UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


________________





Form 10-Q





(Mark
      One)R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended September 30, 2009or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from to





Commission
file number: 000-50805


________________





Hines
Real Estate Investment Trust, Inc.


(Exact
Name of Registrant as Specified in its Charter)





Maryland
            20-0138854(State
      or Other Jurisdiction of
            (I.R.S.
      EmployerIncorporation
      or Organization)
            Identification
      No.)2800
      Post Oak BoulevardSuite 5000Houston,
      Texas
            77056-6118(Address
      of principal executive offices)
            (Zip
      code)





Registrant’s
telephone number, including area code:


(888) 220-6121








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 x   No o





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 o   No o





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
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act (Check one):


Large
      accelerated filer   o
            Accelerated
      Filer   o
            Non-accelerated
      filer   ý
            Smaller
      Reporting Company   o





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





Yes o   No x





As of
November 6, 2009, 214.8 million shares of the registrant’s common stock were
outstanding.





TABLE
OF CONTENTS





PART I –
      FINANCIAL INFORMATIONItem 1.
            Condensed
      Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets
            
            
            1Condensed
      Consolidated Statements of Operations
            
            
            2Condensed
      Consolidated Statements of Equity
            
            
            3Condensed
      Consolidated Statements of Cash Flows
            
            
            4Notes
      to the Condensed Consolidated Financial Statements
            
            
            5Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            23Item 3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            
            36Item 4T.
            Controls
      and Procedures
            
            
            36PART II –
      OTHER INFORMATIONItem
      1A.
            Risk
      Factors
            
            
            37Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            
            39Item 4.
            Submission
      of Matters to a Vote of Security Holders
            
            
            39Item 6.
            Exhibits
            
            
            40SIGNATURESCertificationCertificationCertification
      of CEO & CFO pursuant to Section 906








PART
      I - FINANCIAL INFORMATIONItem
      1. Condensed Consolidated Financial StatementsHINES
      REAL ESTATE INVESTMENT TRUST, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETS(UNAUDITED)September
      30,
            
            
            December
      31,2009
            
            
            2008(in
      thousands, except per share amounts)ASSETSInvestment
      property, net
            
            $
            2,393,900
            
            
            $
            2,374,007Investments
      in unconsolidated entities
            
            
            383,341
            
            
            
            364,374Cash
      and cash equivalents
            
            
            153,519
            
            
            
            39,927Restricted
      cash and marketable securities
            
            
            9,225
            
            
            
            19,732Distributions
      receivable
            
            
            2,208
            
            
            
            5,275Tenant
      and other receivables
            
            
            48,077
            
            
            
            43,012Intangible
      lease assets, net
            
            
            316,219
            
            
            
            370,049Deferred
      leasing costs, net
            
            
            49,134
            
            
            
            47,982Deferred
      financing costs, net
            
            
            8,674
            
            
            
            8,993Other
      assets
            
            
            3,379
            
            
            
            7,086TOTAL
      ASSETS
            
            $
            3,367,676
            
            
            $
            3,280,437LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued expenses
            
            $
            76,292
            
            
            $
            93,364Due
      to affiliates
            
            
            5,624
            
            
            
            9,515Intangible
      lease liabilities, net
            
            
            97,512
            
            
            
            112,371Other
      liabilities
            
            
            17,681
            
            
            
            21,643Interest
      rate swap contracts
            
            
            80,984
            
            
            
            116,074Participating
      interest liability
            
            
            54,048
            
            
            
            45,419Distributions
      payable
            
            
            33,086
            
            
            
            32,990Notes
      payable
            
            
            1,629,001
            
            
            
            1,529,842Total
      liabilities
            
            
            1,994,228
            
            
            
            1,961,218Commitments
      and contingenciesEquity:Shareholders'
      equity:Preferred
      shares, $.001 par value; 500,000 preferred shares authorized, none issued
      or outstanding as of September 30, 2009 and December
    31,2008
            
            
            -
            
            
            
            -Common
      shares, $.001 par value; 1,500,000 common shares authorized as of
      September 30, 2009 and December 31, 2008; 212,538 and 201,743 common
      shares issued and outstanding as of September 30, 2009 and December 31,
      2008, respectively
            
            
            213
            
            
            
            202Additional
      paid-in capital
            
            
            1,635,071
            
            
            
            1,629,033Retained
      deficit
            
            
            (304,733
            )
            
            
            (303,323
            )Accumulated
      other comprehensive income (loss)
            
            
            42,897
            
            
            
            (6,693
            )Shareholders'
      equity
            
            
            1,373,448
            
            
            
            1,319,219Noncontrolling
      interests
            
            
            -
            
            
            
            -Total
      equity
            
            
            1,373,448
            
            
            
            1,319,219TOTAL
      LIABILITIES AND EQUITY
            
            $
            3,367,676
            
            
            $
            3,280,437See
      notes to the consolidated financial statements.


1


HINES
      REAL ESTATE INVESTMENT TRUST, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFor
      the Three and Nine Months Ended September 30, 2009 and
2009(UNAUDITED)Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008(In
      thousands, except per share amounts)Revenues:Rental
      revenue
            
            $
            86,230
            
            
            $
            81,938
            
            
            $
            254,948
            
            
            $
            225,016Other
      revenue
            
            
            7,591
            
            
            
            6,964
            
            
            
            20,811
            
            
            
            19,240Total
      revenues
            
            
            93,821
            
            
            
            88,902
            
            
            
            275,759
            
            
            
            244,256Expenses:Property
      operating expenses
            
            
            23,908
            
            
            
            23,849
            
            
            
            69,183
            
            
            
            63,974Real
      property taxes
            
            
            12,807
            
            
            
            11,477
            
            
            
            35,864
            
            
            
            33,099Property
      management fees
            
            
            2,150
            
            
            
            1,891
            
            
            
            6,280
            
            
            
            5,263Depreciation
      and amortization
            
            
            31,859
            
            
            
            32,888
            
            
            
            94,647
            
            
            
            90,485Asset
      management and acquisition fees
            
            
            7,354
            
            
            
            6,229
            
            
            
            20,466
            
            
            
            23,923Organizational
      and offering expenses
            
            
            -
            
            
            
            34
            
            
            
            -
            
            
            
            3,647General
      and administrative
            
            
            1,247
            
            
            
            1,545
            
            
            
            4,330
            
            
            
            4,637Other
      losses
            
            
            3,415
            
            
            
            -
            
            
            
            3,425
            
            
            
            2Total
      expenses
            
            
            82,740
            
            
            
            77,913
            
            
            
            234,195
            
            
            
            225,030Income
      before other income (expenses), provision for income taxes and equity in
      losses  of unconsolidated entities, net
            
            
            11,081
            
            
            
            10,989
            
            
            
            41,564
            
            
            
            19,226Other
      income (expenses):Gain
      (loss) on derivative instruments, net
            
            
            (11,701
            )
            
            
            (10,530
            )
            
            
            35,090
            
            
            
            (11,194
            )Interest
      expense
            
            
            (22,883
            )
            
            
            (22,153
            )
            
            
            (68,475
            )
            
            
            (61,105
            )Interest
      income
            
            
            54
            
            
            
            903
            
            
            
            429
            
            
            
            2,513Income
      (loss) before provision for income taxes and equity in losses of
      unconsolidated entities, net
            
            
            (23,449
            )
            
            
            (20,791
            )
            
            
            8,608
            
            
            
            (50,560
            )Provision
      for income taxes
            
            
            (63
            )
            
            
            (726
            )
            
            
            (569
            )
            
            
            (1,191
            )Equity
      in losses of unconsolidated entities, net
            
            
            (2,277
            )
            
            
            (2,263
            )
            
            
            (6,474
            )
            
            
            (6,379
            )Net
      income (loss)
            
            
            (25,789
            )
            
            
            (23,780
            )
            
            
            1,565
            
            
            
            (58,130
            )Less:
      Net income attributable to noncontrolling interests
            
            
            (1,028
            )
            
            
            (816
            )
            
            
            (2,975
            )
            
            
            (2,191
            )Net
      loss attributable to common shareholders
            
            $
            (26,817
            )
            
            $
            (24,596
            )
            
            $
            (1,410
            )
            
            $
            (60,321
            )Basic
      and diluted loss per common share:Loss
      per common share
            
            $
            (0.13
            )
            
            $
            (0.13
            )
            
            $
            (0.01
            )
            
            $
            (0.34
            )Weighted
      average number of common shares outstanding
            
            
            210,298
            
            
            
            192,012
            
            
            
            205,325
            
            
            
            178,613Net
      comprehensive income (loss):Net
      income (loss)
            
            $
            (25,789
            )
            
            $
            (23,780
            )
            
            $
            1,565
            
            
            $
            (58,130
            )Other
      comprehensive income:Foreign
      currency translation
            
            
            19,097
            
            
            
            (7,332
            )
            
            
            49,590
            
            
            
            (5,721
            )Other
      comprehensive income (loss)
            
            
            (6,692
            )
            
            
            (31,112
            )
            
            
            51,155
            
            
            
            (63,851
            )Comprehensive
      income attributable to noncontrolling interests
            
            
            (1,028
            )
            
            
            (816
            )
            
            
            (2,975
            )
            
            
            (2,191
            )Net
      comprehensive income (loss) attributable to common
      shareholders
            
            $
            (7,720
            )
            
            $
            (31,928
            )
            
            $
            48,180
            
            
            $
            (66,042
            )See
      notes to the consolidated financial statements.


2


HINES
      REAL ESTATE INVESTMENT TRUST, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF EQUITYFor
      the Nine Months Ended September 30, 2009 and 2008(UNAUDITED)Hines
      Real Estate Investment Trust, Inc.AccumulatedAdditional
            
            
            
            
            
            OtherCommon
            
            
            
            
            
            Paid-In
            
            
            Accumulated
            
            
            Comprehensive
            
            
            
            
            
            NoncontrollingShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Income
      (Loss)
            
            
            Total
            
            
            InterestsBALANCE,
              January
      1, 2009
            
            
            201,743
            
            
            
            202
            
            
            
            1,629,033
            
            
            
            (303,323
            )
            
            
            (6,693
            )
            
            
            1,319,219
            
            
            
            -Issuance
      ofcommon
      shares
            
            
            25,424
            
            
            
            25
            
            
            
            254,196
            
            
            
            -
            
            
            
            -
            
            
            
            254,221
            
            
            
            -Redemption
      ofcommon
      shares
            
            
            (14,629
            )
            
            
            (14
            )
            
            
            (134,407
            )
            
            
            -
            
            
            
            -
            
            
            
            (134,421
            )
            
            
            -Distributions
      declared
            
            
            -
            
            
            
            -
            
            
            
            (96,401
            )
            
            
            -
            
            
            
            -
            
            
            
            (96,401
            )
            
            
            (2,975
            )Selling
      commissions
              and
      dealer manager fees
            
            
            -
            
            
            
            -
            
            
            
            (17,350
            )
            
            
            -
            
            
            
            -
            
            
            
            (17,350
            )
            
            
            -Comprehensive
      income (loss):
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,410
            )
            
            
            -
            
            
            
            (1,410
            )
            
            
            2,975Other
      comprehensiveincome
      -
              Foreign
      currency
              translation
      adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            49,590
            
            
            
            49,590
            
            
            
            -BALANCESeptember
      30, 2009
            
            
            212,538
            
            
            
            213
            
            
            
            1,635,071
            
            
            
            (304,733
            )
            
            
            42,897
            
            
            
            1,373,448
            
            
            
            -AccumulatedAdditional
            
            
            
            
            
            
            OtherCommon
            
            
            
            
            
            
            Paid-In
            
            
            Accumulated
            
            
            Comprehensive
            
            
            
            
            
            
            NoncontrollingShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Income
      (Loss)
            
            
            Total
            
            
            InterestsBALANCE,
              January
      1, 2008
            
            
            159,409
            
            
            
            159
            
            
            
            1,358,523
            
            
            
            (137,915
            )
            
            
            12,509
            
            
            
            1,233,276
            
            
            
            -Issuance
      ofcommon
      shares
            
            
            39,469
            
            
            
            40
            
            
            
            413,758
            
            
            
            -
            
            
            
            -
            
            
            
            413,798
            
            
            
            -Redemption
      ofcommon
      shares
            
            
            (3,742
            )
            
            
            (4
            )
            
            
            (39,751
            )
            
            
            -
            
            
            
            -
            
            
            
            (39,755
            )
            
            
            -Distributions
      declared
            
            
            -
            
            
            
            -
            
            
            
            (84,920
            )
            
            
            -
            
            
            
            -
            
            
            
            (84,920
            )
            
            
            (2,191
            )Selling
      commissions
              and
      dealer manager fees
            
            
            -
            
            
            
            -
            
            
            
            (32,316
            )
            
            
            -
            
            
            
            -
            
            
            
            (32,316
            )
            
            
            -Other
      offering costs, net
            
            
            -
            
            
            
            -
            
            
            
            (4,206
            )
            
            
            -
            
            
            
            -
            
            
            
            (4,206
            )
            
            
            -Comprehensive
      income (loss):
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (60,321
            )
            
            
            -
            
            
            
            (60,321
            )
            
            
            2,191Other
      comprehensiveincome
      -
              Foreign
      currency
              translation
      adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,721
            )
            
            
            (5,721
            )
            
            
            -BALANCESeptember
      30, 2008
            
            
            195,136
            
            
            
            195
            
            
            
            1,611,088
            
            
            
            (198,236
            )
            
            
            6,788
            
            
            
            1,419,835
            
            
            
            -See
      notes to the condensed consolidated financial statements.


3


HINES
      REAL ESTATE INVESTMENT TRUST, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFor
      the Nine Months Ended September 30, 2009 and 2008(UNAUDITED)2009
            
            
            2008CASH
      FLOW FROM OPERATING ACTIVITIES
            
            (In
      thousands)Net
      income (loss)
            
            $
            1,565
            
            
            $
            (58,130
            )Adjustments
      to reconcile net income (loss) to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            90,130
            
            
            
            91,314Non-cash
      compensation expense
            
            
            62
            
            
            
            22Equity
      in losses of unconsolidated entities, net
            
            
            6,474
            
            
            
            6,379Distributions
      received from unconsolidated entities
            
            
            1,699
            
            
            
            1,663Accrual
      of organizational and offering expenses
            
            
            -
            
            
            
            3,647Other
      losses
            
            
            3,425
            
            
            
            2(Gain)
      loss on derivative instruments, net
            
            
            (35,090
            )
            
            
            11,194Net
      change in operating accounts
            
            
            (27,206
            )
            
            
            (23,141
            )Net
      cash provided by operating activities
            
            
            41,059
            
            
            
            32,950CASH
      FLOWS FROM INVESTING ACTIVITIES:Investments
      in unconsolidated entities
            
            
            (23,073
            )
            
            
            -Distributions
      received from unconsolidated entities in excess of equity in
      earnings
            
            
            11,079
            
            
            
            20,042Investments
      in property
            
            
            (5,876
            )
            
            
            (423,601
            )Investments
      in master leases
            
            
            -
            
            
            
            (1,917
            )Master
      lease rent receipts
            
            
            1,200
            
            
            
            5,760Deposit
      proceeds from pending land sale
            
            
            803
            
            
            
            -(Increase)
      decrease in restricted cash
            
            
            10,699
            
            
            
            (4,463
            )Acquired
      lease intangibles
            
            
            -
            
            
            
            (97,910
            )Net
      cash used in investing activities
            
            
            (5,168
            )
            
            
            (502,089
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      (decrease) in other liabilities
            
            
            294
            
            
            
            (1,371
            )Proceeds
      from issuance of common stock
            
            
            201,710
            
            
            
            369,368Redemption
      of common shares
            
            
            (136,200
            )
            
            
            (35,831
            )Payments
      of selling commissions and dealer manager fees
            
            
            (17,162
            )
            
            
            (32,976
            )Payments
      of organizational and offering expenses
            
            
            (9
            )
            
            
            (10,084
            )Distributions
      paid to shareholders and noncontrolling interests
            
            
            (48,003
            )
            
            
            (36,572
            )Proceeds
      from notes payable
            
            
            274,000
            
            
            
            520,000Payments
      on notes payable
            
            
            (195,353
            )
            
            
            (269,444
            )Additions
      to deferred financing costs
            
            
            (2,668
            )
            
            
            (1,460
            )Net
      cash provided by financing activities
            
            
            76,609
            
            
            
            501,630Effect
      of exchange rate changes on cash
            
            
            1,092
            
            
            
            (275
            )Net
      change in cash and cash equivalents
            
            
            113,592
            
            
            
            32,216Cash
      and cash equivalents, beginning of period
            
            
            39,927
            
            
            
            152,443Cash
      and cash equivalents, end of period
            
            $
            153,519
            
            
            $
            184,659See
      notes to the condensed consolidated financial statements.


4


HINES
REAL ESTATE INVESTMENT TRUST, INC.





NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


For
the Three and Nine Months Ended September 30, 2009 and 2008


(UNAUDITED)





1.  Organization





The
accompanying interim unaudited condensed consolidated financial information has
been prepared according to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been
condensed or omitted according to such rules and regulations. For further
information, refer to the financial statements and footnotes for the year ended
December 31, 2008 included in Hines Real Estate Investment Trust, Inc.’s
Annual Report on Form 10-K. In the opinion of management, all adjustments
and eliminations, consisting only of normal recurring adjustments, necessary to
present fairly and in conformity with GAAP the financial position of Hines Real
Estate Investment Trust, Inc. as of September 30, 2009 and December 31,
2008, and the results of operations for the three and nine months ended
September 30, 2009 and 2008 and cash flows for the nine months ended September
30, 2009 and 2008 have been included. The results of operations for such interim
periods are not necessarily indicative of the results for the full
year.





Hines
Real Estate Investment Trust, Inc., a Maryland corporation (“Hines REIT” and,
together with its consolidated subsidiaries, the “Company”), was formed on
August 5, 2003 under the General Corporation Law of the state of Maryland
for the purpose of engaging in the business of investing in and owning interests
in real estate. Beginning with its taxable year ended December 31, 2004, the
Company operated and intends to continue to operate in a manner to qualify as a
real estate investment trust (“REIT”) for federal income tax purposes. The
Company is structured as an umbrella partnership REIT under which substantially
all of the Company’s current and future business is and will be conducted
through its majority-owned subsidiary, Hines REIT Properties, L.P. (the
“Operating Partnership”). Hines REIT is the sole general partner of the
Operating Partnership. Subject to certain restrictions and limitations, the
business of the Company is managed by Hines Advisors Limited Partnership (the
“Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”),
pursuant to the advisory agreement between the Company and the
Advisor.





