,465		$	(214	)	$	8,200
Gain on sales of real estate properties	(10,874		)	(7,035		)	(8,352		)
Impairments	14,908			6,697			7,511
Real estate depreciation and amortization	95,166			85,234			71,725
Total adjustments	99,200			84,896			70,884
Funds from Operations	$	104,665		$	84,682		$	79,084
Funds from Operations per Common Share - Diluted	$	1.31		$	1.15		$	1.26
Weighted Average Common Shares Outstanding - Diluted	80,127,883			73,807,041			62,770,826

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Results of Operations

2012 Compared to 2011

The Company’s results of operations for 2012 compared to 2011 were significantly impacted by acquisitions, dispositions, gains on sale and impairments of properties.



							Change
(Dollars in thousands, except per share data)	2012			2011			$			%
REVENUES
Rental income	$	301,055		$	276,712		$	24,343		8.8	%
Mortgage interest	9,186			6,973			2,213			31.7	%
Other operating	6,109			7,907			(1,798		)	(22.7	)%
	316,350			291,592			24,758			8.5	%
EXPENSES
Property operating	117,683			113,083			4,600			4.1	%
General and administrative	20,908			20,990			(82		)	(0.4	)%
Depreciation	85,122			75,292			9,830			13.1	%
Amortization	10,510			8,198			2,312			28.2	%
Bad debt, net of recoveries	243			(250		)	493			(197.2	)%
	234,466			217,313			17,153			7.9	%
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt	—			(1,986		)	1,986			(100.0	)%
Interest expense	(75,053		)	(76,038		)	985			(1.3	)%
Interest and other income, net	981			819			162			19.8	%
	(74,072		)	(77,205		)	3,133			(4.1	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS	7,812			(2,926		)	10,738			(367.0	)%
DISCONTINUED OPERATIONS
Income from discontinued operations	1,757			2,404			(647		)	(26.9	)%
Impairments	(14,908		)	(6,697		)	(8,211		)	122.6	%
Gain on sales of real estate properties	10,874			7,035			3,839			54.6	%
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	(2,277		)	2,742			(5,019		)	(183.0	)%
NET INCOME (LOSS)	5,535			(184		)	5,719			(3,108.2	)%
Less: Net income attributable to noncontrolling interests	(70		)	(30		)	(40		)	(133.3	)%
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	5,465		$	(214	)	$	5,679		(2,653.7	)%
EARNINGS PER COMMON SHARE
Net income attributable to common stockholders - Basic	$	0.07		$	0.00		$	0.07		0.0	%
Net income attributable to common stockholders - Diluted	$	0.07		$	0.00		$	0.07		0.0	%

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Rental income is comprised of the following:



					Change
(Dollars in thousands)	2012		2011		$			%
Property operating	$	241,902	$	218,254	$	23,648		10.8	%
Single-tenant net lease	53,809		53,856		(47		)	(0.1	)%
Straight-line rent	5,344		4,602		742			16.1	%
Total Rental income	$	301,055	$	276,712	$	24,343		8.8	%

Total revenues from continuing operations increased for the reasons discussed below:

• Property operating income increased due mainly to the recognition of additional revenue of approximately $12.8 million from the Company’s 2011 and 2012 real estate acquisitions, approximately $5.0 million from properties that were previously under construction that commenced operations during 2011 and 2012, and approximately $5.1 million from new leasing activity and annual rent increases. Also, the Company began recognizing the underlying tenant rental income on properties whose single-tenant net leases had expired, resulting in approximately $1.2 million in additional property operating income in 2012 compared to 2011. These increases were partially offset by a $0.4 million decrease related to a property whose revenues were previously reported in property operating income, but are now reported in single-tenant net lease income upon the execution of a new lease agreement with the tenant.

• Single-tenant net lease income increased approximately $0.8 million from the Company's 2012 acquisitions and approximately $2.0 million from leasing activity and annual rent increases. In addition, the Company recognized single-tenant net income of approximately $0.3 million related to a new single-tenant net lease agreement executed during 2012 on a property whose income was previously reported in property operating income. These increases were partially offset by a reduction in revenue totaling approximately $0.6 million due to the expiration of an agreement with one operator in 2011 which provided to the Company replacement rent, as well as a reduction of approximately $2.3 million related to six properties whose single-tenant net leases expired during 2011. The Company began recognizing the underlying tenant rents in property operating income for the underlying tenant leased space.