Public
Offerings





Hines
REIT commenced its initial public offering on June 18, 2004 through which
it raised $527.5 million. The Company commenced its second public offering (the
“Second Offering”) on June 19, 2006 through which it raised
approximately $1.5 billion of gross proceeds prior to its expiration on June 30,
2008.





The
Company commenced its third public offering (the “Third Offering”) on July 1,
2008 pursuant to which it is offering up to $3.5 billion in shares of common
stock including $500.0 million in shares of common stock under its dividend
reinvestment plan.  As of September 30, 2009, Hines REIT had raised
$407.0 million in proceeds through the Third Offering. In addition, from October
1, 2009 through November 6, 2009, Hines REIT received gross offering proceeds of
$40.0 million from the sale of 4.1 million common
shares.





Hines
REIT contributes all net proceeds from its public offerings to the Operating
Partnership in exchange for partnership units in the Operating Partnership. As
of September 30, 2009 and December 31, 2008, Hines REIT owned a 97.0% and
97.3%, respectively, general partner interest in the Operating
Partnership.





Noncontrolling
Interests





Hines
2005 VS I LP, an affiliate of Hines, owned a 0.5% interest in the Operating
Partnership as of September 30, 2009 and December 31, 2008, respectively. In
addition, another affiliate of Hines, HALP Associates Limited Partnership
(“HALP”) owned a 2.5% and 2.2% limited partnership interest in the Operating
Partnership as of September 30, 2009 and December 31, 2008, respectively, which
is a profits interest (the “Participation Interest”). See Note 7 for additional
information regarding the Participation Interest.





Investment
Property





As of
September 30, 2009, the Company owned direct and indirect investments in 63
properties. These properties consisted of 45 U.S. office properties, one
mixed-use office and retail complex in Toronto, Ontario, one industrial property
in Dallas, Texas, four industrial properties in Brazil and a portfolio of 12
grocery-anchored shopping centers located in five states in the southeastern
United States (the “Grocery-Anchored Portfolio”).


5





2.  Summary
of Significant Accounting Policies





Described
below are certain of the Company’s significant accounting policies. The
disclosures regarding several of the policies have been condensed or omitted in
accordance with interim reporting regulations specified by Form 10-Q. Please see
the Company’s Annual Report on Form 10-K for a complete listing of all of its
significant accounting policies.





Basis
of Presentation





The
condensed consolidated financial statements of the Company included in this
quarterly report include the accounts of Hines REIT, the Operating Partnership
(over which Hines REIT exercises financial and operating control) and the
Operating Partnership’s wholly-owned subsidiaries (see Note 3), as well as
the noncontrolling interests. All intercompany balances and transactions have
been eliminated in consolidation.





We have
evaluated subsequent events through November 13, 2009, which is the date the
consolidated financial statements were issued.





Impairment
of Investment Property





Real
estate assets are reviewed for impairment each reporting period if events or
changes in circumstances indicate that the carrying amount of the individual
property may not be recoverable. In such an event, a comparison will be made of
the current and projected operating cash flows of each property on an
undiscounted basis to the carrying amount of such property. If the carrying
amount exceeds the undiscounted cash flows, it would be written down to
the estimated fair value to reflect impairment in the value of the asset.
The determination of whether investment property is impaired requires a
significant amount of judgment by management and is based on the best
information available to management at the time of the evaluation.





In
October 2009, the Company entered into a sale agreement with an unaffiliated
third party to sell a land parcel it acquired in connection with its acquisition
of Williams Tower in May 2008. According to the terms of the sale agreement, the
land parcel is expected to be sold in 2010 for approximately $12.8 million. The
Company recorded an impairment charge of $3.4 million, which is included in
other losses in the accompanying condensed consolidated statement of operations.
The amount of the impairment charge was determined based on the expected sale
price specified in the executed sale agreement.





No
impairment charges were recorded during the nine-months ended September 30, 2009
other than the impairment charge described above. However, if market conditions
continue to deteriorate and result in lower valuations or reduced cash flows of
our properties, additional impairment charges may be recorded in future
periods.





Restricted
Cash and Marketable Securities





As of
September 30, 2009 and December 31, 2008, the Company had restricted cash of
$9.2 million and $17.0 million, respectively, related to escrow accounts
required by certain of the Company’s mortgage agreements. In addition, the
Company had restricted marketable securities of $2.7 million at December 31,
2008, related to one of the Company’s lease agreements. These amounts were
invested in short-term certificates of deposit.





Tenant
and Other Receivables





Receivable
balances outstanding consist primarily of base rents, tenant reimbursements and
receivables attributable to straight-line rent (see Note 2 – Revenue Recognition). 
An allowance for the uncollectible portion of tenant and other receivables is
determined based upon an analysis of the tenant’s payment history, the financial
condition of the tenant, business conditions in the industry in which the tenant
operates and economic conditions in the area in which the property is
located.  Tenant and other receivables are shown at cost in the condensed
consolidated balance sheets, net of allowance for doubtful accounts of
approximately $1.1 million and $956,000, at September 30, 2009 and December 31,
2008, respectively.





Deferred
Leasing Costs





Direct
leasing costs, primarily consisting of third-party leasing commissions and
tenant inducements, are capitalized and amortized over the life of the related
lease. Tenant inducement amortization is recorded as an offset to rental revenue
and the amortization of other direct leasing costs is recorded in amortization
expense.





Tenant
inducement amortization was $1.3 million and $1.1 million for the three months
ended September 30, 2009 and 2008, respectively, and was recorded as an offset
to rental revenue. In addition, the Company recorded approximately $763,000 and
$432,000 as amortization expense related to other direct leasing costs for the
three months ended September 30, 2009 and 2008, respectively.


6


Tenant
inducement amortization was $3.8 million and $2.7 million for the nine months
ended September 30, 2009 and 2008, respectively, and was recorded as an offset
to rental revenue. In addition, the Company recorded $2.2 million and $1.1
million as amortization expense related to other direct leasing costs for the
nine months ended September 30, 2009 and 2008, respectively.





On
December 8, 2006, Norwegian Cruise Line (NCL) signed a lease renewal for
its space in Airport Corporate Center, an office property located in
Miami, Florida. In connection with this renewal, the Company committed to fund
$10.4 million of construction costs related to NCL’s expansion and
refurbishment of its space, to be paid in future periods, beginning in the first
quarter of 2008. As of September 30, 2009, $2.7 million of this commitment
remained unfunded and was recorded in accounts payable and accrued expenses in
the accompanying balance sheet.





Deferred
Financing Costs





Deferred
financing costs consist of direct costs incurred in obtaining debt financing
including the financing fees paid to our Advisor (see Note 8). These costs are
being amortized into interest expense on a straight-line basis, which
approximates the effective interest method, over the terms of the
obligations. For the three months ended September 30, 2009 and 2008,
approximately $772,000 and $446,000, respectively, was amortized into interest
expense in the accompanying condensed consolidated statements of operations. For
the nine months ended September 30, 2009 and 2008, $2.0 million and $1.2
million, respectively, was amortized into interest expense in the accompanying
condensed consolidated statements of operations.





Other
Assets





Other
assets included the following as of September 30, 2009 and December 31, 2008 (in
thousands):





September
      30, 2009
            
            
            December
      31, 2008Property
      acquisition escrow deposit
            
            $
            -
            
            
            $
            4,885Prepaid
      insurance
            
            
            1,688
            
            
            
            1,221Other
            
            
            1,691
            
            
            
            980Total
            
            $
            3,379
            
            
            $
            7,086





Second Offering





Certain
organizational and offering costs associated with the Second Offering were paid
by the Advisor on the Company’s behalf. Pursuant to the terms of the advisory
agreement in effect for the Second Offering, the Company was obligated to
reimburse the Advisor in an amount equal to the amount of actual organizational
and offering costs incurred, so long as such costs, together with selling
commissions and dealer-manager fees, did not exceed 15% of gross proceeds from
the Second Offering. For the three and nine months ended September 30, 2008, the
Advisor incurred approximately $34,000 and $3.6 million, respectively, of
internal offering costs on the Company’s behalf in connection with the Second
Offering which have been expensed in the accompanying condensed consolidated
statement of operations for the three months then ended. In addition,
approximately $6,000 and $4.2 million, respectively, of third-party offering
costs for the three and nine months ended September 30, 2008, were offset
against net proceeds of the Second Offering within additional paid-in capital in
the accompanying condensed consolidated statements of equity.





Third
Offering





The
Company commenced the Third Offering on July 1, 2008. During the three
months ended September 30, 2009 and 2008, the Advisor incurred $2.5 million and
$4.0 million, respectively, of organizational and offering costs related to the
Third Offering. During the nine months ended September 30, 2009 and 2008, the
Advisor incurred $10.9 million and $5.9 million, respectively, of organizational
and offering costs related to the Third Offering.  Pursuant to the
terms of the advisory agreement in effect for the Third Offering, the Company is
not obligated to reimburse the Advisor for organizational and offering costs
related to the Third Offering. Additionally, the Advisor is not a
shareholder of the Company. Accordingly, no such amounts have been recorded in
the accompanying condensed consolidated financial statements.





Revenue Recognition





The
Company recognizes rental revenue on a straight-line basis over the life of the
lease including rent holidays, if any. Straight-line rent receivable in the
amount of $37.0 million and $28.6 million as of September 30, 2009 and
December 31, 2008, respectively, consisted of the difference between the
tenants’ rents calculated on a straight-line basis from the date of acquisition
or lease commencement over the remaining terms of the related leases and the
tenants’ actual rents due under the lease agreements and is included in tenant
and other receivables in the accompanying condensed consolidated balance sheets.
Revenues associated with tenant reimbursements are recognized in the period in
which the expenses are incurred based upon the tenant lease provisions. Revenues
relating to lease termination fees are generally recognized at the time that a
tenant’s right to occupy the space is terminated and when the Company has
satisfied all obligations under the agreement.


7





Income Taxes





In
connection with the operation of Atrium on Bay, an office property located in
Toronto, Ontario, the Company has recorded a benefit for Canadian income taxes
of approximately $47,000 and an income tax provision for Canadian taxes of
$561,000 for the three months ended September 30, 2009 and 2008, respectively,
in accordance with Canadian tax laws and regulations. The Company has recorded
an income tax provision for Canadian income taxes of approximately $151,000 and
$816,000 for the nine months ended September 30, 2009 and 2008, respectively, in
accordance with Canadian tax laws and regulations.





The
Company also recorded an income tax provision for the Texas margin tax related
to its properties located in Texas. As a result, the Company recorded
approximately $110,000 and $175,000 for the three months ended September 30,
2009 and 2008, respectively. The Company recorded approximately $418,000 and
$380,000 for the nine months ended September 30, 2009 and 2008,
respectively.





As of
September 30, 2009, the Company had no significant temporary differences, tax
credits, or net operating loss carry-forwards.





Redemption of Common Stock





The
Company complies with the Distinguishing Liabilities from Equity topic of the
Financial Accounting Standards Board (the “FASB”) Accounting Standards
Codification , which requires, among other things, that financial instruments
that represent a mandatory obligation of the Company to repurchase shares be
classified as liabilities and reported at settlement value.  Management
believes that shares tendered for redemption by the holder under the Company’s
share redemption program do not represent a mandatory obligation until such
redemptions are approved.  At such time, the Company will reclassify such
obligations from equity to an accrued liability based upon their respective
settlement values. The Company has recorded a liability of $16.3 million in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet and such amount has been included in redemption of common
shares in the accompanying condensed consolidated statement of
equity as of September 30, 2009 related to 1.8 million shares tendered for
redemption and approved by the board of directors, but which were not redeemed
until October 2009. The Company recorded a liability of $18.1 million in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet as of December 31, 2008 related to 1.9 million shares tendered for
redemption and approved by the board of directors, but which were not redeemed
until January 2009.





Per Share Data





Loss per
common share is calculated by dividing the net loss attributable to common
shareholders for each period by the weighted average number of common shares
outstanding during such period. Loss per common share on a basic and diluted
basis is the same because the Company has no potentially dilutive common shares
outstanding.





Recent Accounting Pronouncements





In June
2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial
Assets (“SFAS No. 166”), which is not yet included in the Accounting Standards
Codification. SFAS No. 166 is a revision to FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will require more information about transfers of financial
assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. SFAS No. 166 is effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009. The adoption of SFAS No.
166 is not expected to have a significant impact on the Company’s consolidated
financial statements.





In
June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation
No. 46(R) (“SFAS No. 167”), which is not yet included in the Accounting
Standards Codification. SFAS No. 167 is a revision to FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, and
changes how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the other entity’s
purpose and design and the reporting entity’s ability to direct the activities
of the other entity that most significantly impact the other entity’s economic
performance. SFAS No. 167 is effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009. The adoption of SFAS No.
167 is not expected to have a significant impact on the Company’s consolidated
financial statements.


8


3.  Real
Estate Investments





The
Company makes real estate investments directly through entities wholly-owned by
the Operating Partnership, or indirectly through other entities. The following
table provides summary information regarding the properties in which the Company
owned interests as of September 30, 2009. All assets which are 100% owned by the
Company are referred to as “directly-owned properties.” All other properties are
owned indirectly through its investments in the Hines US Core Office Fund
LP (the “Core Fund”), the Grocery-Anchored Portfolio and Distribution Park
Rio.





Direct
      InvestmentsDate
            
            Leasable
            
            Percent
            
            Our
      EffectiveProperty
            
            City
            
            Acquired
            
            Square
      Feet
            
            Leased
            
            Ownership
      (1)321
      North Clark
            
            Chicago,
      Illinois
            
            04/2006
            
            885,664
            
            98%
            
            100%Distribution
      Park Araucaria
            
            Curitiba,
      Brazil
            
            12/2008
            
            459,587
            
            100%
            
            100%Citymark
            
            Dallas,
      Texas
            
            08/2005
            
            220,079
            
            99%
            
            100%4050/4055
      Corporate Drive
            
            Dallas,
      Texas
            
            05/2008
            
            643,429
            
            100%
            
            100%JPMorgan
      Chase Tower
            
            Dallas,
      Texas
            
            11/2007
            
            1,248,551
            
            88%
            
            100%345
      Inverness Drive
            
            Denver,
      Colorado
            
            12/2008
            
            175,284
            
            100%
            
            100%Arapahoe
      Business Park
            
            Denver,
      Colorado
            
            12/2008
            
            309,450
            
            91%
            
            100%Raytheon/DIRECTV
      Buildings
            
            El
      Segundo, California
            
            03/2008
            
            550,579
            
            100%
            
            100%Watergate
      Tower IV
            
            Emeryville,
      California
            
            12/2006
            
            344,433
            
            100%
            
            100%Williams
      Tower
            
            Houston,
      Texas
            
            05/2008
            
            1,480,623
            
            82%
            
            100%2555
      Grand
            
            Kansas
      City, Missouri
            
            02/2008
            
            595,607
            
            100%
            
            100%One
      Wilshire
            
            Los
      Angeles, California
            
            08/2007
            
            661,553
            
            97%
            
            100%3
      Huntington Quadrangle
            
            Melville,
      New York
            
            07/2007
            
            407,731
            
            87%
            
            100%Airport
      Corporate Center
            
            Miami,
      Florida
            
            01/2006
            
            1,021,397
            
            90%
            
            100%Minneapolis
      Office/Flex Portfolio
            
            Minneapolis,
      Minnesota
            
            09/2007
            
            766,210
            
            82%
            
            100%3400
      Data Drive
            
            Rancho
      Cordova, California
            
            11/2006
            
            149,703
            
            100%
            
            100%Daytona
      Buildings
            
            Redmond,
      Washington
            
            12/2006
            
            251,313
            
            100%
            
            100%Laguna
      Buildings
            
            Redmond,
      Washington
            
            01/2007
            
            460,661
            
            78%
            
            100%1515
      S Street
            
            Sacramento,
      California
            
            11/2005
            
            348,881
            
            100%
            
            100%1900
      and 2000 Alameda
            
            San
      Mateo, California
            
            06/2005
            
            253,187
            
            95%
            
            100%Distribution
      Park Elouveira
            
            Sao
      Paulo, Brazil
            
            12/2008
            
            534,794
            
            100%
            
            100%Distribution
      Park Vinhedo
            
            Sao
      Paulo, Brazil
            
            12/2008
            
            609,474
            
            100%
            
            100%Seattle
      Design Center
            
            Seattle,
      Washington
            
            06/2007
            
            390,684
            
            80%
            
            100%5th
      and Bell
            
            Seattle,
      Washington
            
            06/2007
            
            197,135
            
            98%
            
            100%Atrium
      on Bay
            
            Toronto,
      Ontario
            
            02/2007
            
            1,075,926
            
            98%
            
            100%Total
      for Directly-Owned Properties
            
            
            
            14,041,935
            
            93%


Indirect
      InvestmentsCore Fund InvestmentsOne
      Atlantic Center
                
                Atlanta,
      Georgia
                
                07/2006
                
                1,100,312
                
                76%
                
                23.20%The
      Carillon Building
                
                Charlotte,
      North Carolina
                
                07/2007
                
                471,507
                
                78%
                
                23.20%Charlotte
      Plaza
                
                Charlotte,
      North Carolina
                
                06/2007
                
                625,026
                
                95%
                
                23.20%One
      North Wacker
                
                Chicago,
      Illinois
                
                03/2008
                
                1,373,754
                
                97%
                
                23.20%Three
      First National Plaza
                
                Chicago,
      Illinois
                
                03/2005
                
                1,421,131
                
                91%
                
                18.56%333
      West Wacker
                
                Chicago,
      Illinois
                
                04/2006
                
                853,218
                
                77%
                
                18.51%One
      Shell Plaza
                
                Houston,
      Texas
                
                05/2004
                
                1,230,395
                
                100%
                
                11.60%Two
      Shell Plaza
                
                Houston,
      Texas
                
                05/2004
                
                565,553
                
                95%
                
                11.60%425
      Lexington Avenue
                
                New
      York, New York
                
                08/2003
                
                700,034
                
                100%
                
                11.67%499
      Park Avenue
                
                New
      York, New York
                
                08/2003
                
                291,480
                
                77%
                
                11.67%600
      Lexington Avenue
                
                New
      York, New York
                
                02/2004
                
                289,386
                
                96%
                
                11.67%Renaissance
      Square
                
                Phoenix,
      Arizona
                
                12/2007
                
                965,508
                
                86%
                
                23.20%Riverfront
      Plaza
                
                Richmond,
      Virginia
                
                11/2006
                
                951,590
                
                96%
                
                23.20%




9


Date
              
              Leasable
              
              Percent
              
              Our
      EffectiveProperty
              
              City
              
              Acquired
              
              Square
      Feet
              
              Leased
              
              Ownership
      (1)Core Fund InvestmentsJohnson
      Ranch Corporate Centre
              
              Roseville,
      California
              
              05/2007
              
              179,990
              
              62%
              
              18.51%Roseville
      Corporate Center
              
              Roseville,
      California
              
              05/2007
              
              111,418
              
              67%
              
              18.51%Summit
      at Douglas Ridge
              
              Roseville,
      California
              
              05/2007
              
              185,128
              
              63%
              
              18.51%Olympus
      Corporate Centre
              
              Roseville,
      California
              
              05/2007
              
              193,178
              
              56%
              
              18.51%Douglas
      Corporate Center
              
              Roseville,
      California
              
              05/2007
              
              214,606
              
              78%
              
              18.51%Wells
      Fargo Center
              
              Sacramento,
      California
              
              05/2007
              
              502,365
              
              96%
              
              18.51%525
      B Street
              
              San
      Diego, California
              
              08/2005
              
              449,183
              
              94%
              
              23.20%The
      KPMG Building
              
              San
      Francisco, California
              
              09/2004
              
              379,328
              
              100%
              
              23.20%101
      Second Street
              
              San
      Francisco, California
              
              09/2004
              
              388,370
              
              84%
              
              23.20%720
      Olive Way
              
              Seattle,
      Washington
              
              01/2006
              
              300,710
              
              89%
              
              18.51%1200
      19th Street
              
              Washington,
      D.C.
              