• Straight-line rent increased mainly due to new leases subject to straight-lining on properties acquired in 2011 and 2012.

• Mortgage interest increased approximately $3.8 million due to additional interest from fundings on two mortgage construction notes receivable for the two build-to-suit facilities affiliated with Mercy Health, offset partially by a reduction of approximately $1.6 million from the repayment of mortgage notes.

• Other operating income decreased mainly due to the expiration in September 2011 of lease guaranty support payments related to two properties in New Orleans totaling approximately $1.5 million.

Total expenses increased for the reasons discussed below:

• Property operating expense increased due mainly to the recognition of additional expenses totaling approximately $4.4 million from the Company’s 2011 and 2012 real estate acquisitions and $3.7 million from properties that were previously under construction that commenced operations during 2011 and 2012. Also, the Company began recognizing the underlying tenant rental expense on properties whose single-tenant net leases had expired, resulting in approximately $0.6 million in additional expense in 2012 compared to 2011. These increases were partially offset by overall decreases in real estate tax expense of approximately $3.3 million and utility expense of approximately $0.6 million.

• General and administrative expense decreased mainly due to a reduction in pension costs of approximately $0.8 million and a decrease in expenses related to potential acquisitions and developments of approximately $0.8 million during 2012 compared to 2011. These decreases were offset by $1.5 million in litigation expenses in 2012 that are not expected to recur.

• Depreciation expense increased approximately $3.7 million related to the Company’s 2011 and 2012 real estate acquisitions and approximately $2.7 million related to properties previously under construction that commenced operations during 2011 and 2012. In addition, six properties were reclassified from discontinued operations to continuing operations resulting in a depreciation expense adjustment of approximately $1.1 million. The remaining $2.3 million increase was due mainly to additional depreciation expense recognized related to various building and tenant improvements.

• Amortization expense increased approximately $2.5 million as a result of lease intangibles recognized on properties acquired in 2011 and 2012, partially offset by a $0.1 million reduction in amortization on fully amortized intangibles.

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Other income (expense) changed favorably mainly due to the reasons below:

• In 2011, the Company recognized a $2.0 million loss from the early redemption of its senior notes due 2011 (the "Senior Notes due 2011").

• Interest expense decreased mainly due to the redemption of the Senior Notes due 2011 resulting in a reduction in interest expense of approximately $5.5 million, as well as a reduction of approximately $0.6 million from a lower weighted average principal balance on the Unsecured Credit Facility in 2012 compared to 2011. These decreases were partially offset by a decrease in capitalized interest of approximately $3.5 million and additional interest expense totaling approximately $1.7 million on mortgage notes assumed as a part of the Company's 2011 and 2012 acquisitions. The components of interest expense are as follows:



(Dollars in thousands)	2012			2011
Contractual interest	$	75,892		$	79,260
Net discount accretion	1,014			1,237
Deferred financing costs amortization	3,168			4,072
Interest cost capitalization	(5,021		)	(8,531		)
Total Interest expense	$	75,053		$	76,038

Income (loss) from discontinued operations totaled $(2.3) million and $2.7 million, respectively, for the year ended December 31, 2012 and 2011, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale or disposed of as of December 31, 2012. The Company disposed of 19 properties in 2012 and disposed of five properties in 2011 with one property classified as held for sale as of December 31, 2012.

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2011 Compared to 2010

The Company’s results of operations for 2011 compared to 2010 were significantly impacted by higher interest expense in 2011 resulting from financing activities that occurred in late 2010 and 2011. Other items impacting the results of operations for 2011 are discussed below.



							Change
(Dollars in thousands, except per share data)	2011			2010			$			%
REVENUES
Rental income	$	276,712		$	239,037		$	37,675		15.8	%
Mortgage interest	6,973			2,377			4,596			193.4	%
Other operating	7,907			8,583			(676		)	(7.9	)%
	291,592			249,997			41,595			16.6	%
EXPENSES
Property operating	113,083			98,101			14,982			15.3	%
General and administrative	20,990			16,886			4,104			24.3	%
Impairment	—			1,259			(1,259		)	(100.0	)%
Depreciation	75,292			64,016			11,276			17.6	%
Amortization	8,198			5,314			2,884			54.3	%
Bad debt, net of recoveries	(250		)	(427		)	177			(41.5	)%
	217,313			185,149			32,164			17.4	%
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt	(1,986		)	(480		)	(1,506		)	313.8	%
Interest expense	(76,038		)	(65,710		)	(10,328		)	15.7	%
Interest and other income, net	819			2,402			(1,583		)	(65.9	)%
	(77,205		)	(63,788		)	(13,417		)	21.0	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	(2,926		)	1,060			(3,986		)	(376.0	)%
DISCONTINUED OPERATIONS
Income from discontinued operations	2,404			5,087			(2,683		)	(52.7	)%
Impairments	(6,697		)	(6,252		)	(445		)	7.1	%
Gain on sales of real estate properties	7,035			8,352			(1,317		)	(15.8	)%
INCOME FROM DISCONTINUED OPERATIONS	2,742			7,187			(4,445		)	(61.8	)%
NET INCOME (LOSS)	(184		)	8,247			(8,431		)	(102.2	)%
Less: Net income attributable to noncontrolling interests	(30		)	(47		)	17			(36.2	)%
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(214	)	$	8,200		$	(8,414	)	(102.6	)%
EARNINGS PER COMMON SHARE
Net income attributable to common stockholders - Basic	$	0.00		$	0.13		$	(0.13	)	(100.0	)%
Net income attributable to common stockholders - Diluted	$	0.00		$	0.13		$	(0.13	)	(100.0	)%

Rental income is comprised of the following:



					Change
(Dollars in thousands)	2011		2010		$		%
Property operating	$	218,254	$	186,127	$	32,127	17.3	%
Single-tenant net lease	53,856		50,369		3,487		6.9	%
Straight-line rent	4,602		2,541		2,061		81.1	%
Total Rental income	$	276,712	$	239,037	$	37,675	15.8	%

Total revenues from continuing operations increased for the reasons discussed below:

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• Property operating income increased due mainly to the recognition of additional revenue of approximately $27.2 million from the Company’s 2010 and 2011 real estate acquisitions, approximately $0.4 million from properties that were previously under construction that commenced operations during 2010 and 2011, and approximately $2.5 million from new leasing activity and annual rent increases. Also, the Company began recognizing the underlying tenant rental income on properties whose single-tenant net leases had expired, resulting in approximately $2.0 million in additional property operating income in 2011.

• Single-tenant net rental income increased approximately $6.8 million as a result of a 2010 acquisition and approximately $0.8 million from annual rent increases. These increases were partially offset by a reduction in revenue totaling approximately $1.2 million due to the expiration of an agreement with one operator in 2011 which provided to the Company replacement rent, as well as a reduction of approximately $2.6 million related to nine properties whose single-tenant net leases expired during 2010 and 2011. The Company began recognizing the underlying tenant rents in property operating income for the underlying tenant leased space.

• Straight-line rent increased mainly due to new leases subject to straight-lining on properties acquired in 2010 and 2011.

• Mortgage interest income increased due mainly to interest earned on new and existing mortgage notes.

• Other operating income decreased approximately $0.5 million due to the expiration in September 2011 of lease guaranty support payments related to two properties in New Orleans.

Total expenses increased for the reasons discussed below:

• Property operating expense increased due mainly to the recognition of additional expenses totaling approximately $10.9 million from the Company’s 2010 and 2011 real estate acquisitions and $1.6 million from properties that were previously under construction that commenced operations during 2010 and 2011. Also, the Company began incurring the underlying tenant rental expense on properties whose single-tenant net leases had expired, resulting in approximately $0.7 million in additional expense in 2011 compared to 2010. Additionally, certain general and administrative expenses were allocated to the operations of recently acquired real estate buildings totaling approximately $1.5 million, and there was an overall increase of approximately $0.3 million in utility expense in 2011 compared to 2010.