              08/2003
              
              337,239
              
              33%
              (2)
              11.67%Warner
      Center
              
              Woodland
      Hills, California
              
              10/2006
              
              808,274
              
              90%
              
              18.51%Total
      for Core Fund Properties
              
              
              
              14,888,683
              
              88%Grocery-Anchored PortfolioCherokee
      Plaza
              
              Atlanta,
      Georgia
              
              11/2008
              
              99,749
              
              100%
              
              70%Bellaire
      Boulevard Center
              
              Bellaire,
      Texas
              
              11/2008
              
              35,081
              
              100%
              
              70%Thompson
      Bridge Commons
              
              Gainesville,
      Georgia
              
              03/2009
              
              92,587
              
              95%
              
              70%Champions
      Village
              
              Houston,
      Texas
              
              11/2008
              
              384,581
              
              91%
              
              70%King's
      Crossing
              
              Kingwood,
      Texas
              
              11/2008
              
              126,397
              
              97%
              
              70%Sandy
      Plains Exchange
              
              Marietta,
      Georgia
              
              02/2009
              
              72,784
              
              95%
              
              70%Commons
      at Dexter Lakes
              
              Memphis,
      Tennessee
              
              11/2008
              
              228,496
              
              95%
              
              70%Mendenhall
      Commons
              
              Memphis,
      Tennessee
              
              11/2008
              
              79,871
              
              99%
              
              70%University
      Palms Shopping Center
              
              Oviedo,
      Florida
              
              11/2008
              
              99,172
              
              90%
              
              70%Shoppes
      at Parkland
              
              Parkland,
      Florida
              
              03/2009
              
              145,652
              
              93%
              
              70%Oak
      Park Village
              
              San
      Antonio, Texas
              
              11/2008
              
              64,287
              
              100%
              
              70%Heritage
      Stations
              
              Wake
      Forest, North Carolina
              
              01/2009
              
              68,778
              
              94%
              
              70%Total
      for Grocery-Anchored Portfolio
              
              
              
              1,497,435
              
              94%OtherDistribution
      Park Rio
              
              Rio
      de Janeiro, Brazil
              
              07/2007
              
              693,115
              
              99%
              
              50%Total
      for All Properties
              
              
              
              31,121,168
              
              91%
              (3)


(1)
            This
      percentage shows the effective ownership of the Operating Partnership in
      the properties listed. On September 30, 2009, Hines REIT owned a 97.0%
      interest in the Operating Partnership as its sole general partner.
      Affiliates of Hines owned the remaining 3.0% interest in the Operating
      Partnership. In addition, the Company owned an approximate 28.7%
      non-managing general partner interest in the Core Fund as of September 30,
      2009. The Core Fund does not own 100% of these properties; its ownership
      interest in its properties ranges from 40.3% to 80.7%.(2)
            Redevelopment
      of this asset, in which three floors were added to the building, was
      completed in June 2009. Efforts to lease this space are currently
      underway.(3)
            This
      amount represents the percentage leased assuming the Company owns a 100%
      interest in each of these properties.  The percentage
      leased based on the Company’s effective ownership interest in each
      property is 92%.





10


Investment
property consisted of the following as of September 30, 2009 and December 31,
2008 (in thousands):





September
      30, 2009
            
            
            December
      31, 2008Buildings
      and improvements
            
            $
            2,038,378
            
            
            $
            1,987,184Less:
      accumulated depreciation
            
            
            (115,369
            )
            
            
            (75,783
            )Buildings
      and improvements, net
            
            
            1,923,009
            
            
            
            1,911,401Land
            
            
            470,891
            
            
            
            462,606Investment
      property, net
            
            $
            2,393,900
            
            
            $
            2,374,007





As of September 30, 2009, the cost basis and accumulated amortization
      related to lease intangibles was as follows
      (in thousands):Lease
      IntangiblesIn-Place
      Leases
            
            Out-of-Market
              Lease
      Assets
            
            Out-of-Market
              Lease
      LiabilitiesCost
            $
            418,248
            
            $
            61,136
            
            $
            137,561Less:
      accumulated amortization
            
            (143,450)
            
            
            (19,715)
            
            
            (40,049)Net
            $
            274,798
            
            $
            41,421
            
            $
            97,512





As of
December 31, 2008, the cost basis and accumulated amortization related to lease
intangibles was as follows (in thousands):





Lease
      IntangiblesIn-Place
      Leases
            
            Out-of-Market Lease
      Assets
            
            Out-of-Market
      Lease LiabilitiesCost
            $
            424,063
            
            $
            61,228
            
            $
            138,577Less:
      accumulated amortization
            
            (100,453)
            
            
            (14,789)
            
            
            (26,206)Net
            $
            323,610
            
            $
            46,439
            
            $
            112,371





Amortization
expense of in-place leases was $18.1 million and $21.1 million for the
three months ended September 30, 2009 and 2008, respectively, and amortization
of out-of-market leases, net, was an increase to rental revenue of approximately
$3.8 million and $765,000, respectively. Amortization expense was $54.2 million
and $56.4 million for in-place leases for the nine months ended September
30, 2009 and 2008, respectively, and amortization of out-of-market leases, net,
was an increase to rental revenue of $11.0 million and $3.9 million,
respectively.





Anticipated
amortization of in-place leases and out-of-market leases, net, including
out-of-market ground leases for the period from October 1 through December 31,
2009 and for each of the years ended December 31, 2010 through 2013 is as
follows (in thousands):





In-Place
      Leases
            
            
            Out-of-Market
      Leases, NetOctober
      1 through December 31, 2009
            
            $
            17,550
            
            
            $
            (3,645
            )2010
            
            
            58,807
            
            
            
            (12,121
            )2011
            
            
            51,032
            
            
            
            (11,063
            )2012
            
            
            40,408
            
            
            
            (10,125
            )2013
            
            
            29,650
            
            
            
            (8,509
            )





In
connection with its directly-owned properties, the Company has entered into
non-cancelable lease agreements with tenants for space. As of September 30,
2009, the approximate fixed future minimum rentals for the period from October 1
through December 31, 2009 and for each of the years ended December 31, 2010
through 2013 and thereafter are as follows (in thousands):





Fixed
      Future Minimum RentalsOctober
      1 through December 31, 2009
            
            $
            61,5842010
            
            
            214,1892011
            
            
            195,4652012
            
            
            171,7052013
            
            
            133,487Thereafter
            
            
            505,382Total
            
            $
            1,281,812





11


Pursuant
to the lease agreements with certain tenants in one of its buildings, the
Company receives fees for the provision of various telecommunication-related
services and the use of certain related facilities. The fixed future minimum
rentals expected to be received for such services for the period from October 1
through December 31, 2009 and for each of the years ended December 31, 2010
through 2013 and for the period thereafter are $305,000, $2.6 million,
$2.3 million, $1.8 million, $1.4 million and $1.1 million,
respectively. The Company has outsourced the provision of these services to a
tenant in the same building, to whom it pays fees for the provision of such
services. The fixed future minimum payments for such services for the period
from October 1 through December 31, 2009 and for each of the years ended
December 31, 2010 through 2013 and for the period thereafter are
approximately $218,000, $750,000, $535,000, $372,000, $260,000 and $22,000,
respectively.





During
the three and nine months ended September 30, 2009 and 2008, the Company did not
earn more than 10% of its revenue from any individual tenant.





One of
the Company’s properties is subject to a ground lease, which expires on
March 31, 2032. Although the lease provides for increases in payments over
the term of the lease, ground rent expense accrues on a straight-line basis. The
fixed future minimum ground lease payments for the period from October 1 through
December 31, 2009 and for each of the years ended December 31, 2010 through 2013
and for the period thereafter are approximately $103,000, $420,000, $428,000,
$437,000, $445,000 and $9.9 million, respectively. Ground lease expense for each
of the three month periods ended September 30, 2009 and 2008 was approximately
$141,000. Ground lease expense for each of the nine month periods ended
September 30, 2009 and 2008 was approximately $422,000.





In
January 2009, the Company entered into a possession and use agreement with the
City of Redmond, Washington, related to a portion of the land owned in
connection with the Laguna Buildings, which gives the city immediate use and
possession of the land until final terms of the sale are determined. Upon
execution of the agreement, the Company received a deposit of approximately
$803,000. However, because the terms of the sale have not been finalized and
title to the land has not been transferred, the Company has recorded a liability
related to the deposit in other liabilities in the accompanying condensed
consolidated balance sheet as of September 30, 2009. The Company expects to
finalize the terms of the sale and transfer the title to this land during the
fourth quarter of 2009.





4.  
Investments in Unconsolidated Entities





The Company owns indirect interests in real estate through its investments in
the Core Fund, the Grocery-Anchored Portfolio and Distribution Park Rio. The
table below presents the activity of the Company’s unconsolidated entities for
the three months ended September 30, 2009 (in thousands):





Grocery-Anchored
            
            
            DistributionCore
      Fund
            
            
            Portfolio
            
            
            Park
      Rio
            
            
            TotalBalance
      as of July 1, 2009
            
            $
            283,555
            
            
            $
            75,078
            
            
            $
            27,106
            
            
            $
            385,739Contributions
            
            
            -
            
            
            
            4
            
            
            
            -
            
            
            
            4Distributions
      declared
            
            
            (644
            )
            
            
            (1,565
            )
            
            
            (588
            )
            
            
            (2,797
            )Equity
      in earnings (losses)
            
            
            (2,947
            )
            
            
            107
            
            
            
            563
            
            
            
            (2,277
            )Effect
      of exchange rate
            
            
            -
            
            
            
            -
            
            
            
            2,672
            
            
            
            2,672Balance
      as of September 30, 2009
            
            $
            279,964
            
            
            $
            73,624
            
            
            $
            29,753
            
            
            $
            383,341The table below presents the activity of the Company's unconsolidated
      entities for the three months ended September 30, 2008 (in
      thousands):DistributionCore
      Fund
            
            
            Park
      Rio
            
            
            TotalBalance
      as of July 1, 2008
            
            
            
            
            
            $
            312,596
            
            
            $
            33,675
            
            
            $
            346,271Contributions
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Distributions
      declared
            
            
            
            
            
            
            (7,281
            )
            
            
            (604
            )
            
            
            (7,885
            )Equity
      in earnings (losses)
            
            
            
            
            
            
            (2,957
            )
            
            
            694
            
            
            
            (2,263
            )Effect
      of exchange rate
            
            
            
            
            
            
            -
            
            
            
            (5,719
            )
            
            
            (5,719
            )Balance
      as of September 30, 2008
            
            
            
            
            
            $
            302,358
            
            
            $
            28,046
            
            
            $
            330,404




12






The
      table below presents the activity of the Company's unconsolidated entities
      for the nine months ended September 30, 2009 (in
    thousands):Grocery-Anchored
            
            
            DistributionCore
      Fund
            
            
            Portfolio
            
            
            Park
      Rio
            
            
            TotalBalance
      as of January 1, 2009
            
            $
            290,062
            
            
            $
            51,473
            
            
            $
            22,839
            
            
            $
            364,374Contributions
            
            
            -
            
            
            
            27,957
            
            
            
            -
            
            
            
            27,957Distributions
      declared
            
            
            (1,927
            )
            
            
            (5,944
            )
            
            
            (1,843
            )
            
            
            (9,714
            )Equity
      in earnings (losses)
            
            
            (8,171
            )
            
            
            138
            
            
            
            1,559
            
            
            
            (6,474
            )Effect
      of exchange rate
            
            
            -
            
            
            
            -
            
            
            
            7,198
            
            
            
            7,198Balance
      as of September 30, 2009
            
            $
            279,964
            
            
            $
            73,624
            
            
            $
            29,753
            
            
            $
            383,341The
      table below presents the activity of the Company's unconsolidated entities
      for the nine months ended September 30, 2008 (in
    thousands):DistributionCore
      Fund
            
            
            Park
      Rio
            
            
            TotalBalance
      as of January 1, 2008
            
            
            
            
            
            $
            330,441
            
            
            $
            30,716
            
            
            $
            361,157Contributions
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Distributions
      declared
            
            
            
            
            
            
            (20,041
            )
            
            
            (2,055
            )
            
            
            (22,096
            )Equity
      in earnings (losses)
            
            
            
            
            
            
            (8,042
            )
            
            
            1,663
            
            
            
            (6,379
            )Effect
      of exchange rate
            
            
            
            
            
            
            -
            
            
            
            (2,278
            )
            
            
            (2,278
            )Balance
      as of September 30, 2008
            
            
            
            
            
            $
            302,358
            
            
            $
            28,046
            
            
            $
            330,404





Investment
in the Grocery-Anchored Portfolio





On
November 13, 2008, the Company acquired a 70% interest in a joint venture
with a subsidiary of Weingarten Realty Investors
(“Weingarten”).  Concurrently, the joint venture entered into an
agreement to acquire a portfolio of grocery-anchored retail centers owned by
Weingarten for $271.4 million.  This portfolio includes 12 retail
properties anchored by grocery stores located in Texas, Georgia, Tennessee,
Florida and North Carolina and consists of approximately 1.5 million square
feet of rentable area that is 94% leased. The initial closing included eight
properties for approximately $205.1 million. During the three months ended
March 31, 2009, the joint venture closed on the remaining four properties
and assumed four additional loans totaling $34.6 million. Weingarten
will continue to manage this portfolio for the joint venture, though the
Company’s approval is required for any significant actions of the joint
venture.





Impairment
of Unconsolidated Entities





The
Company’s investments in unconsolidated entities are reviewed for impairment,
periodically, if events or circumstances change indicating that the carrying
amount of its investments may not be recoverable.  The ultimate
realization of its investments in unconsolidated entities is dependent on a
number of factors, including the performance of each investment and market
conditions.  In accordance with the Investments – Equity Method and
Joint Ventures Topic of the FASB Accounting Standards Codification, the Company
will record an impairment charge if it determines that a decline in the value of
an investment is other than temporary.  Based on the analysis of the
facts and circumstances at September 30, 2009, no impairment was recorded for
the Company’s investments in unconsolidated entities. If market conditions
continue to deteriorate and result in lower valuations or reduced cash flows of
our investments, impairment charges may be recorded in future
periods.


13


5.  Debt
Financing





The
following table includes all of the Company’s outstanding notes payable as of
September 30, 2009 and December 31, 2008 (in thousands, except interest
rates):





Description
            Origination
      or
              Assumption
      Date
            Maturity
      Date
            
            Interest
      Rate
            
            
            Principal
      Outstanding at September 30,  2009
            
            
            Principal
      Outstanding at December 31, 2008SECURED
      MORTGAGE DEBTWells
      Fargo Bank, N.A. — Airport Corporate Center
            1/31/2006
            3/11/2010
            
            
            4.775
            %
            
            $
            77,900
            (1)
            
            $
            90,852Metropolitan
      Life Insurance Company —
    1515 S. Street
            4/18/2006
            5/1/2011
            
            
            5.680
            %
            
            
            45,000
            (2)
            
            
            45,000Capmark
      Finance, Inc. — Atrium on Bay
            2/26/2007
            2/26/2017
            
            
            5.330
            %
            
            
            175,009
            (3)
            
            
            155,477The
      Prudential Insurance Company of America — One
      Wilshire
            10/25/2007
            11/1/2012
            
            
            5.980
            %
            
            
            159,500
            
            
            
            159,500IXIS
      Real Estate Capital Inc. – Raytheon/ DIRECTV
    Buildings
            3/13/2008
            12/5/2016
            
            
            5.675
            %
            
            
            52,060
            (4)
            
            
            52,515New
      York State Teachers’ Retirement System – 2555 Grand
            4/24/2008
            5/1/2013
            
            
            5.375
            %
            
            
            86,000
            (5)
            
            
            86,000New
      York State Teachers’ Retirement System – Williams
    Tower
            5/29/2008
            6/1/2013
            
            
            5.500
            %
            
            
            165,000
            (6)
            
            
            165,000Artesia
      Mortgage Capital Corporation –
                345
      Inverness Drive
            12/30/2008
            12/11/2016
            
            
            5.850
            %
            
            
            13,951
            (7)
            
            
            13,790Artesia
      Mortgage Capital Corporation – Arapahoe Business Park
    I
            12/30/2008
            6/11/2015
            
            
            5.330
            %
            
            
            8,801
            (8)
            
            
            8,676Artesia
      Mortgage Capital Corporation – Arapahoe Business Park
    II
            12/30/2008
            11/11/2015
            
            
            5.530
            %
            
            
            9,430
            (9)
            
            
            9,411HSH
      POOLED MORTGAGE FACILITYHSH
      Nordbank — Citymark, 321 North Clark, 1900 and 2000
      Alameda
            8/1/2006
            8/1/2016
            
            
            5.8575
            %
            (10)
            
            185,000
            
            
            
            185,000HSH
      Nordbank — 3400 Data Drive, Watergate Tower IV
            1/23/2007
            1/12/2017
            
            
            5.2505
            %
            (10)
            
            98,000
            
            
            
            98,000HSH
      Nordbank — Daytona and Laguna Buildings
            5/2/2007
            5/2/2017
            
            
            5.3550
            %
            (10)
            
            119,000
            
            
            
            119,000HSH
      Nordbank — 3 Huntington Quadrangle
            7/19/2007
            7/19/2017
            
            
            5.9800
            %
            (10)
            
            48,000
            
            
            
            48,000HSH
      Nordbank — Seattle Design Center/5th and Bell
            8/14/2007
            8/14/2017
            
            
            6.0300
            %
            (10)
            
            70,000
            
            
            
            70,000MET
      LIFE SECURED MORTGAGE FACILITYMet
      Life — JPMorgan Chase Tower/
                Minneapolis
      Office/Flex Portfolio
            12/20/2007
            1/1/2013
            
            
            5.70
            %
            
            
            205,000
            
            
            
            205,000OTHER
      NOTES PAYABLEKeyBank
      Revolving Credit Facility
            9/9/2005
            10/31/2010
            
            
            Variable
            
            
            
            108,500
            (11)
            
            
            16,000Atrium
      Note Payable
            9/1/2004
            10/1/2011
            
            
            7.390
            %
            
            
            2,850
            (12)
            
            
            2,621$
            1,629,001
            
            
            $
            1,529,842


__________





(1)
            This
      interest-only loan's original principal amount of
      $91.0 million was assumed by the Company in connection with its
      acquisition of Airport Corporate Center. This mortgage matured on March
      11, 2009 and was extended to March 11, 2010 with the option for an
      additional 6-month extension subject to certain
      conditions.  Concurrently, the Company made a principal payment
      of $13.1 million to reduce the outstanding principal balance to $77.9
      million. All other significant terms and covenants of the loan remained
      the same, including the fixed interest rate of 4.775%.(2)
            The
      Company entered into mortgage financing in connection with its acquisition
      of 1515 S. Street. The mortgage agreement provided for an
      interest only loan with a principal amount of
      $45.0 million.(3)
            The
      Company entered into mortgage financing in connection with its acquisition
      of Atrium on Bay. The mortgage agreement provided for an interest only
      loan with a principal amount of 190.0 million Canadian dollars. This
      amount was translated from Canadian dollars to U.S. dollars at a rate of
      $0.9211 as of September 30, 2009. 14
 (4)
            The
      Company assumed a mortgage note in the principal amount of $54.2 million
      in connection with its acquisition of the Raytheon/DirecTV Buildings. At
      the time of acquisition, the fair value of this mortgage was estimated to
      be $52.9 million, resulting in a discount of $1.3 million. The discount is
      being amortized over the term of the mortgage.(5)
            The
      Company entered into an interest-only loan with the New York State
      Teachers’ Retirement System (“NYSTRS”) in the principal amount of $86.0
      million secured by its interest in 2555 Grand.(6)
            The
      Company entered into an interest-only loan with NYSTRS in the principal
      amount of $165.0 million secured by its interest in
      Williams Tower.(7)
            The
      Company assumed a $15.5 million note in connection with its
      acquisition of 345 Inverness Drive. The note is interest-only until June
      11, 2010, at which time the principal will begin amortizing until its
      maturity. At the time of acquisition, the fair value of this note was
      estimated to be $13.8 million, resulting in a discount of $1.7
      million. The discount is being amortized over the term of the
      note.(8)
            The
      Company assumed a $9.8 million note in connection with its acquisition of
      Arapahoe Business Park I. The note is interest-only until June 11, 2010,
      at which time the principal will begin amortizing until its maturity. At
      the time of acquisition, the fair value of this note was estimated to be
      $8.7 million, resulting in a discount of $1.1 million.
      The discount is being amortized over the term of the
      note.(9)
            The
      Company assumed a $10.5 million note in connection with its acquisition of
      Arapahoe Business Park II. At the time of acquisition, the fair value of
      this note was estimated to be $9.4 million, resulting in a discount
      of $1.1 million. The discount is being amortized over the term of the
      note.(10)
            The
      Company entered into an interest rate swap agreement which effectively
      fixed the interest rate of this borrowing at the specified rate. See Note
      6for
      additional information regarding the Company’s
derivatives.(11)
            The
      Revolving Credit Facility had an original maturity date of October 31,
      2009, subject to extension at the election of the Company for two
      successive periods of one year each, subject to specified conditions. The
      facility allows, at the election of the Company, for borrowing at a
      variable rate or a LIBOR-based rate plus a spread ranging from 125 to 200
      basis points based on prescribed leverage ratios. On September 23, 2009,
      the Company exercised its option to extend the maturity date of the credit
      facility to October 31, 2010. Other than the maturity date, no other terms
      or conditions of the credit facility were changed as a result of the
      extension. The weighted average interest rate on outstanding borrowings
      under this facility was 2.9% as of September 30, 2009.(12)
            This
      is a note payable to Citicorp Vendor Finance Ltd. related to
      installation of certain equipment at Atrium on Bay. This amount was
      translated to U.S. dollars at a rate of $0.9211 as of September 30,
      2009.





The
Company is contractually obligated to make principal payments on its
outstanding notes payable for the period from October 1, 2009 through December
31, 2009, for each of the years ended December 31, 2010 through December 31,
2013 and for the period thereafter of $0.3 million, $187.7 million, $48.8
million, $160.7 million, $457.3 million and $778.6 million.





The
Company is not aware of any instances of noncompliance with financial covenants
as of September 30, 2009.





6.  Derivative
Instruments





The
Company has several interest rate swap transactions with HSH Nordbank AG, New
York Branch (“HSH Nordbank”). These swap transactions were entered into as
economic hedges against the variability of future interest rates on the
Company’s variable interest rate borrowings with HSH Nordbank. The interest rate
swaps have been recorded at their estimated fair value in interest rate swap
contracts in the accompanying condensed balance sheets. The gain or loss on
derivative instruments recorded in the Company’s condensed consolidated
statements of operations for the three and nine months ended September 30, 2009
and 2008 is the result of changes in the fair value of interest rate swaps
during each period (see Note 12 for additional information).


15





The
tables below provide additional information regarding each of the Company’s
outstanding interest rate swaps (all amounts are in thousands except for
interest rates):





Effective
      Date
            Expiration
      Date
            
            Notional
      Amount
            
            Interest Rate
      Received
            
            Interest
      Rate PaidAugust 1,
      2006
            August
      1, 2016
            
            $
            185,000
            
            Libor
      + 0.40%
            
            
            5.8575
            %January 12,
      2007
            January
      12, 2017
            
            
            98,000
            
            Libor
      + 0.40%
            
            
            5.2505
            %May 2,
      2007
            May
      2, 2017
            
            
            119,000
            
            Libor
      + 0.40%
            
            
            5.3550
            %July 19,
      2007
            July
      19, 2017
            
            
            48,000
            
            Libor
      + 0.40%
            
            
            5.9800
            %August 14,
      2007
            August
      14, 2017
            
            
            70,000
            
            Libor
      + 0.45%
            
            
            6.0300
            %





Liability
      derivativesFair
      valueDerivatives not
      designated as hedging instruments:
            
            September 30,
              2009
            
            
            December 31,
              2008Interest
      rate swap contracts
            
            $
            (80,984
            )
            
            $
            (116,074
            )Total
      derivatives
            
            $
            (80,984
            )
            
            $
            (116,074
            )





Amount
      recognized in income on derivativesFor
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember 30,
      2009
            
            
            September 30,
      2008
            
            
            September 30,
      2009
            
            
            September 30,
      2008Gain
      (loss) on derivative instruments, net
            
            $
            (11,701
            )
            
            $
            (10,530
            )
            
            $
            35,090
            
            
            $
            (11,194
            )Total
            
            $
            (11,701
            )
            
            $
            (10,530
            )
            
            $
            35,090
            
            
            $
            (11,194
            )





7.  Distributions





With the
authorization of its board of directors, the Company has declared distributions
monthly and aggregated and paid such distributions quarterly. The Company
intends to continue this distribution policy for so long as its board of
directors decides this policy is in the best interests of its shareholders. The
Company has made the following quarterly distributions to its shareholders
and noncontrolling interests for each of the quarters in the periods ended
September 30, 2009 and the year ended December 31, 2008. Distributions were
declared for the months of July through September at a rate of $0.00165699 per
share, per day, which is slightly lower than the amounts declared for each of
the months since the Company’s last change of its distribution rate in May
2008.





Distributions
      for the Quarter Ended
            Date
      Paid
            
            Total
      Distribution(In
      thousands)2009September
      30, 2009
            October
      1, 2009
            
            $
            33,086June
      30, 2009
            July
      1, 2009
            
            $
            33,570March
      31, 2009
            April
      1, 2009
            
            $
            32,7202008December 31,
      2008
            January
      2, 2009
            
            $
            32,990September 30,
      2008
            October
      1, 2008
            
            $
            31,773June 30,
      2008
            July
      1, 2008
            
            $
            29,002March 31,
      2008
            April
      15, 2008
            
            $
            26,337





16


8.  Related
Party Transactions





The table below outlines fees incurred and expense reimbursements payable
to Hines, the Advisor and Hines Real Estate Investments, Inc. (the “Dealer
Manager”) for each of the three and nine months ended September 30, 2009 and
2008 and outstanding as of September 30, 2009 and December 31, 2008. All amounts
are in thousands:





Incurred
            
            
            Incurred
            
            
            Unpaid
      as ofThree
            
            
            ThreeMonths
            
            
            Months
            
            
            Nine
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,
            
            
            Ended
      September 30,
            
            
            Ended
      September 30,
            
            
            September
      30,
            
            
            December
      31,Type
      and Recipient
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Selling
      Commissions – the Dealer Manager
            
            $
            4,549
            
            
            $
            3,620
            
            
            $
            13,130
            
            
            $
            24,318
            
            
            $
            236
            
            
            $
            135Dealer
      Manager Fee – the Dealer Manager
            
            
            1,441
            
            
            
            1,168
            
            
            
            4,220
            
            
            
            7,998
            
            
            
            (6
            )
            
            
            (93
            )Organizational
      and Offering Expenses -  the Advisor
            
            
            -
            
            
            
            40
            
            
            
            -
            
            
            
            7,814
            
            
            
            -
            
            
            
            9Acquisition
      Fee – the Advisor
            
            
            -
            
            
            
            -
            
            
            
            1,160
            
            
            
            3,018
            
            
            
            -
            
            
            
            4,534Asset
      Management Fee – the Advisor
            
            
            3,646
            
            
            
            3,115
            
            
            
            10,676
            
            
            
            8,944
            
            
            
            3,646
            
            
            
            1,141Participation
      Interest in the Operating Partnership – HALP Associates Limited
      Partnership
            
            
            3,708
            
            
            
            3,115
            
            
            
            8,630
            
            
            
            11,962
            
            
            
            54,048
            
            
            
            45,419Debt
      Financing Fee – the Advisor
            
            
            -
            
            
            
            -
            
            
            
            242
            
            
            
            -
            
            
            
            -
            
            
            
            1,058Property
      Management Fee – Hines
            
            
            2,006
            
            
            
            1,810
            
            
            
            5,866
            
            
            
            5,169
            
            
            
            221
            
            
            
            (11
            )Leasing
      Fee – Hines
            
            
            449
            
            
            
            550
            
            
            
            859
            
            
            
            2,352
            
            
            
            360
            
            
            
            645Tenant
      Construction Management Fees – Hines
            
            
            -
            
            
            
            33
            
            
            
            25
            
            
            
            201
            
            
            
            29
            
            
            
            184Re-development
      Construction Management Fees – Hines
            
            
            -
            
            
            
            38
            
            
            
            11
            
            
            
            38
            
            
            
            (5
            )
            
            
            -Expense
      Reimbursements – Hines (with respect to management and operation of the
      Company’s properties)
            
            
            4,215
            
            
            
            4,101
            
            
            
            12,535
            
            
            
            11,283
            
            
            
            633
            
            
            
            1,098





Due
      to AffiliatesDue to affiliates includes the following (in thousands):September
      30,
            
            December
      31,2009
            
            2008Dealer
      manager fees and selling commissions
            
            
            230
            
            
            
            42Asset
      management, acquisition fees and property-level fees and
      reimbursements
            
            
            4,884
            
            
            
            8,649Other
            
            
            510
            
            
            
            824Total
            
            $
            5,624
            
            
            $
            9,515





The Participation Interest





Pursuant
to the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, HALP owns a profits interest in the Operating Partnership.
The limited partnership interest in the Operating Partnership
attributable to the Participation Interest was 2.5% and 2.2% as of September 30,
2009 and December 31, 2008, respectively. The Participation Interest
entitles HALP to receive distributions from the Operating Partnership based upon
its percentage interest in the Operating Partnership at the time of
distribution. The Company recorded a liability related to the Participation
Interest based on the estimated settlement value of this ownership interest in
the accompanying condensed consolidated balance sheets which is remeasured to
fair value at each balance sheet date. See Note 12 for additional
information.





17


9.
      Changes in Assets and LiabilitiesThe effect of the changes in asset and liability accounts on cash flows
      from operating activities for the nine months ended September 30, 2009 and
      2008 is as follows (in thousands):2009
            
            
            2008Changes
      in assets and liabilities:Increase
      in other assets
            
            $
            (858
            )
            
            $
            (459
            )Increase
      in tenant and other receivables
            
            
            (5,451
            )
            
            
            (18,338
            )Additions
      to deferred leasing costs
            
            
            (13,816
            )
            
            
            (15,880
            )Increase
      (decrease) in accounts payable and accrued expenses
            
            
            (7,982
            )
            
            
            3,562Increase
      in participation interest liability
            
            
            8,630
            
            
            
            11,962Decrease
      in other liabilities
            
            
            (4,397
            )
            
            
            (2,845
            )Decrease
      in due to affiliates
            
            
            (3,332
            )
            
            
            (1,143
            )Changes
      in assets and liabilities:
            
            $
            (27,206
            )
            
            $
            (23,141
            )





10.
      Supplemental Cash Flow DisclosuresSupplemental cash flow disclosures for the nine months ended September 30,
      2009 and 2008 are as follows (in thousands):2009
            
            
            2008Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
            
            $
            65,791
            
            
            $
            57,525Cash
      paid for income taxes
            
            $
            2,053
            
            
            $
            444Supplemental
      Schedule of Non-Cash ActivitiesUnpaid
      selling commission and dealer manager fees
            
            $
            230
            
            
            $
            -Deferred
      offering costs offset against additional paid-in-capital
            
            $
            -
            
            
            $
            4,206Distributions
      declared and unpaid
            
            $
            33,086
            
            
            $
            31,773Distributions
      receivable
            
            $
            2,208
            
            
            $
            7,281Distributions
      reinvested
            
            $
            51,278
            
            
            $
            43,690Shares
      tendered for redemption
            
            $
            16,295
            
            
            $
            -Stock
      subscription
            
            $
            1,173
            
            
            $
            718Non-cash
      net liabilities acquired upon acquisition of property
            
            $
            -
            
            
            $
            20,995Accrual
      of deferred financing costs
            
            $
            6
            
            
            $
            -Assumption
      of mortgage upon acquisition of property
            
            $
            -
            
            
            $
            52,930Accrued
      additions to deferred leasing costs
            
            $
            2,160
            
            
            $
            5,080Accrued
      additions to investment property
            
            $
            266
            
            
            $
            563





11.  Commitments
and Contingencies





The
Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are generally covered by insurance.
While the resolution of these matters cannot be predicted with certainty,
management believes the final outcome of such matters will not have a material
adverse effect on the Company’s consolidated financial statements.




12.  Fair
Value Disclosures





The discussion below presents information about the three-level fair value
hierarchy described in the Fair Value Measurements and Disclosure topic of the
FASB Accounting Standards Codification and the valuation techniques utilized by
the Company. In general, fair values determined by Level 1 inputs utilize quoted
prices (unadjusted) in active markets for identical assets or liabilities
the Company has the ability to access. Fair values determined by Level 2 inputs
utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets and
inputs other than quoted prices observable for the asset or liability, such as
interest rates and yield curves observable at commonly quoted intervals. Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability. In instances in which the inputs used to measure fair value may fall
into different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the fair value measurement in its entirety has been
determined is based on the lowest level input significant to the fair value
measurement in its entirety. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability.


18


Assets
and Liabilities Measured at Fair Value on a Recurring Basis
 
 Derivative
Instruments
 
 As
indicated previously in Note 6, the Company has several interest rate swap
transactions with HSH Nordbank. These swap transactions were entered into as
economic hedges against the variability of future interest rates on the
Company’s variable interest rate borrowings with HSH Nordbank. The Company has
not designated any of these contracts as cash flow hedges for accounting
purposes.




.


Although
the Company has determined the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by the Company and its counterparty, HSH Nordbank. In adjusting the fair
values of its derivative contracts for the effect of nonperformance risk, the
Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds and guarantees. However,
as of September 30, 2009, the Company has assessed the significance of the
impact of the credit valuation adjustments on the overall valuation of its
derivative positions and has determined that the credit valuation adjustments
are not significant to the overall valuations of its derivatives. As a result,
the Company has determined its derivative valuations are classified in Level 2
of the fair value hierarchy.





The
following tables set forth the Company’s financial liabilities measured at fair
value on a recurring basis, which equals book value, by level within the fair
value hierarchy as of September 30, 2009 (in thousands).  The
Company’s derivative financial instruments are recorded in interest rate swap
contracts in the condensed consolidated balance sheet. The Company has not
designated any of its derivative instruments as hedging
instruments.