• General and administrative expense increased approximately $2.6 million due to compensation related expenses, approximately $0.5 million resulted from a one-time reversal in 2010 from a change in the named executive officer benefit arrangements upon retirement and approximately $0.5 million related to an increase in pension expense. The Company also incurred expenses related to potential acquisitions and developments of approximately $1.2 million and incurred additional professional fees of approximately $0.6 million. These increases were partially offset by certain general and administrative expenses allocated to the operations of recently acquired real estate properties totaling approximately $1.5 million.

• Impairment for 2010 includes a charge related to a building that the Company had classified as held for sale in 2010 and had recorded an impairment to reduce the carrying value of the building to its estimated fair market value less costs to sell. However, during 2011, the Company entered into a long-term lease on the building and reclassified it to held for use, resulting in a reclassification of the 2010 impairment charge from discontinued operations to continuing operations.

• Depreciation expense increased approximately $8.0 million related to the Company’s 2010 and 2011 real estate acquisitions and approximately $1.8 million related to properties previously under construction that commenced operations in 2010 and 2011. The remaining $1.5 million increase was due mainly to additional depreciation expense recognized related to various building and tenant improvements.

• Amortization expense increased approximately $3.8 million as a result of lease intangibles recognized on properties acquired in 2011, partially offset by a $0.9 million reduction in amortization on fully amortized intangibles.

Other income (expense) changed unfavorably mainly due to the reasons below:

• In 2011, the Company recognized a $2.0 million loss from the redemption of the Senior Notes due 2011. In 2010, the Company recognized a $0.5 million loss relating to certain repurchases on the open market of a portion of the Senior Notes due 2011.

• Interest expense increased approximately $22.4 million from the issuance of the Senior Notes due 2021 in December 2010, increased approximately $1.8 million due to a decrease in capitalized interest on development projects, and increased approximately $1.9 million from mortgage notes assumed as a part of the Company’s 2011 acquisitions. Also, additional interest expense of approximately $1.6 million was incurred in 2011 due to a higher weighted average principal balance on the

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Unsecured Credit Facility in 2011 compared to 2010. These increases were partially offset by a decrease in interest of approximately $17.3 million from the redemption of the Senior Notes due 2011. The components of interest expense are as follows:



(Dollars in thousands)	2011			2010
Contractual interest	$	79,260		$	71,351
Net discount accretion	1,237			975
Deferred financing costs amortization	4,072			3,700
Interest cost capitalization	(8,531		)	(10,316		)
Total Interest expense	$	76,038		$	65,710

• Interest and other income, net decreased primarily due to cash settlements received from former tenants in 2010.

Income from discontinued operations totaled $2.7 million and $7.2 million, respectively, for the year ended December 31, 2011 and 2010, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale or disposed of as of December 31, 2011. The Company disposed of five properties in 2011 and disposed of nine properties in 2010 with 15 properties classified as held for sale as of December 31, 2011.

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Liquidity and Capital Resources

The Company derives most of its revenues from its real estate property and mortgage portfolio based on contractual arrangements with its tenants, sponsoring health systems and borrowers. The Company may, from time to time, also generate funds from capital market financings, sales of real estate properties or mortgages, borrowings under the Unsecured Credit Facility, or from other debt or equity offerings.

Key Indicators

The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:

•Debt metrics;

•Dividend payout percentage; and

•Interest rates, underlying treasury rates, debt market spreads and equity markets.

The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

Sources and Uses of Cash

The Company’s primary sources of cash include rent and interest receipts from its real estate and mortgage portfolio based on contractual arrangements with its tenants, sponsoring health systems, and borrowers, borrowings under its Unsecured Credit Facility, proceeds from the sales of real estate properties or the repayments of mortgage notes receivable and proceeds from public or private debt or equity offerings. As of December 31, 2012, the Company had $110.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.72% and a remaining capacity of approximately $590.0 million. The Company’s primary uses of cash include dividend distributions, debt service payments (including principal and interest), real estate investments (including acquisitions and construction advances), as well as property operating and general and administrative expenses. Sources and uses of cash are detailed in the table below, as well as in the Company’s Consolidated Statements of Cash Flows.