Basis
      of Fair Value MeasurementsQuoted
      Prices
            SignificantIn
      Active
            Other
            SignificantFair
      Value
            Markets
      for
            Observable
            Unobservableof
      Assets
            Identical
      Items
            Inputs
            InputsDescription
            (Liabilities)
            (Level
      1)
            (Level
      2)
            (Level
      3)Interest
      rate swap contracts
            $
      (80,984)
            $
      —
            $
      (80,984)
            $
      —





Assets and Liabilities Measured at
Fair Value on a Nonrecurring Basis





Impairment
of Investment Property





Real
estate assets are reviewed for impairment each reporting period if events or
changes in circumstances indicate that the carrying amount of the individual
property may not be recoverable. In October 2009, the Company entered into a
sale agreement with an unaffiliated third party to sell a land parcel it
acquired in connection with its acquisition of Williams Tower in May 2008.
According to the terms of the sale agreement, the land parcel is expected to be
sold in 2010. The Company recorded an impairment charge, which was determined
based on the expected sale price specified in the executed sale agreement. The
impairment charge is included in other losses in the accompanying condensed
consolidated statement of operations. The table below includes additional
information regarding the impairment charge, which is required in accordance
with the Fair Value Measurements and Disclosure topic of the FASB Accounting
Standards Codification (in thousands):





Basis
      of Fair Value MeasurementsQuoted
      Prices
            
            SignificantIn
      Active
            
            Other
            
            SignificantFair
      Value
            
            Markets
      for
            
            Observable
            
            Unobservable
            
            Totalof
      Assets
            
            Identical
      Items
            
            Inputs
            
            Inputs
            
            Gains/Description
            (Liabilities)
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)
            
            (Losses)Land
      parcel
            
            $
            12,770
            
            
            $
            —
            
            
            $
            12,770
            
            
            $
            —
            
            
            $
            (3,415
            )





19


Other Items 
 Participation
Interest
 
 In accordance with the Compensation – Stock Compensation topic of the FASB
Accounting Standards Codification, the Company recorded a liability related
to the Participation Interest based on the estimated settlement value of this
ownership interest in the accompanying condensed consolidated balance sheets
which is remeasured at fair value at each balance sheet date. The fair
value of the shares underlying the Participation Interest liability is
determined based on the related redemption price in place as of each
balance sheet date. Adjustments required to record this liability at fair value
are included in asset management and acquisition fees in the accompanying
consolidated statements of operations. See Note 8 – Related Party Transactions –
The Participation Interest for additional information.





Other
Financial Instruments





As of
September 30, 2009, management estimated that the fair value of notes payable,
which had a carrying value of $1.6 billion, was $1.5 billion. As of
December 31, 2008, management estimated that the fair value of notes
payable, which had a carrying value of approximately $1.5 billion, was
$1.4 billion. The discount rates used approximate current lending rates for
loans or groups of loans with similar maturities and credit quality, assumes the
debt is outstanding through maturity and considers the debt’s collateral (if
applicable).  Management has utilized market information as available or
present value techniques to estimate the amounts required to be disclosed. Since
such amounts are estimates that are based on limited available market
information for similar transactions, there can be no assurance that the
disclosed values could be realized.




Other
financial instruments not measured at fair value on a recurring basis include
cash and cash equivalents, restricted cash and marketable securities,
distributions receivable, tenant and other receivables, accounts payable and
accrued expenses, other liabilities and distributions payable.  The
carrying value of these items reasonably approximates their fair value based on
their highly-liquid nature and/or short-term maturities.




13.  Reportable
Segments





The
Segment Reporting Topic of the FASB Accounting Standards Codification
establishes standards for reporting financial and descriptive information about
an enterprise’s reportable segments. The Company’s investments in real estate
are geographically diversified and management evaluates the operating
performance of each at an individual property level. The Company has determined
it has four reportable segments: 1) office properties, 2) domestic industrial
properties, 3) domestic retail properties and 4) international industrial
properties. The office properties segment consists of 21 office properties that
the Company owns directly as well as 25 office properties that are owned
indirectly through the Company’s investment in the Core Fund. The domestic
industrial properties segment consists of one directly-owned industrial property
located in Dallas, Texas. The domestic retail segment consists of 12
grocery-anchored shopping centers that are owned indirectly through the
Company’s investment in a joint venture with Weingarten. The international
industrial properties segment consists of three directly-owned industrial
properties located in Curitiba and Sao Paolo, Brazil and one industrial property
located in Rio de Janeiro, Brazil that is owned indirectly through the Company’s
investment in a joint venture with a Hines affiliate.





The
Company’s indirect investments are accounted for using the equity method of
accounting for investments. As such, the activities of these investments are
reflected in investments in unconsolidated entities in the consolidated
balance sheets and equity in losses of unconsolidated entities, net in the
condensed consolidated statements of operations.




20
 The
tables below provide additional information related to each of the Company’s
segments (in thousands) and a reconciliation to the Company’s income or loss, as
applicable. "Corporate-Level Accounts" includes amounts incurred by the
corporate-level entities which are not allocated to any of the reportable
segments.
 
 Three
      Months Ended September 30,
              
              Nine
      Months Ended September 30,2009
              
              2008
              
              2009
              
              2008Total
      revenueDomestic
      office properties
              
              $
              88,821
              
              $
              87,806
              
              $
              261,963
              
              $
              242,670Domestic
      industrial properties
              
              
              1,120
              
              
              1,096
              
              
              3,364
              
              
              1,586International
      industrial properties
              
              
              3,880
              
              
              -
              
              
              10,432
              
              
              -Corporate-level
      accounts
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
      revenue
              
              $
              93,821
              
              $
              88,902
              
              $
              275,759
              
              $
              244,256Net
      operating income (loss)Domestic
      office properties segment
              
              $
              51,016
              
              $
              50,831
              
              $
              153,566
              
              $
              140,681Domestic
      industrial properties segment
              
              
              842
              
              
              854
              
              
              2,620
              
              
              1,239International
      industrial properties segment
              
              
              3,098
              
              
              -
              
              
              8,246
              
              
              -Corporate-level
      accounts
              
              
              (8,601)
              
              
              (7,808)
              
              
              (24,796)
              
              
              (32,207)Total
      segment net operating income (loss)
              $
              46,355
              
              $
              43,877
              
              $
              139,636
              
              $
              109,713
 Equity
      in earnings (losses) of unconsolidated entitiesEquity
      in losses of domestic office properties
            
            $
            (2,947)
            
            $
            (2,957)
            
            $
            (8,171)
            
            $
            (8,042)Equity
      in earnings of domestic retail properties
            
            
            107
            
            
            -
            
            
            138
            
            
            -Equity
      in earnings of international industrial properties
            
            
            563
            
            
            694
            
            
            1,559
            
            
            1,663Total
      equity in earnings (losses) of unconsolidated entities
            
            $
            (2,277)
            
            $
            (2,263)
            
            $
            (6,474)
            
            $
            (6,379)Total
      assets
            
            
            
            
            
            
            September
      30, 2009
            
            December
      31, 2008Domestic
      office properties
            
            
            
            
            
            
            
            $
            2,676,115
            
            $
            2,732,893Domestic
      industrial properties
            
            
            
            
            
            
            
            
            43,242
            
            
            44,146International
      industrial properties
            
            
            
            
            
            
            
            
            148,268
            
            
            119,368Investment
      in unconsolidated entities -
            
            
            
            
            
            
            
            
            -
            
            
            -Office
      properties
            
            
            
            
            
            
            
            
            279,964
            
            
            290,062Domestic
      retail properties
            
            
            
            
            
            
            
            
            73,624
            
            
            51,473International
      industrial properties
            
            
            
            
            
            
            
            
            29,753
            
            
            22,839Corporate-level
      accounts
            
            
            
            
            
            
            
            
            116,710
            
            
            19,656Total
      assets
            
            
            
            
            
            
            $
            3,367,676
            
            $
            3,280,437Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            2009
            
            2008Reconciliation
      to net income (loss)Total
      segment net operating income (loss)
            
            $
            46,355
            
            $
            43,877
            
            $
            139,636
            
            $
            109,713Depreciation
      and amortization
            
            
            (31,859)
            
            
            (32,888)
            
            
            (94,647)
            
            
            (90,485)Other
      losses
            
            
            (3,415)
            
            
            -
            
            
            (3,425)
            
            
            (2)Equity
      in earnings (losses) of unconsolidated entities
            
            
            (2,277)
            
            
            (2,263)
            
            
            (6,474)
            
            
            (6,379)Gain
      (loss) on derivative instruments, net
            
            
            (11,701)
            
            
            (10,530)
            
            
            35,090
            
            
            (11,194)Interest
      expense
            
            
            (22,883)
            
            
            (22,153)
            
            
            (68,475)
            
            
            (61,105)Interest
      income
            
            
            54
            
            
            903
            
            
            429
            
            
            2,513Provision
      for income taxes
            
            
            (63)
            
            
            (726)
            
            
            (569)
            
            
            (1,191)Provision
      for income taxes
            
            $
            (25,789)
            
            $
            (23,780)
            
            $
            1,565
            
            $
            (58,130)





21


14. Subsequent
Events
 
 Declaration of Dividends
 
 On
October 30, 2009, with the authorization of its board of directors, the Company
declared distributions for the month of November 2009. These distributions
will be calculated based on shareholders of record each day during November
in an amount equal to $0.00165699 per share, per day and will be paid
in January 2010 in cash or reinvested in stock for those participating in
the Company’s dividend reinvestment plan.
 
 KeyBank Activity
 
 From
October 1, 2009 through November 9, 2009, the Company repaid $24.5 million under
its revolving credit facility with KeyBank resulting in an outstanding principal
balance of $84.0 million as of November 9, 2009.
 
 Shareholder Redemptions
 
 For the
month of September 2009, in accordance with its share redemption program,
Hines REIT redeemed 1.8 million common shares and made corresponding payments
(on October 1, 2009, respectively) totaling $16.3 million to shareholders
who had requested these redemptions. The shares redeemed were cancelled and will
have the status of authorized, but unissued shares. The Company recorded a $16.3
million liability as of September 30, 2009 for the redemptions paid in October
2009. See Note 2 – Redemption
of Common Stock for additional information.
 The
Company’s board of directors authorized an amendment to the share
redemption program such that the Company will redeem shares (subject
to the conditions and limitations of the share redemption program) on a
quarterly, rather than monthly, basis.  Subject to the conditions and
limitations of the share redemption program, the first quarterly redemptions
will occur in January 2010, for redemption requests properly submitted during
the fourth quarter of 2009. The share redemption program also has been amended
to limit the funds available for redemption each quarter to the lesser of the
amount required to redeem 10% of the shares outstanding as of the same date in
the prior calendar year or the amount of proceeds received from the dividend
reinvestment plan in the quarter prior to the quarter in which the redemption
request was received.


HSH Rebalancing





HSH
Nordbank has the right to have the properties serving as collateral under the
HSH Nordbank credit facility appraised every two years. Should the
aggregate outstanding principal amounts under this facility exceed 55% of the
lender’s appraised values, the Company will be required to make a partial
payment or provide additional collateral to eliminate such excess. Subject to
this requirement, on October 1, 2009, the Company posted additional cash
collateral of approximately $70.0 million to rebalance the collateral for seven
of the ten properties that had been appraised. The additional cash collateral
was primarily funded with a borrowing under the Company’s revolving credit
facility.





Preferred Offering





The board
of directors has determined to consider the pursuit of a public best efforts
offering of preferred shares. Accordingly, on October 9, 2009 the Company filed
an initial registration statement for a best efforts offering of preferred
shares. There is no assurance that the Company will pursue an offering of
preferred shares, raise proceeds from such an offering or, if the Company does
raise such proceeds, that the Company will be able to successfully invest such
proceeds, or that such investments will enhance the long term returns to the
Company’s common shareholders.





*****


22


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





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included elsewhere
in this Form 10-Q. The following discussion should also be read in
conjunction with our audited consolidated financial statements and the notes
thereto and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in our Annual Report on Form 10-K for the
year ended December 31, 2008.





Cautionary
Note Regarding Forward-Looking Statements





This
Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements include
statements concerning future financial performance and distributions, future
debt and financing levels, acquisitions and investment objectives, payments
to Hines Advisors Limited Partnership (the “Advisor”), and its affiliates
and other plans and objectives of management for future operations or economic
performance, or assumptions or forecasts related thereto as well as all other
statements that are not historical statements. These statements are only
predictions. We caution that forward-looking statements are not guarantees.
Actual events or our investments and results of operations could differ
materially from those expressed or implied in forward-looking statements.
Forward-looking statements are typically identified by the use of terms such as
“may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,”
“believe,” “continue,” “predict,” “potential” or the negative of such terms and
other comparable terminology.





The
forward-looking statements included in this Form 10-Q are based on our
current expectations, plans, estimates, assumptions and beliefs that involve
numerous risks and uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, the availability of future financing and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Any of the assumptions underlying
forward-looking statements could be inaccurate. To the extent that our
assumptions differ from actual results, our ability to meet such forward-looking
statements, including our ability to generate positive cash flow from
operations, pay distributions to our shareholders and maintain the value of the
real estate properties in which we hold an interest, may be significantly
hindered.





The
following are some of the risks and uncertainties, which could cause actual
results to differ materially from those presented in certain forward-looking
statements:





•
            Whether
      we will have the opportunity to invest offering and dividend
      reinvestment plan proceeds to acquire properties or other investments or
      whether such proceeds will be needed to redeem shares; and
      if proceeds are available for investment, our ability to
      make such investments in a timely manner and at appropriate
      amounts that provide acceptable
returns;





•
            The
      potential need to fund tenant improvements, lease-up costs or other
      capital expenditures, as well as increases in property operating expenses
      and costs of compliance with environmental matters or discovery of
      previously undetected environmentally hazardous or other undetected
      adverse conditions at our properties;•
            Risks
      associated with debt;





•
            Competition
      for tenants and real estate investment opportunities, including
      competition with affiliates of Hines Interests Limited Partnership
      (“Hines”);





•
            Risks
      associated with adverse changes in general economic or local market
      conditions, including terrorist attacks and other acts of violence, which
      may affect the markets in which we and our tenants
  operate;





•
            Catastrophic
      events, such as hurricanes, earthquakes and terrorist attacks; and our
      ability to secure adequate insurance at reasonable and appropriate
      rates;•
            Risks
      associated with the currency exchange rate related to our international
      investments;





•
            International
      investment risks, including the burden of complying with a wide variety of
      foreign laws and the uncertainty of such laws, the tax treatment of
      transaction structures, political and economic instability, foreign
      currency fluctuations, and inflation and governmental measures to curb
      inflation may adversely affect our operations and our ability to make
      distributions;





•
            The
      failure of any bank in which we deposit our funds could reduce the amount
      of cash we have available to pay distributions and make additional
      investments;


23


•
            Changes
      in governmental, tax, real estate and zoning laws and regulations and the
      related costs of compliance and increases in our administrative operating
      expenses, including expenses associated with operating as a public
      company;





•
            Risks
      relating to our investment in Hines US Core Office Fund LP (the “Core
      Fund”), such as its reliance on Hines for its operations and investments,
      and our potential liability for Core Fund obligations;•
            The
      lack of liquidity associated with our assets;•
            Our
      reliance on our Advisor, Hines and affiliates of Hines for our day-to-day
      operations and the selection of real estate investments, and our Advisor’s
      ability to attract and retain high-quality personnel who can provide
      service at a level acceptable to us;•
            Risks
      associated with conflicts of interests that result from our relationship
      with our Advisor and Hines, as well as conflicts of interests certain of
      our officers and directors face relating to the positions they hold with
      other entities; and•
            Our
      ability to continue to qualify as a real estate investment trust (“REIT”)
      for federal income tax purposes.





These
risks are more fully discussed in, and all forward-looking statements should be
read in light of, all of the factors discussed in Part I, “Item 1A.
Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2008 and Part II, "Item 1A. Risk Factors" in this Form 10-Q.





You are
cautioned not to place undue reliance on any forward-looking statements included
in this Form 10-Q. All forward-looking statements are made as of the date
of this Form 10-Q and the risk that actual results will differ materially
from the expectations expressed in this Form 10-Q may increase with the
passage of time. In light of the significant uncertainties inherent in the
forward-looking statements included in this Form 10-Q, the inclusion of
such forward-looking statements should not be regarded as a representation by us
or any other person that the objectives and plans set forth in this
Form 10-Q will be achieved. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by reference to these risks and uncertainties. Each
forward-looking statement speaks only as of the date of the particular
statement, and we do not undertake to update any forward-looking
statement.





Executive
Summary





Hines
Real Estate Investment Trust, Inc. (“Hines REIT” and, together with its
consolidated subsidiaries, “we”, “us” or the “Company”) and its subsidiary,
Hines REIT Properties, L.P. (the “Operating Partnership”) were formed in August
2003 for the purpose of investing in and owning interests in real estate. We
invest in real estate to satisfy our primary investment objectives including
preserving invested capital, paying regular cash distributions and achieving
modest capital appreciation of our assets over the long term. We make
investments directly through entities wholly owned by the Operating Partnership
or indirectly through other entities such as through our investment in the Core
Fund. As of September 30, 2009, we had direct and indirect interests in 63
properties. These properties consist of 45 office properties located throughout
the United States, one mixed-use office and retail property in Toronto, Ontario,
one industrial property in Dallas, Texas, four industrial properties in Brazil
and a portfolio of 12 grocery-anchored shopping centers located in five states
in the Southeastern United States (the “Grocery-Anchored
Portfolio”).





Our
principal targeted assets are office properties that have quality construction,
desirable locations and quality tenants. We expect to continue to focus
primarily on investments in institutional-quality office properties located in
the United States (whether as direct investments or as indirect investments
through the Core Fund or otherwise). However, we also intend to continue to
pursue other real estate investments that we believe will satisfy our long-term
primary objectives of preserving invested capital and achieving modest capital
appreciation over the long term, in addition to providing regular cash
distributions to our shareholders. To achieve these objectives, we intend to
invest in properties which will be diversified by location, lease expirations
and tenant industries. In the future, our investments may include additional
investments outside of the United States, investments in non-office properties,
non-core or development investments, loans, ground leases and investments in
other joint ventures.





In order
to provide capital for these investments, we sold shares to the public through
our initial public offering (the “Initial Offering”) and our second public
offering  (the “Second Offering”), the latter of which terminated on
June 30, 2008. On July 1, 2008, we commenced our third public offering (the
“Third Offering”) pursuant to which we are offering a maximum of $3.5 billion in
common shares. We intend to continue raising significant amounts of capital
through our Third Offering prior to its expiration on July 1, 2010. As of
September 30, 2009, we have raised $2.4 billion through all of our
offerings.





24


Economic
Update





While the
current consensus view indicates that global GDP grew by 3% in the third quarter
and there have been other positive economic signs such as significant recovery
by the stock markets, increased government stimuli, increased corporate debt and
equity activities, and declining job losses, real estate fundamentals across the
globe remained challenging. We believe the effects of the economic recession
will continue to have an adverse impact on real estate market fundamentals,
including tenant demand, overall occupancies, leasing velocity, rental rates,
subletting and tenant defaults. We are proactively managing our portfolio in an
effort to minimize the negative impacts during this time. As with most
commercial real estate, our portfolio of assets is not immune to the effects of
a recession, however, due to the quality and diversification of our portfolio,
we believe that our portfolio is relatively well positioned to limit the
negative impact from this down cycle.





In spite
of the challenges presented by the current economy and markets, our portfolio
was 92% leased as of September 30, 2009, compared to our December 31, 2008
leased percentage of 95%. Our management closely monitors the portfolio's
lease expirations, which range from 3.0% to 8.0% of leasable square feet per
year from now through 2011. We believe this level of expirations is manageable,
and we will remain focused on filling tenant vacancies with the highest-quality
tenants in each of the markets in which we operate. Although we continue to be
leased to a diverse tenant base over a variety of industries, our
portfolio approximately 16% leased to over 225 companies in the financial
and insurance industries and approximately 15% leased to over 125 companies in
the legal industry. Depite the recent increase in leasing activities in select
markets, most markets where we operate are experiencing lower rental rates and
increased leasing incentives. We continue to be concerned about the ultimate
impact of events in the financial markets on our tenants in the finance,
insurance and legal industries and we are monitoring them in an effort to
mitigate potential adverse impacts to our portfolio.





Like many
other property owners, we have been impacted by tenant downsizing, which has
combined with other factors in the broader economy and real estate markets to
put downward pressure on demand for office space, driving down rental rates and
leasing velocity.  As a result of these conditions, as well as our
commitment to conservative management of our liquidity position, we declared
distributions for the months of July through November 2009 at a per-share amount
that is slightly lower than the amount declared for each of the months since our
last distribution rate change in May 2008.  Distributions declared for July
through November are at the rate of $0.00165699 per share per day, which if
declared and paid for 365 days, would equate to a 6.0% annualized yield on our
current offering price of $10.08. Depending on, among other things, our
financial performance in the future, there is no assurance that this level of
distributions to shareholders will be maintained.





Given the
economic environment and the overall decline in the value of most investors’
portfolios, there is less capital being invested in most sectors including
commercial real estate.  In addition, investors remain focused on
liquidity and safety and, therefore, there is a significant increase in requests
to redeem securities and a decrease in sales of securities to investors. During
the first three quarters of 2009, we experienced similar circumstances, whereby
proceeds received from our current offering were lower than our historical
capital raising activities and share redemptions under our redemption plan were
significantly higher. Redemption requests started to trend downward in the
2nd and
3rd
quarters of 2009.  In September 2009, we amended our share redemption
program to allow us to preserve more capital to meet our liquidity needs and
pursue attractive investment opportunities which could enhance the long-term
investment returns of our current common shareholders.  See “Item 2.
Management’s Discussion and Analysis of Financial Condition and Result of
Operations – Subsequent Events” for additional information regarding the
modification to our redemption program.





While
we have seen some recent improvements in the debt capital markets, debt capital
continues to be difficult to obtain and more expensive. We have managed our
portfolio to date in an effort to minimize our exposure to volatility in the
debt capital markets. We have done this by using moderate levels of long-term
fixed-rate debt and minimizing our exposure to short-term variable-rate debt
which is more likely to be impacted by market volatility. Our portfolio was 57%
leveraged as of September 30, 2009, with 90% of our debt in the form of
long-term, fixed-rate mortgage loans (some of which are effectively fixed
through the use of interest rate swaps).




Critical
Accounting Policies





Each of
our critical accounting policies involves the use of estimates that require
management to make assumptions that are subjective in nature. Management relies
on its experience, collects historical and current market data, and analyzes
these assumptions in order to arrive at what it believes to be reasonable
estimates. In addition, application of these accounting policies involves
the exercise of judgments regarding assumptions as to future uncertainties.
Actual results could materially differ from these estimates. A disclosure of our
critical accounting policies is included in our Annual Report on Form 10-K for
the year ended December 31, 2008 in "Management’s Discussion and Analysis of
Financial Condition." There have been no significant changes to our policies
during 2009.




25


Financial
Condition, Liquidity and Capital Resources





General





Our
principal cash requirements are for property-level operating expenses, capital
improvements and leasing costs, debt service, corporate-level general and
administrative expenses, distributions and redemptions. We have three primary
sources of capital for meeting our cash requirements:





•
            proceeds
      from our public offerings, including our dividend reinvestment
      plan;•
            debt
      financings, including secured or unsecured
      facilities; and•
            cash
      flow generated by our real estate investments and
    operations.





Our cash
needs for  additional investments in our properties have been met
primarily by proceeds from our public equity offerings and debt financing, while
our operating cash needs have primarily been met through cash flow generated by
our properties and investments. We believe that our current capital resources
and cash flow from operations are sufficient to meet our liquidity needs for the
foreseeable future; however, any cash used to fund redemption requests from
shareholders reduces the liquidity available to fund our cash
needs.





We intend
to refinance mortgage debt expiring in the near term with new mortgage financing
or our revolving credit facility. We also intend to continue to pay
distributions to our shareholders on a quarterly basis. However, as discussed
above, in light of the current economic conditions, we may not be able
to maintain the current level of distributions to our shareholders in
future periods.





Cash
Flows from Operating Activities





Our
direct investments in real estate assets generate cash flow in the form of
rental revenues, which are reduced by debt service, direct leasing costs and
property-level operating expenses. Property-level operating expenses consist
primarily of salaries and wages of property management personnel, utilities,
cleaning, insurance, security and building maintenance costs, property
management and leasing fees, and property taxes. Additionally, we have incurred
corporate-level debt service, general and administrative expenses, asset
management and acquisition fees.





Net cash
provided by operating activities was $41.1 million for the nine months ended
September 30, 2009 compared to net cash provided by operating activities of
$33.0 million for the nine months ended September 30, 2008.





Cash Flows from Investing Activities





Net
cash used in investing activities was $5.2 million for the nine months ended
September 30, 2009 compared to $502.1 million for the nine months ended
September 30, 2008. The decrease is primarily due to a significant reduction in
acquisitions completed during 2009. During the nine months ended September 30,
2008, we had cash outflows of $521.5 million related to the acquisition of
properties and their related lease intangibles. We did not acquire any direct
interests in properties during the nine months ended September 30, 2009. In
addition, we have described certain additional transactions below which may be
helpful in understanding changes in our investing cash flows between 2009 and
2008.





In January 2009, we entered into possession and use agreements with the City of
Redmond, Washington, related to a portion of the land owned in connection with
the Laguna Buildings, which gives the city immediate use and possession of the
land until final terms of the sale are determined. Upon execution of the
agreements, we received a deposit of approximately $803,000. However, because
the terms of the sale have not been finalized and title to the land has not been
transferred, we have recorded a liability related to the deposit and the
proceeds are included in deposit proceeds from pending land sale on the
accompanying condensed statement of cash flows as of September 30,
2009.





As of
September 30, 2009, we had invested $395.5 million in the Core Fund
representing an approximate 28.7% non-managing general partner interest. During
the nine months ended September 30, 2009 and 2008, we received distributions
from the Core Fund totaling $6.0 million and $19.7 million, respectively,
which was included in cash flows from investing activities as it exceeded our
equity in earnings of the joint venture. The Core Fund decreased the amount of
its distributions during 2009 in order to pay down debt and improve its
liquidity position and expects distributions, if any, will be minimal for the
next several quarters.





As of
September 30, 2009, we had invested $28.9 million in Distribution Park Rio
representing a 50% interest. During the nine months ended September 30, 2009 and
2008, we received distributions from Distribution Park Rio totaling $1.8 million
and $2.1 million, respectively. Approximately $284,000 and $391,000 of this
amount was included in cash flows from investing activities as it exceeded our
equity in earnings of the joint venture and the remaining amount was included in
operating cash flows for the nine months ended September 30, 2009 and 2008,
respectively.





26


On
November 13, 2008, we acquired a 70.0% non-managing interest in the
Grocery-Anchored Portfolio through a joint venture. Concurrently with our
initial investment, the joint venture acquired interests in eight of these
properties. The joint venture acquired interests in the remaining four
properties prior to March 31, 2009. As of September 30, 2009, we had invested
$79.9 million in the Grocery-Anchored Portfolio, $23.1 million of which was
invested during 2009. During the nine months ended September 30, 2009, we
received distributions from the Grocery-Anchored Portfolio totaling $4.9
million. Approximately $4.8 million of this amount was included in cash flows
from investing activities as it exceeded our equity in earnings of the joint
venture and the remaining amount was included in operating cash flows for the
nine months ended September 30, 2009. Additionally, included in the total
distributions received was a return of a portion of the capital contributed to
the joint venture in the fourth quarter of 2008 of $1.8 million, which was used
to fund a deposit on the joint venture’s mortgage financing.





During
the nine months ended September 30, 2009 and 2008, respectively, we had net cash
inflows of $1.2 million and $3.8 million, for master leases entered into in
connection with our acquisitions.





During
the nine months ended September 30, 2009, we had decreases in restricted cash
and marketable securities of $10.7 million. This decrease is primarily related
to rent and escrows of $10.7 million at one of our properties required by
its mortgage agreement to be restricted as of year-end, which was subsequently
released. During the nine months ended September 30, 2008, we had an increase in
restricted cash of $4.5 million related to certain escrows required by our
mortgage agreements of properties acquired during that period.





Cash Flows from Financing Activities





Public Offerings





We offer
shares of our common stock for sale through continuous public offerings, which
provides us with the ability to raise capital on an ongoing basis. We
raised $527.5 million in proceeds through our Initial Offering prior to its
expiration on June 18, 2006. We raised $1.5 billion in proceeds through our
Second Offering prior to its expiration on June 30, 2008.  We
commenced our Third Offering on July 1, 2008, pursuant to which we are
offering up to $3.5 billion in shares of common stock, including $500.0
million in shares of common stock under our dividend reinvestment
plan.  As of September 30, 2009, we had raised $407.0 million in
proceeds, including proceeds from the dividend reinvestment plan, through the
Third Offering.





During
the nine months ended September 30, 2009 and 2008, respectively, we raised
proceeds of $201.7 million and $369.4 million excluding proceeds from the
dividend reinvestment plan. The decrease in proceeds is a result of the current
capital markets and economic environment. See
“Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Economic Update” for additional
information regarding the current state of the economy.





We funded
redemptions of $136.2 million for the nine months ended September 30, 2009
compared to $35.8 million for the nine months ended September 30, 2008. As
indicated previously, we have experienced a significant increase in requests for
redemptions during 2009 compared to the same period in 2008, due to the current
economic environment. However, we have recently experienced a decrease in
redemption request levels. Redemptions paid during the first quarter
of 2009 averaged $21.2 million per month, compared with $14.6
million and $9.7 million per month during the second and third
quarters of 2009, respectively. In addition, effective October 1, 2009, we
modified our share redemption program to redeem shares on a quarterly rather
than monthly basis and such redemptions will be limited to our dividend
reinvestment plan proceeds from the prior quarter.





Payment of Offering and Other Costs and Expenses





In
addition to making investments in accordance with our investment objectives, we
used our capital resources to pay Hines Real Estate Investments, Inc. (the
“Dealer Manager”) and the Advisor for services they provided to us during the
various phases of our offerings and operations. During our offerings, we pay the
Dealer Manager selling commissions and dealer manager fees, and during the
Second Offering we reimbursed the Advisor for organizational and offering costs.
Pursuant to the terms of the Third Offering, we are not obligated to pay
organizational and offering costs related to the Third Offering, other than
selling commissions and the dealer manager fee. As a result, we have not
incurred or paid any organizational or offering costs during 2009.





For the
nine months ended September 30, 2009 and 2008, we paid the Dealer Manager
selling commissions of $13.0 million and $24.7 million, respectively, and dealer
manager fees of $4.1 million and $8.3 million, respectively. All such selling
commissions and a portion of such dealer manager fees were reallowed by the
Dealer Manager to participating broker dealers for their services in selling our
shares. Commissions and dealer manager fees paid during the nine months ended
September 30, 2009 decreased, as compared to the nine months ended September 30,
2008, primarily as a result of a decrease in capital raised.


27


Our
Second Offering terminated on June 30, 2008. No organizational and offering
costs related to the Second Offering were incurred after December 31, 2008.
During the nine months ended September 30, 2008, the Advisor incurred internal
organizational and offering costs related to the Second Offering totaling
approximately $3.6 million and third-party offering costs of $4.2 million.
During the nine months ended September 30, 2008 we made payments totaling $10.1
million for Second Offering organizational and offering costs, all of which were
reimbursements made to our Advisor.





Distributions





In order
to meet the requirements for being treated as a REIT under the Internal Revenue
Code of 1986 and to pay regular cash distributions to our shareholders, which is
one of our investment objectives, we have declared and expect to continue to
declare distributions to shareholders (as authorized by our board of directors)
as of daily record dates and aggregate and pay such distributions
quarterly.





From
July 1, 2006 through April 30, 2008, we declared distributions (as
authorized by our board of directors) equal to $0.00170959 per share, per
day. We increased the dividend rate to $0.00175233 per share, per day for the
months of May 2008 through June 2009. As discussed above (See
“Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Economic Update”), beginning in July 2009,
we reduced our distribution rate to $0.00165699 per share, per day. In addition,
we maintained this rate for distributions declared for the months of August
through November 2009. The distributions declared were authorized and set by our
board of directors at a level the board believed to be appropriate based upon
the board’s evaluation of our assets, historical and projected levels of cash
flow and results of operations, additional capital and debt anticipated to be
raised or incurred and invested in the future, the historical and projected
timing between receiving offering proceeds and investing such proceeds in real
estate investments, and general market conditions and trends. However, as
discussed above, in light of the current economic environment, we may not be
able to maintain the current level of distributions to our shareholders in
future periods.





The table below outlines our total distributions declared to shareholders
and noncontrolling interests for the nine months ended September 30, 2009
and 2008, including the breakout between the distributions paid in cash and
those reinvested pursuant to our dividend reinvestment plan (all amounts are in
thousands).





NoncontrollingShareholders
            
            InterestsNine
      Months Ended
            Cash
      Distributions
            
            Dividends
      Reinvested
            
            Total
      Declared
            
            Total
      DeclaredSeptember
      30, 2009
            $
            46,255
            
            $
            50,146
            
            $
            96,401
            
            $
            2,975September
      30, 2008
            $
            37,479
            
            $
            47,441
            
            $
            84,920
            
            $
            2,191





For the
nine months ended September 30, 2009 and 2008, we funded our cash distributions
with cash flows from operating activities and distributions received from our
unconsolidated entities.





Debt Financings





We use debt financing from time to time for acquisitions and investments as well
as for property improvements, tenant improvements, leasing commissions and other
working capital needs. We may obtain financing at the time an asset is acquired
or an investment is made or at such later time as determined to be appropriate,
depending on market conditions and other factors. See
“Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Economic Update” for additional
information regarding the current state of the debt markets.





For the
nine months ended September 30, 2009, we received debt proceeds of $274.0
million and made payments of $181.5 million related to borrowings under our
revolving credit facility. We use proceeds from our revolving credit facility to
make capital contributions related to acquisitions, fund general working capital
needs and to make principal payments on other debts as described above. In
addition, upon execution of the Airport Corporate Center debt maturity
extension, we made a principal payment of $13.1 million to reduce the
outstanding principal balance to $77.9 million. The remaining debt payments
relate to amortizing loans at certain of our properties.





As of
September 30, 2009, our debt financing was approximately 57% of the estimated
aggregate value of our real estate investments (including our pro rata share of
real estate assets and related debt owned through our investments in other
entities such as the Core Fund) compared with 55% at December 31,
2008.





For the
nine months ended September 30, 2008, we entered into $251.0 million of
permanent mortgage financing related to our wholly-owned property acquisitions.
We also assumed a $54.2 million mortgage related to our acquisition of the
Raytheon/DirecTV Buildings. These mortgages were primarily interest-only and had
terms that varied from five to eight years with a weighted average interest rate
of 5.50%. In addition, we received proceeds of $269.0 million and made debt
payments of $269.0 million, related to borrowings under our
revolver.


28


HSH
Nordbank has the right to have the properties serving as collateral under the
HSH Nordbank credit facility appraised every two years. Should the
aggregate outstanding principal amounts under this facility exceed 55% of the
lender’s appraised values, we must rebalance through making a partial payment or
providing additional collateral to eliminate such excess. Subject to this
requirement, on October 1, 2009, we posted additional cash collateral of
approximately $70.0 million to rebalance the collateral for seven of the
ten properties that had been appraised. The additional cash collateral was
primarily funded with a borrowing under our revolving credit facility. We expect
that we will be required to post additional cash collateral once the final three
properties are appraised.





Results of
Operations





RESULTS
      FOR OUR DIRECTLY-OWNED PROPERTIES





We owned
25 properties directly that were 93% leased as of September 30, 2009 compared to
20 properties that were 94% leased as of September 30, 2008. The following table
presents the property-level revenues and expenses for the three and nine months
ended September 30, 2009, as compared to the same period in 2008. Same-store
properties for the nine months ended September 30, 2009 include all properties
owned as of January 1, 2008. Revenues and expenses for properties acquired after
January 1, 2008 are included in “Recent Acquisitions.” Same-store properties for
the three months ended September 30, 2009 include all properties owned as of
July 1, 2008. All amounts are in thousands, except for percentages:





Three
      Months Ended September 30,
            
            Change2009
            
            2008
            
            $
            
            %Property
      revenuesSame-store
      properties
            
            $
            87,903
            
            $
            88,902
            
            $
            (999)
            
            
            (1.1)
            %Recent
      acquisitions
            
            
            5,918
            
            
            -
            
            
            5,918
            
            
            -
            %Total
      property revenues
            
            $
            93,821
            
            $
            88,902
            
            $
            4,919
            
            
            5.5
            %Property
      expenses (1)Same-store
      properties
            
            $
            70,120
            
            $
            70,831
            
            $
            (711)
            
            
            (1.0)
            %Recent
      acquisitions
            
            
            4,082
            
            
            -
            
            
            4,082
            
            
            -
            %Total property expenses
            
            $
            74,202
            
            $
            70,831
            
            $
            3,371
            
            
            4.8
            %Property
      revenues in excess of expensesSame-store
      properties
            
            $
            17,783
            
            $
            18,071
            
            $
            (288)
            
            
            (1.6)
            %Recent
      acquisitions
            
            
            1,836
            
            
            -
            
            
            1,836
            
            
            -
            %Total
      property revenues in excess of expenses
            
            $
            19,619
            
            $
            18,071
            
            $
            1,548
            
            
            8.6
            %Interest
      income/expenseInterest
      expense
            
            $
            22,883
            
            $
            22,153
            
            $
            730
            
            
            3.3
            %Interest
      income
            
            $
            54
            
            $
            903
            
            $
            (849)
            
            
            (94.0)
            %  29
 Nine
      Months Ended September 30,
            
            Change2009
            
            2008
            
            $
            
            %Property
      revenuesSame-store
      properties
            
            $
            203,061
            
            $
            206,935
            
            $
            (3,874)
            
            
            (1.9)
            %Recent
      acquisitions
            
            
            72,698
            
            
            37,321
            
            
            35,377
            
            
            94.8
            %Total
      property revenues
            
            $
            275,759
            
            $
            244,256
            
            $
            31,503
            
            
            12.9
            %Property
      expenses (1)Same-store
      properties
            
            $
            153,965
            
            $
            162,323
            
            $
            (8,358)
            
            
            (5.1)
            %Recent
      acquisitions
            
            
            56,002
            
            
            31,691
            
            
            24,311
            
            
            76.7
            %Total property expenses
            
            $
            209,967
            
            $
            194,014
            
            $
            15,953
            
            
            8.2
            %Property
      revenues in excess of expensesSame-store
      properties
            
            $
            49,096
            
            $
            44,612
            
            $
            4,484
            
            
            10.1
            %Recent
      acquisitions
            
            
            16,696
            
            
            5,630
            
            
            11,066
            
            
            196.6
            %Total
      property revenues in excess of expenses
            
            $
            65,792
            
            $
            50,242
            
            $
            15,550
            
            
            31.0
            %Interest
      income/expenseInterest
      expense
            
            $
            68,475
            
            $
            61,105
            
            $
            7,370
            
            
            12.1
            %Interest
      income
            
            $
            429
            
            $
            2,513
            
            $
            (2,084)
            
            
            (82.9)
            %


__________





(1)
            Property
      expenses include property operating expenses, real property taxes,
      property management fees, depreciation and amortization of real estate
      assets, other losses and income
taxes.