	Year Ended December 31,						Change
(Dollars in thousands)	2012			2011			$			%
Cash and cash equivalents, beginning of period	$	4,738		$	113,321		$	(108,583	)	(95.8	)%
Cash provided by operating activities	116,397			107,852			8,545			7.9	%
Cash used in investing activities	(113,254		)	(296,813		)	183,559			(61.8	)%
Cash provided by (used in) financing activities	(1,105		)	80,378			(81,483		)	(101.4	)%
Cash and cash equivalents, end of period	$	6,776		$	4,738		$	2,038		43.0	%

Operating Activities

Cash flows provided by operating activities increased approximately $8.5 million in 2012 compared to 2011. Several items impact cash flows from operations including, but not limited to, cash generated from property operations, interest payments and the timing of the payment of invoices.

Investing Activities

Cash flows used in investing activities decreased approximately $183.6 million in 2012 compared to 2011 primarily due to a decrease in the volume of real estate acquisition and development activities.

Financing Activities

Cash flows used in financing activities increased in 2012 compared to 2011 primarily due to repayments on the Unsecured Credit Facility during 2012, as well as a reduction in net proceeds from equity issuances in 2012 compared to 2011.

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Contractual Obligations

The Company monitors its contractual obligations to manage the availability of funds necessary to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of December 31, 2012, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a real estate investment trust under the Internal Revenue Code. The Company's material contractual obligations are included in the table below. As of December 31, 2012, the Company had no long-term capital lease or purchase obligations.



	Payments Due by Period
(Dollars in thousands)	Total		Less than 1 Year		1 -3 Years		3 - 5 Years		More than 5 Years
Long-term debt obligations, including interest (1)	$	1,656,145	$	89,768	$	442,741	$	604,578	$	519,058
Operating lease commitments (2)	268,069		4,390		9,001		9,225		245,453
Construction loan obligation (3)	84,173		84,173		—		—		—
Tenant improvements (4)	—		—		—		—		—
Pension obligations (5)	—		—		—		—		—
Total contractual obligations	$	2,008,387	$	178,331	$	451,742	$	613,803	$	764,511

(1)

The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility, whose balance and interest rate may fluctuate from day to day. Excluded from the table above are the discount on the Senior Notes due 2014 of $0.2 million, the discount on the Senior Notes due 2017 of $1.3 million, the discount on the Senior Notes due 2021 of $2.7 million, and the discounts and premiums totaling approximately $2.8 million on 13 mortgage notes payable, which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2012. The Company’s long-term debt principal obligations are presented in more detail in the table below. On February 14, 2013, the Company repaid one mortgage note payable for approximately $14.9 million.



(In millions)	Principal Balance at Dec. 31, 2012		Principal Balance at Dec. 31, 2011		Maturity Date	Contractual Interest Rates at December 31, 2012	Principal Payments	Interest Payments
Unsecured Credit Facility	$	110.0	$	212.0	2/17	LIBOR + 1.40%	At maturity	Quarterly
Senior Notes due 2014	264.7		264.7		4/14	5.125%	At maturity	Semi-Annual
Senior Notes due 2017	300.0		300.0		1/17	6.500%	At maturity	Semi-Annual
Senior Notes due 2021	400.0		400.0		1/21	5.750%	At maturity	Semi-Annual
Mortgage notes payable	225.2		225.4		4/13-10/30	5.000%-7.625%	Monthly	Monthly
	$	1,299.9	$	1,402.1


(2)	Includes primarily the corporate office and ground leases, with expiration dates through 2101, related to various real estate investments for which the Company is currently making payments.


(3)	Includes the Company’s remaining funding commitment on two construction mortgage loans as of December 31, 2012.

(4)

The Company has various first-generation tenant improvement amounts remaining on its stabilizing properties as of December 31, 2012 of approximately $35 million to $45 million related to properties developed by the Company that the Company may fund for tenant improvements as leases are signed. The Company cannot predict when or if these amounts will be expended and, therefore, has not included estimated fundings in the table above.

(5)

As of December 31, 2012, only the Company’s chief executive officer was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $23.1 million as of December 31, 2012. Because the Company does not know when its chief executive officer will retire, it has not projected when the retirement benefits would be paid in the table above. As of December 31, 2012, the Company had recorded a $15.2 million liability, included in other liabilities, related to its pension plan obligations.