As
indicated above, the changes in property revenues and expenses between the three
and nine months ended September 30, 2009 and 2008 were primarily due to
acquisitions made in those years. The margin of property revenues in excess
of property expenses for same-store properties decreased by 1.6% during the
three months ended September 30, 2009 as compared to the same periods in 2008.
The decrease in this margin is primarily due to the impairment charge of $3.4
million recorded in the third quarter related to the Williams Tower land
parcel.





The
margin of property revenues in excess of property expenses for same-store
properties increased by 10.1% during the nine months ended September 30, 2009 as
compared to the same period in 2008. The increase in this margin is primarily
due to decreased depreciation and amortization resulting from fully depreciated
lease intangibles.





The
increase in interest expense for the three and nine months ended September 30,
2009 compared to the same period in 2008 is primarily due to increased
borrowings related to our acquisitions of directly-owned properties. Average
debt outstanding during the three months ended September 30, 2009 and 2008 was
$1.6 billion and $1.5 billion, respectively. Average debt outstanding during the
nine months ended September 30, 2009 and 2008 was $1.6 billion and $1.4 billion,
respectively. The decrease in interest income is primarily due to lower interest
rates on cash we held in short-term investments during delays between raising
capital and acquiring real estate investments.





As a result of future potential acquisitions and our recent acquisitions having
less than a full period of operations, our results of operations for the
three and nine months ended September 30, 2009 are not indicative of what we
expect our results of operations to be in future periods.





RESULTS
      FOR OUR INDIRECTLY-OWNED PROPERTIES





Our
Interest in the Core Fund





As of
September 30, 2009, we owned a 28.7% non-managing general partner interest in
the Core Fund, which held interests in 25 properties that were 88% leased. As of
September 30, 2008, we owned a 28.7% non-managing general partner interest in
the Core Fund, which held interests in 25 properties that were 92% leased.
Our equity in losses related to our investment in the Core Fund for the three
months ended September 30, 2009 and 2008 was $2.9 million and $3.0 million,
respectively. Our equity in losses related to our investment in the Core Fund
for the nine months ended September 30, 2009 and 2008 was $8.2 million and $8.0
million, respectively.





30


Our
Interest in Distribution Park Rio





We own a
50% non-managing interest in Distribution Park Rio, an industrial property
located in Rio de Janeiro, Brazil. Our equity in earnings related to our
investment in Distribution Park Rio for each of the three months ended September
30, 2009 and 2008 was approximately $563,000 and $694,000, respectively. Our
equity in earnings related to our investment in Distribution Park Rio for the
nine months ended September 30, 2009 and 2008 was $1.6 million and $1.7 million,
respectively.





CORPORATE-LEVEL
ACTIVITIES





Corporate-level
activities include results related to derivative instruments, asset management
and acquisition fees, general and administrative expenses as well as other
expenses which are not directly related to our property operations.





Derivative
Instruments





We have
entered into several interest rate swap transactions with HSH Nordbank as
economic hedges against the variability of future interest rates on our variable
interest rate borrowings. We have not designated any of these contracts as cash
flow hedges for accounting purposes. The interest rate swaps have been recorded
at their estimated fair value in the accompanying consolidated balance sheets as
of September 30, 2009 and December 31, 2008. The gain or loss on derivative
instruments recorded during the three and nine months ended September 30, 2009
and 2008 is the result of changes in the fair value of interest rate swaps
during each period. See “Item 3. Quantitative and Qualitative Disclosures About
Market Risk” included elsewhere in this Quarterly Report on Form 10-Q for
additional information regarding certain risks related to our derivatives, such
as the risk of counterparty non-performance.





The
losses resulting from the decrease in the fair value of the interest rate swaps
for the three months ended September 30, 2009 and 2008 of $11.7 million and
$10.5 million have been recorded in gain (loss) on derivative instruments, net
in the consolidated statements of operations.





The gain
resulting from the increase in the fair value of the interest rate swaps for the
nine months ended September 30, 2009 of $35.1 million has been recorded in
gain (loss) on derivative instruments, net in the consolidated statements of
operations. The loss resulting from the decrease in the fair value of the
interest rate swaps for the nine months ended September 30, 2008 of $11.2
million has been recorded in gain (loss) on derivative instruments, net in the
consolidated statements of operations.





Other
Corporate-level Activities





The
tables below provide detail relating to our asset management and acquisition
fees and general and administrative expenses for the three and nine months ended
September 30, 2009 and 2008.  All amounts in thousands, except
percentages:





Three
      Months Ended September 30,
            
            Change2009
            
            2008
            
            $
            
            %Asset
      Management and Acquisition Fees
            
            $
            7,354
            
            $
            6,229
            
            $
            1,125
            
            
            18.1
            %General
      and Administrative Expenses
            
            $
            1,247
            
            $
            1,545
            
            $
            (298)
            
            
            (19.3)
            %Nine
      Months Ended September 30,
            
            Change2009
            
            2008
            
            $
            
            %Asset
      Management and Acquisition Fees
            
            $
            20,466
            
            $
            23,923
            
            $
            (3,457)
            
            
            (14.5)
            %General
      and Administrative Expenses
            
            $
            4,330
            
            $
            4,637
            
            $
            (307)
            
            
            (6.6)
            %





We pay
monthly asset management fees to our Advisor based on the amount of net equity
capital invested in real estate investments and pay acquisition fees to our
Advisor based on the purchase prices of our real estate investments. The
increase in asset management and acquisition fees for the three-months ended
September 30, 2009 is due to an increase in the amount of net equity capital
invested in real estate investments. The decrease in asset management and
acquisition fees for the nine months ended September 30, 2009 is the result of:
(i) a $3.5 million increase in asset management fees due to an increase in the
amount of net equity capital invested in real estate investments, (ii) a $4.6
million decrease in acquisition fees due to reduced acquisition activity and
(iii) a $2.3 million reduction of asset management and acquisition fees
resulting from fair value adjustments of the Participation Interest liability
recorded in the current year.





General
and administrative expenses include legal and accounting fees, insurance costs,
costs and expenses associated with our board of directors and other
administrative expenses. Certain of these costs are variable, which
may  increase in the future as we continue to raise capital and make
additional real estate investments.


31


Net
Income Attributable to Noncontrolling Interests





As of
September 30, 2009 and 2008, affiliates of Hines owned 3.0% and
2.6% interests, respectively, in the Operating Partnership. We allocated income
of approximately $1.0 million and $816,000, respectively, to the holders of
these noncontrolling interests for the three months ended September 30,
2009 and 2008. We allocated income of $3.0 million and $2.2 million,
respectively, to the holders of these noncontrolling interests for the nine
months ended September 30, 2009 and 2008.





Operating Funds Generated by the
Company





Operating
funds generated by the Company (“OFG”) is a non-GAAP supplemental financial
performance measure that our management uses in evaluating the operating
performance of the Company.  It includes funds generated by the operations
of our real estate investments and funds used in the Company’s corporate-level
operations.  Similar to Funds from Operations (“FFO”), a non-GAAP financial
performance measure defined by the National Association of Real Estate
Investment Trusts (“NAREIT”) widely recognized as a measure of operating
performance, OFG excludes items such as depreciation and amortization. 
However, changes in the accounting and reporting rules under GAAP that have been
put into effect since the establishment of NAREIT’s definition of FFO have
prompted a significant increase in the magnitude of non-cash and non-operating
items included in FFO, as defined. Such  items include amortization of
certain in-place lease intangible assets and liabilities and the amortization of
certain tenant incentives. OFG excludes these items, the effects of
straight-line rent revenue recognition, fair value adjustments to derivative
instruments that do not qualify for hedge accounting treatment, non-cash
impairment charges and certain other items as described in the footnotes below,
and also includes items such as master lease rental receipts, which are excluded
from net income (loss) and FFO, but which we consider in the evaluation of
the operating performance of our real estate investments.  We believe that
OFG reflects the overall impact on the performance of our real estate
investments of occupancy rates, rental rates, property operating costs, as well
as corporate-level general and administrative expenses and interest costs, which
is not immediately apparent from net income (loss).  As such, we believe
OFG, in addition to net income (loss) and cash flows from operating activities
as defined by GAAP, is a meaningful supplemental performance measure and is
useful in understanding how the Company’s management evaluates the Company’s
ongoing operating performance.





However,
OFG should not be considered as an alternative to net income (loss) or to cash
flows from operating activities and is not intended to be used as a liquidity
measure indicative of cash flow available to fund the Company’s cash
needs.  Additionally, please see the limitations listed below
associated with the use of OFG as compared to net income (loss):





· OFG
excludes gains (losses) related to changes in estimated values
of derivative instruments related to our interest rate
swaps.  Although we expect to hold these instruments to maturity,
if we were to settle these instruments currently, it would have an impact on our
operations.





· OFG
excludes the Participation Interest component of the acquisition and asset
management fees.  Although we believe the settlement of this liability
will be funded using proceeds from the sale of properties in the future, if we
were to settle it currently it would have an impact on our
operations.





· OFG
excludes impairment charges related to long-lived assets that have been written
down to current market valuations. Although these losses are included in the
calculation of net income (loss), we have excluded them from OFG because
we believe doing so more appropriately presents the
operating performance of our real estate investments on a comparative
basis.





· OFG
excludes organizational and offering expenses and acquisition expenses payable
to our Advisor.  Although these amounts reduce net income, we fund
such costs with proceeds from our offering and acquisition-related indebtedness
and do not consider these expenses in the evaluation of the operating
performance of the Company and determining OFG.


32





The
table below summarizes OFG for the three and nine months ended September 30,
2009 and 2008 and a reconciliation of such non-GAAP financial
performance measure to our net income (loss) for the three and nine months
then ended (in thousands):





Three
      Months Ended
            
            Three
      Months Ended
            
            Nine
      Months Ended
            
            Nine
      Months EndedSeptember
      30, 2009
            September
      30, 2008
            September
      30, 2009
            September
      30, 2008Net
      income (loss)
            
            $
            (25,789)
            
            $
            (23,780)
            
            $
            1,565
            
            $
            (58,130)Adjustments:Depreciation
      and amortization (1)
            
            
            31,859
            
            
            32,888
            
            
            94,647
            
            
            90,485(Gain)
      loss on derivative instruments (2)
            
            
            11,701
            
            
            10,530
            
            
            (35,090)
            
            
            11,194Participation
      interest expense (3)
            
            
            3,708
            
            
            3,115
            
            
            8,630
            
            
            11,962Impairment
      on land parcel (4)
            
            
            3,415
            
            
            -
            
            
            3,415
            
            
            -Other
      components of revenues and expenses (5)
            
            
            (4,133)
            
            
            (3,201)
            
            
            (12,251)
            
            
            (11,899)Master
      lease rents (6)
            
            
            -
            
            
            1,058
            
            
            1,200
            
            
            5,760Organizational
      and offering expenses (7)
            
            
            -
            
            
            34
            
            
            -
            
            
            3,647Acquisition
      fees (7)
            
            
            -
            
            
            -
            
            
            1,160
            
            
            3,018Adjustments
      to equity in losses from unconsolidated entities, net
    (8)
            
            
            10,264
            
            
            10,335
            
            
            32,202
            
            
            30,616Adjustments
      for noncontrolling interests (9)
            
            
            (964)
            
            
            (796)
            
            
            (2,856)
            
            
            (2,182)Operating
      Funds Generated by the Company
              Attributable
      to Common Shareholders
            
            $
            30,061
            
            $
            30,183
            
            $
            92,622
            
            $
            84,471Operating
      Funds Generated by the Company Per Common Share
            
            $
            0.14
            
            $
            0.16
            
            $
            0.45
            
            $
            0.47Weighted
      Average Shares Outstanding
            
            
            210,298
            
            
            192,012
            
            
            205,325
            
            
            178,613





1)
            
            Represents
      the depreciation and amortization of various real estate
      assets.  Historical cost accounting for real estate assets in
      accordance with GAAP implicitly assumes that the value of real estate
      assets diminishes predictably over time. Since real estate values have
      historically risen or fallen with market conditions, we believe that such
      depreciation and amortization may be of limited relevance in evaluating
      current operating performance and, as such, these items are excluded from
      our determination of OFG.2)
            
            Represents
      components of net income (loss) related to the estimated changes in the
      values of our interest rate swap derivatives.  We have excluded
      these changes in value from our evaluation of the operating performance of
      the Company and OFG because we expect to hold the underlying instruments
      to their maturity and accordingly the interim gains or losses will remain
      unrealized.3)
            
            Represents
      the portion of the acquisition and asset management fees that are paid in
      equity, which we expect will be settled in the future using proceeds from
      the sale of properties or other non-operating sources, and which we
      therefore do not consider in evaluating the operating performance of the
      Company and determining OFG.4)
            
            Represents
      an impairment charge recorded in the 3rd quarter of 2009 in accordance
      with the Property, Plant and Equipment topic of the FASB Accounting
      Standards Codification. Although such charges are included
      in the calculation of net income (loss), we have excluded them from
      OFG because we believe doing so more appropriately
      presents the operating performance of our real estate investments on
      a comparative basis.5)
            
            Includes the
      following components of revenues and expenses that we do not consider in
      evaluating the operating performance of the Company and determining
      OFG for the three and nine months ended September 30, 2009 and 2008
      (in thousands):





Three
      Months Ended
            
            Three
      Months Ended
            
            Nine
      Months Ended
            
            Nine
      Months EndedSeptember
      30, 2009
            September
      30, 2008
            September
      30, 2009
            September
      30, 2008Straight-line
      rent adjustment (a)
            
            $
            (2,633)
            
            $
            (4,244)
            
            $
            (7,884)
            
            $
            (12,822)Amortization
      of lease incentives (b)
            
            
            1,302
            
            
            1,077
            
            
            3,837
            
            
            2,747Amortization
      of out-of-market leases (b)
            
            
            (3,789)
            
            
            (765)
            
            
            (11,042)
            
            
            (3,898)Amortization
      of deferred financing costs (b)
            
            
            772
            
            
            446
            
            
            2,032
            
            
            1,237Other
            
            
            215
            
            
            285
            
            
            806
            
            
            837$
            (4,133)
            
            $
            (3,201)
            
            $
            (12,251)
            
            $
            (11,899)





33


a
            )
            Represents
      the adjustments to rental revenue as required by GAAP to recognize minimum
      lease payments on a straight-line basis over the respective lease
      terms.  We have excluded these adjustments from our evaluation
      of the operating performance of the Company and in determining OFG because
      we believe that the rent that is billable during the current period is a
      more relevant measure of the Company’s operating performance for such
      period.b
            )
            Represents
      the amortization of lease incentives, out-of-market leases and deferred
      financing costs.  As stated in Note 1 above, historical cost
      accounting for real estate assets in accordance with GAAP implicitly
      assumes that the value of real estate assets diminishes predictably over
      time. Since real estate values have historically risen or fallen with
      market conditions, we believe that such amortization may be of limited
      relevance in evaluating current operating performance and, as such, these
      items are excluded from our determination of OFG.6
            )
            Includes
      master lease rents related to master leases entered into in conjunction
      with certain asset acquisitions. In accordance with GAAP, these rents are
      not included in rental revenue; however, we consider this rent in
      evaluating the operating performance of the Company and determining
      OFG.7
            )
            Represents
      organizational and offering expenses and acquisition fees paid to our
      Advisor that are expensed in our condensed consolidated statements of
      operations. We fund such costs with proceeds from our offering and
      acquisition-related indebtedness, and therefore do not consider these
      expenses in evaluating the operating performance of the
      Company and determining OFG.8
            )
            Includes
      adjustments to equity in losses of unconsolidated entities, net, similar
      to those described in Notes 1, 5 and 6 above for our unconsolidated
      entities, which are necessary to convert the Company's share of income
      (loss) from unconsolidated entities to OFG.9
            )
            Includes
      income attributable to noncontrolling interests and all adjustments to
      eliminate the noncontrolling interests’ share of the adjustments to
      convert the Company’s net income (loss) to
OFG.





Additionally, pursuant to the terms of
the Grocery Anchored Portfolio joint venture agreement, for the three and nine
months ended September 30, 2009, we received distributions of approximately $
428,000 and $ 1.1 million in excess of our pro-rata share of the joint venture’s
OFG, respectively.





Related-Party
Transactions and Agreements





We have
entered into agreements with the Advisor, Dealer Manager and Hines or its
affiliates, whereby we pay certain fees and reimbursements to these entities,
including acquisition fees, selling commissions, dealer manager fees, asset and
property management fees, leasing fees, construction management fees, debt
financing fees, re-development construction management fees, reimbursement of
organizational and offering expenses, and reimbursement of certain operating
costs, as described previously.





Off-Balance
Sheet Arrangements





As of
September 30, 2009 and December 31, 2008, we had no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.





Subsequent
Events





KeyBank
Activity





From
October 1, 2009 through November 9, 2009, we repaid $24.5 million under our
revolving credit facility with KeyBank resulting in an outstanding principal
balance of $84.0 million as of November 9, 2009.





Shareholder
Redemptions





For the
month of September 2009, in accordance with our share redemption
program, we redeemed 1.8 million common shares and made corresponding
payments (on October 1, 2009, respectively) totaling $16.3 million to
shareholders who had requested these redemptions. The shares redeemed were
cancelled and will have the status of authorized, but unissued shares. We
recorded a $16.3 million liability as of September 30, 2009 for the redemptions
paid in October 2009.





Our board
of directors authorized an amendment to the share redemption program such
that we will redeem shares (subject to the conditions and limitations
of the share redemption program) on a quarterly, rather than monthly,
basis.  Subject to the conditions and limitations of the share
redemption program, the first quarterly redemptions will occur in January 2010,
for redemption requests properly submitted during the fourth quarter of 2009.
The share redemption program also has been amended to limit the funds available
for redemption each quarter to the lesser of the amount required to redeem 10%
of the shares outstanding as of the same date in the prior calendar year or the
amount of proceeds received from the dividend reinvestment plan in the quarter
prior to the quarter in which the redemption request was
received.


34


HSH
Rebalancing





HSH
Nordbank has the right to have the properties serving as collateral under the
HSH Nordbank credit facility appraised every two years. Should the
aggregate outstanding principal amounts under this facility exceed 55% of the
lender’s appraised values, we will be required to make a partial payment or
provide additional collateral to eliminate such excess. Subject to this
requirement, on October 1, 2009, we posted additional cash collateral of
approximately $70.0 million to rebalance the collateral for seven of the ten
properties that had been appraised. The additional cash collateral was primarily
funded with a borrowing under our revolving credit facility. We expect that we
will be required to post additional cash collateral once the final three
properties are appraised.





Preferred
Offering





Our board of directors has determined to consider the pursuit of a public best
efforts offering of preferred shares. Accordingly, on October 9, 2009 we filed
an initial registration statement for a best efforts offering of preferred
shares. There is no assurance that we will pursue an offering of preferred
shares, raise proceeds from such an offering or, if it does raise such proceeds,
that we will be able to successfully invest such proceeds, or that such
investments will enhance the long term returns to our common
shareholders.




Post
Oak Land Sale





In
October 2009, we entered into a sale agreement with an unaffiliated third party
to sell a land parcel it acquired in connection with its acquisition of Williams
Tower in May 2008 for $12.8 million. Per the
terms of the sale agreement, the purchaser has a six month due diligence period
in which it can terminate the contract for any reason, without penalty. 
Accordingly, there can be no assurances that this transaction will be
consummated.




35


Item 3.
Quantitative and
Qualitative Disclosures About Market Risk.





Market
risk is the exposure to loss resulting from changes in interest rates, foreign
currency exchange rates and equity prices. The primary risks in pursuing our
business plan are interest rate risk and foreign currency exchange
risk.





We are
exposed to the effects of interest rate changes primarily as a result of our
revolving credit facility, which bears interest at a variable
rate.  We typically use this facility on a short-term basis to
maintain liquidity and fund expansion of our real estate investment portfolio
and operations. As of September 30, 2009, we had $108.5 million outstanding
under this facility, and the weighted average interest rate on outstanding
borrowings was 2.9%.  Annual interest expense would increase $1.1
million for every 1% increase in interest rates on this balance.





As of
September 30, 2009, we also had $520.0 million of debt outstanding under
our HSH Credit Facility, which is a variable-rate pooled mortgage facility.
However, as a result of the interest rate swap agreements entered into with HSH
Nordbank, these borrowings effectively bear interest at fixed rates ranging from
5.25% to 6.03%.  We are exposed to credit risk of the counterparty to
these interest rate swap agreements in the event of non-performance under the
terms of the derivative contracts.  In the event of non-performance by
the counterparty, we would be subject to the variability of interest rates on
the debt outstanding under the HSH Credit Facility to which our outstanding
interest rate swaps relate. Please see “Debt Financings” above for more
information concerning our outstanding debt.





We
currently have investments in Canada and Brazil and as a result are subject to
risk from the effects of exchange rate movements of foreign currencies, which
may affect future costs and cash flows. For all currencies, we are currently a
net receiver of the foreign currency (we receive more cash than we pay out), and
therefore our foreign operations benefit from a weaker U.S. dollar and are
adversely affected by a stronger U.S. dollar relative to the foreign currency.
During the three months ended September 30, 2009 and 2008, we had no currency
transactions which resulted in significant gains or losses being recorded in our
condensed consolidated statements of operations. Generally, we have not entered
into any foreign currency forward exchange contracts to hedge the effects of
adverse fluctuations in foreign currency exchange rates. We have obtained
non-recourse mortgage financing at a fixed rate of interest in the local
currency related to our property in Toronto, Canada. To the extent that currency
fluctuations increase or decrease net operating income as translated to U.S.
dollars, the change in debt service, as translated to U.S. dollars, will
partially offset the effect of fluctuations in net operating income, and, to
some extent, mitigate the risk from changes in foreign currency
rates. Based upon our equity ownership in our international subsidiaries as
of September 30, 2009, holding everything else constant, a 10% immediate,
simultaneous, unfavorable change in all of the foreign currency exchange rates
to which we are exposed would decrease the net book value of our investments in
our international subsidiaries by approximately $ 22.7 million and would
decrease the quarterly net income of our international subsidiaries by
approximately $688,000.





Item 4T.
Controls and
Procedures.





In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of September 30, 2009, to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (ii) accumulated and communicated to our
management, as appropriate to allow timely decisions regarding required
disclosure.





No change
occurred in our internal controls over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30,
2009 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.


36


PART II – OTHER
INFORMATION





Item 1A. Risk
Factors.





We are
subject to a number of risks and uncertainties, which are discussed in Part I,
Item 1A of our 2008 Annual Report on Form 10-K.  The risk factors set
forth below reflect changes to the risk factors included in our 2008 Annual
Report on Form 10-K.





Investment
Risks





Our
shareholders’ ability to have their shares redeemed is limited under our share
redemption program, and if shareholders are able to have their shares redeemed,
it may be at a price that is less than the price paid for the shares and the
then-current market value of the shares. Unless our board of directors
determines otherwise, funds available for redemption will be limited to the
lesser of the amount required to redeem 10% of the shares outstanding as of the
same date in the prior calendar year or the amount of proceeds received from our
dividend reinvestment plan in the prior quarter.  Cash used to fund
redemptions may reduce our liquidity available to fund acquisitions of real
estate investments and other cash needs.





Even
though our share redemption program may provide shareholders with a limited
opportunity to redeem their shares after they have held them for a period of one
year, shareholders should understand that our share redemption program contains
significant restrictions and limitations. In addition, irrespective of the
amount of time a shareholder has held their securities, only the following
shares are eligible for redemption: (i) shares purchased directly from us, (ii)
shares received through a non-cash transaction, not in the secondary market and
(iii) shares purchased from another shareholder prior to January 11, 2009. We
expect to redeem shares to the extent our board of directors determines we have
sufficient available cash to do so subject to the annual and quarterly
limitations on the number of shares we can redeem set forth in our share
redemption program. During 2009, we have experienced an increase in share
redemption requests. From January 1, 2009 to September 30, 2009, we have
redeemed approximately $136.2 million in shares as compared to $58.7 million,
$10.6 million and $2.3 million during the years ended December 31, 2008, 2007
and 2006, respectively. Moreover, the number of share redemption requests we
received during the months of February and March 2009 exceeded the then-monthly
limit on shares we may redeem pursuant to the share redemption plan. While our
board of directors elected to waive this monthly limitation, we cannot assure
our shareholders that our board will elect to or will otherwise be able to waive
this or other limitations in the future. If at any time some but not all
tendered shares are redeemed, shares will be redeemed on a pro rata basis after
all redemption requests due to death or disability have been honored. Unless
our board of directors determines otherwise, the funds available for redemption
will be limited to the lesser of the amount required to redeem 10% of the shares
outstanding as of the same date in the prior calendar year or proceeds received
from our dividend reinvestment plan in the prior quarter.  Cash used
to fund redemptions reduces our liquidity available to fund acquisitions of real
estate investments and other cash needs.Our board of directors reserves
the right to amend, suspend or terminate the share redemption program at any
time in its discretion upon 30 days’ written notice. Shares are currently
redeemed at a price of $9.15 per share. However, our board of directors may
change the redemption price from time to time upon 30 days’ written notice
based on our then-current estimated net asset value at the time of the
adjustment and such other factors as it deems appropriate, including the
then-current offering price of our shares (if any), our then- current dividend
reinvestment plan price and general market conditions. The methodology used in
determining the redemption price is subject to a number of limitations and to a
number of assumptions and estimates which may not be accurate or complete. The
redemption price, like our offering price, may not be indicative of the price
our shareholders would receive if our shares were actively traded, if we were
liquidated or if they otherwise sold their shares. Therefore, shareholders
should not assume that they will be able to sell all or any portion of their
shares back to us pursuant to our share redemption program or at a price that
reflects the then-current market value of their shares.





Business
and Real Estate Risks





Any
indirect investment we make will be consistent with the investment objectives
and policies described in this report and will, therefore, be subject to similar
business and real estate risks. The Core Fund, which has investment objectives
and policies similar to ours, is subject to many of the same business and real
estate risks as we are.





For
example, the Core Fund:





•
            may
      not have sufficient available funds to make distributions and expects
      distributions, if any, for the next several quarters to be
      minimal;





•
            expects
      to acquire additional properties in the future which, if unsuccessful,
      could affect our ability to pay distributions to our
      shareholders;





•
            is
      subject to risks as a result of joint ownership of real estate with Hines
      and other Hines programs or third
parties;





•
            intends
      to use borrowings to partially fund acquisitions, which may result in
      foreclosures and unexpected debt-service requirements and indirectly
      negatively affect our ability to pay dividends to our
      shareholders;


37


•
            is
      also dependent upon Hines and its key employees for its
      success;





•
            also
      operates in a competitive business with competitors who have significant
      financial resources and operational
flexibility;





•
            may
      not have funding or capital resources for future tenant
      improvements;





•
            depends
      on its tenants for its revenue and relies on certain significant
      tenants;





•
            is
      subject to risks associated with terrorism, uninsured losses and high
      insurance costs;





•
            will
      be affected by general economic and regulatory factors it cannot control
      or predict;





•
            will
      make illiquid investments and be subject to general economic and
      regulatory factors, including environmental laws, which it cannot control
      or predict; and





•
            will
      be subject to property taxes and operating expenses that may
      increase.





To the
extent the operations and ability of the Core Fund, or any other entity through
which we indirectly invest in real estate, to make distributions is adversely
affected by any of these risks, our operations and ability to pay distributions
to our shareholders will be adversely affected.





Our
use of borrowings to partially fund acquisitions and improvements on properties
could result in foreclosures and unexpected debt service expenses upon
refinancing, both of which could have an adverse impact on our operations and
cash flow.





We intend
to rely in part on borrowings under our credit facilities and other external
sources of financing to fund the costs of new investments, capital expenditures
and other items. Accordingly, we are subject to the risk that our cash flow will
not be sufficient to cover required debt service payments and that we will be
unable to meet other covenants or requirements in the credit
agreements.





If we
cannot meet our required debt obligations, the property or properties subject to
indebtedness could be foreclosed upon by, or otherwise transferred to, our
lender, with a consequent loss of income and asset value to the Company. For tax
purposes, a foreclosure of any of our properties would be treated as a sale of
the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the
mortgage exceeds our tax basis in the property, we would recognize taxable
income on foreclosure, but we may not receive any cash proceeds. Additionally,
we may be required to refinance our debt subject to “lump sum” or “balloon”
payment maturities on terms less favorable than the original loan or at a time
we would otherwise prefer to not refinance such debt. A refinancing on such
terms or at such times could increase our debt service payments, which would
decrease the amount of cash we would have available for operations, new
investments and distribution payments.





Volatility
in debt markets could impact future acquisitions and values of real estate
assets potentially reducing cash available for distribution to our
shareholders.





The
commercial real estate debt markets have recently been adversely affected by
certain factors including the tightening of underwriting standards by lenders
and credit rating agencies and the significant inventory of unsold
Collateralized Mortgage Backed Securities in the market. Additionally, the
deteriorating economic environment continues to have an adverse impact on real
estate fundamentals which has led to declining property values. These factors,
among others, have resulted in lenders decreasing the availability of debt
financing as well as increasing the cost of debt financing. Should the overall
availability of debt decrease and/or the cost of borrowings increase, either by
increases in the index rates or by increases in lender spreads, such factors
will impact our ability to complete future acquisitions at prices, including
financing terms, that are acceptable to us or at all. This may result in future
acquisitions generating lower overall economic returns and potentially reducing
future cash flow available for distribution to our shareholders.





In
addition, the state of the debt markets have had an impact on the overall amount
of capital investing in real estate which has resulted in price or value
decreases of real estate assets. Although this may benefit us for future
acquisitions, it has negatively impacted the current value of our existing
assets and could make it more difficult for us to sell any of our investments if
we were to determine to do so.


38


Tax
Risks





Recently
enacted tax legislation may make REIT investments comparatively less attractive
than investments in other corporate entities.





Under
current law, qualifying corporate distributions received by individuals prior to
2011 are subject to tax at a maximum rate of 15%. This special tax rate is
generally not applicable to distributions paid by a REIT, unless such
distributions represent earnings on which the REIT itself has been taxed. As a
result, distributions (other than capital gain distributions) paid by us to
individual investors will generally be subject to the tax rates that are
otherwise applicable to ordinary income which currently are as high as 35%. This
may make an investment in our common shares comparatively less attractive
relative to an investment in the shares of other corporate entities which pay
distributions that are not formed as REITs.





Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds.





On August
24, 2009, we issued 1,000 shares to each of George A. Davis, Thomas A. Hassard,
Stanley D. Levy and Paul Murphy Jr. in conjunction with their re-election to our
board as independent directors. These restricted shares were issued pursuant to
our Employee and Director Incentive Share Plan and without registration under
the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act. During the
three months ended September 30, 2009, we did not sell or issue any other equity
securities that were not registered under the Securities Act.





The
following table lists shares we redeemed under our share redemption plan during
the period covered by this report.





TotalNumber
      of
            
            MaximumShares
            
            Number
      ofPurchased
      as
            
            Shares
      thatPart
      of
            
            May
      Yet beTotal
            
            Average
            
            Publicly
            
            PurchasedNumber
      of
            
            Price
            
            Announced
            
            Under
      theShares
            
            Paid
      per
            
            Plans
      or
            
            Plans
      orPeriod
            
            Purchased
            
            Share
            
            Programs
            
            Programs(1)July
      1, 2009 to July 31, 2009
            
            
            1,097,158
            
            $
            9.15
            
            
            1,097,158
            
            
            6,560,007August
      1, 2009 to August 31, 2009
            
            
            964,127
            
            
            9.15
            
            
            964,127
            
            
            5,757,491September
      1, 2009 to September 30, 2009
            
            
            1,109,669
            
            
            9.15
            
            
            1,109,669
            
            
            4,887,045Total
            
            
            3,170,954
            
            $
            9.15
            
            
            3,170,954


__________




(1)
            With
      respect to redemption requested during the third quarter of 2009, the
      terms of our share redemption program such that we had discretion to
      redeem shares on a monthly basis so long as the total number of shares
      redeemed for a particular month did not exceed, 1/12 of 10% of our shares
      outstanding as of the prior calendar year-end. For the three months ended
      September 30, 2009, all shareholder requests for redemptions were fully
      funded. In addition, in September 2009, we announced a modification to our
      share redemption program to redeem shares on a quarterly rather than
      monthly basis and such redemptions will be limited to the lesser of the
      amount required to redeem 10% of the shares outstanding as of the same
      date in the prior calendar year or the amount of proceeds received
      from our dividend reinvestment plan in the quarter prior to the
      quarter in which the redemption request was received. Our share redemption
      plan has been in effect since June 2004 and has no definitive expiration
      date. However, the plan may be suspended or terminated at the discretion
      of the board of directors at any
time.





39


Item
4.  Submission of Matters to a Vote of
Security Holders.





Our annual meeting of shareholders was held on August 24, 2009.  Management
proposals 1 and 2 were approved.  The results are as
follows:





Proposal
1





The
following directors were re-elected at the meeting to serve a one-year term as
directors:





For
            Against
            Authority
      Withheld or Abstained from VotingJeffrey
      C. Hines
            103,205,863
            —
            1,804,972C.
      Hastings Johnson
            103,177,346
            —
            1,833,488Charles
      M. Baughn
            103,172,271
            —
            1,838,564George
      A. Davis
            103,122,590
            —
            1,888,244Thomas
      A. Hassard
            103,182,256
            —
            1,828,579Stanley
      D. Levy
            103,163,564
            —
            1,847,270Paul
      B. Murphy Jr
            103,176,902
            —
            1,833,932





Proposal
2





Ratification
of the appointment of Deloitte & Touche LLP as the Company’s independent
registered public accounting firm for fiscal year 2009.





For
            Against
            Authority
      Withheld or Abstained from Voting102,600,742
            802,526
            1,607,566





Item 6.
Exhibits.





The
exhibits required by this item are set forth on the Exhibit Index attached
hereto.


40


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





HINES
REAL ESTATE INVESTMENT TRUST, INC.





November
13,
2009                                                                                    
By:  /s/ CHARLES N.
HAZEN


Charles
N. Hazen


President
and Chief Executive Officer








November
13,
2009                                                                                      By:  /s/ SHERRI W.
SCHUGART


Sherri W. Schugart


Chief Financial Officer


41





EXHIBT
INDEX





Exhibit
      No.
            
            
            
            
            Description3.1
            
            
            
            —
            
            Second
      Amended and Restated Articles of Incorporation of Hines Real Estate
      Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant’s
      Current Report on Form 8-K on July 13, 2007 and incorporated by reference
      herein).3.2
            
            
            
            —
            
            Second
      Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc.
      (filed as Exhibit 3.1 to the registrant’s Current Report on
      Form 8-K on August 3, 2006 and incorporated by reference
      herein).31.1
            *
            
            
            —
            
            Certification.31.2
            *
            
            
            —
            
            Certification.32.1
            *
            
            
            —
            
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to
      18 U.S.C., Section 1350, as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this
      Exhibit is furnished to the SEC and shall not be deemed to be
      “filed.”


__________





*
            Filed
      herewith





42