On February 15, 2013, the Company amended its $700.0 million Unsecured Credit Facility to decrease the cost of borrowings from LIBOR plus 1.50% to LIBOR plus 1.40%, to decrease the facility fee from 0.35% to 0.30%, and to extend the maturity date to April 14, 2017, with the option to extend for up to an additional year. As of December 31, 2012, the Company had $110.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.72% and a remaining borrowing capacity of approximately $590.0 million. See Note 9 to the Consolidated Financial Statements for more information.

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As of December 31, 2012, 77.1% of the Company’s debt balances were due after 2014. Also, for the year ended December 31, 2012, the Company’s stockholders’ equity totaled approximately $1.0 billion and its leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 43.3%. The Company’s fixed charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale, as well as other income from discontinued operations (see Note 5 to the Consolidated Financial Statements). In accordance with this definition, the Company’s earnings from continuing operations as of December 31, 2012 were sufficient to cover its fixed charges with a ratio of 1.03 to 1.00. The Company’s earnings calculated in accordance with its fixed charge covenant ratio under its Unsecured Credit Facility, which is based on a rolling four quarter calculation, covered its fixed charges 2.3 times.

The Company’s various debt instruments contain various representation, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company's ability to incur indebtedness and create liens or encumbrances. As of December 31, 2012, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in terms of ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition.

At-The-Market Equity Offering Program



Year	Shares Sold	Sales Price Per Share	Net Proceeds (in millions)
2011	11,648,700	$20.27 - $23.63	$	251.6
2010	5,258,700	$20.23 - $25.16	$	117.7

In January 2013, the Company sold 1,599,271 shares of common stock under this program for approximately $39.7 million in net proceeds. On February 17, 2013, the Company terminated the sales agreements under this program, leaving no shares currently available for issuance.

The Company used the net proceeds from the at-the-market equity offering program for general corporate purposes, including the acquisition and development of healthcare facilities, funding of mortgage loans and the repayment of debt.

Security Deposits and Letters of Credit

As of December 31, 2012, the Company held approximately $8.0 million in letters of credit, security deposits, and capital replacement reserves for the benefit of the Company in the event the obligated lessee or borrower fails to perform under the terms of its respective lease or mortgage. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases or mortgage notes.

2013 Acquisition and Mortgage Note Payable Repayment

In January 2013, the Company purchased a 52,225 square foot medical office building in Tennessee for a purchase price of $16.2 million. On February 14, 2013, the Company paid in full a mortgage note payable in the amount of $14.9 million bearing interest at a rate of 6.55% per year. The Company funded the acquisition and note repayment with proceeds from its at-the-market equity offering program. See Note 4 to the Consolidated Financial Statements for more information on this acquisition.

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Purchase Options

The Company had approximately $206.3 million in real estate properties as of December 31, 2012 that were subject to exercisable purchase options or purchase options that become exercisable during 2013. On a probability-weighted basis, the Company estimates that approximately half of these options might be exercised in the future. The Company does not believe it can reasonably estimate at this time the probability of exercise of any purchase options that become exercisable in 2014 or thereafter.

Potential Dispositions

In addition to the potential dispositions discussed in Trends and Matters Impacting Operating Results on page 21, the Company may from time to time sell additional properties and redeploy cash from property sales and mortgage repayments into investments. To the extent revenues related to the properties being sold and the mortgages being repaid exceed income from these investments, the Company’s consolidated results of operations and cash flows could be adversely affected.

Development Activity

As of December 31, 2012, the Company had two construction mortgage loans and twelve properties in the process of stabilization subsequent to construction. See Note 14 to the Consolidated Financial Statements for more detail on these projects.



(Dollars in thousands)	Number of Properties	Approximate Square Feet	Funded During Year Ended December 31, 2012		Total Amount Funded Through December 31, 2012		Estimated Remaining Budget
Construction mortgage notes	2	386,000	$	77,985	$	118,441	$	84,173
Stabilization in progress	12	1,282,716	38,459		405,941		$35,000 - $45,000
Construction in progress	0	—	—		—		—
Total	14	1,668,716	$	116,444	$	524,382

The Company intends to fund these commitments with available cash on hand, cash flows from operations, proceeds from the Unsecured Credit Facility, proceeds from the sale of real estate properties, proceeds from repayments of mortgage notes receivable, and from capital financing activities, including proceeds from the at-the-market equity offering program.

Operating Leases

As of December 31, 2012, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 43 real estate investments, excluding those leases the Company has prepaid. These operating leases have expiration dates through 2101. Rental expense relating to the operating leases for the years ended December 31, 2012, 2011 and 2010 was $4.3 million, $4.3 million and $4.0 million, respectively.

Dividends

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT. Common stock cash dividends paid during or related to 2012 are shown in the table below:



Quarter	Quarterly Dividend	Date of Declaration	Date of Record	Date Paid/*Payable
4th Quarter 2011	$0.30	January 31, 2012	February 16, 2012	March 1, 2012
1st Quarter 2012	$0.30	May 1, 2012	May 17, 2012	June 1, 2012
2nd Quarter 2012	$0.30	July 31, 2012	August 16, 2012	August 31, 2012
3rd Quarter 2012	$0.30	October 30, 2012	November 15, 2012	November 30, 2012
4th Quarter 2012	$0.30	January 29, 2013	February 14, 2013	* March 1, 2013

The ability of the Company to pay dividends is dependent upon its ability to generate cash flows and to make accretive new investments.

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Liquidity

Net cash provided by operating activities was $116.4 million, $107.9 million and $87.8 million for 2012, 2011 and 2010, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.

The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, repaying maturing debt and funding other debt service. Liquidity sources available include cash on hand, cash flows from operations, borrowings under the Unsecured Credit Facility, proceeds from mortgage notes receivable repayments, proceeds from sales of real estate investments, or additional capital market financings, including the Company’s at-the-market equity offering program, or other debt or equity offerings. The Company also had unencumbered real estate assets with a cost of approximately $2.4 billion as of December 31, 2012, which could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

The Company has some exposure to variable interest rates and its stock price has been impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately 1 to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices.

Impact of Inflation

The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index and require the tenant to pay all or some portion of the increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurances that the Company's ability to increase rents or recover operating expenses will always keep pace with inflation.

New Accounting Pronouncements

Note 1 to the Consolidated Financial Statements provides a discussion of new accounting standards. The Company does not believe these new standards will have a significant impact on the Company’s Consolidated Financial Statements, cash flows or results of operations.

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Market Risk

The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk.

As of December 31, 2012, $1.2 billion of the Company’s $1.3 billion of outstanding debt bore interest at fixed rates. Additionally, all of the Company’s mortgage notes and other notes receivable bore interest at fixed rates.

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



					Impact on Earnings and Cash Flows
(Dollars in thousands)	Outstanding Principal Balance As of 12/31/12		Calculated Annual Interest		Assuming 10% Increase in Market Interest Rates			Assuming 10% Decrease in Market Interest Rates
Variable Rate Debt:
Unsecured Credit Facility	$	110,000	$	1,892	$	(24	)	$	24



			Fair Value
(Dollars in thousands)	Carrying Value at December 31, 2012		December 31, 2012		Assuming 10% Increase in Market Interest Rates		Assuming 10% Decrease in Market Interest Rates		December 31, 2011 (1)
Fixed Rate Debt:
Senior Notes due 2014, net of discount (2)	$	264,522	$	279,861	$	279,786	$	279,929	$	288,636
Senior Notes due 2017, net of discount (2)	298,728		340,624		339,985		341,228		342,088
Senior Notes due 2021, net of discount (2)	397,307		472,180		468,056		476,190		460,405
Mortgage Notes Payable (2)	222,487		234,508		231,385		237,771		231,136
	$	1,183,044	$	1,327,173	$	1,319,212	$	1,335,118	$	1,322,265
Fixed Rate Receivables:
Mortgage Notes Receivable (3)	$	162,191	$	158,311	$	156,888	$	159,749	$	95,479
Other Notes Receivable (3)	116		115		114		116		295
	$	162,307