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 March 31, 2008or£
            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 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 May
5, 2008, 178.5 million shares of the registrant’s common stock were
outstanding.










TABLE
OF CONTENTS





PART I –
      FINANCIAL INFORMATIONItem 1.
            Consolidated
      Financial Statements (Unaudited)Condensed Consolidated Balance
      Sheets
            2Condensed Consolidated Statements of
      Operations
            3Condensed Consolidated Statement of Shareholders’
      Equity
            4Condensed Consolidated Statements of Cash
      Flows
            5Notes to the Condensed Consolidated Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            21Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            36Item 4T.
            Controls and Procedures
            37PART II –
      OTHER INFORMATIONItem 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            38Item 6.
            Exhibits
            40SIGNATURESCertification
      of CEO pursuant to Section 302Certification
      of CFO pursuant to Section 302Certification
      of CEO & CFO pursuant to Section 906


1


PART I





FINANCIAL
INFORMATION





Item 1.Consolidated Financial
Statements (Unaudited).





HINES REAL ESTATE INVESTMENT TRUST, INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





March
      31,2008
            
            
            December 31,2007(In
      thousands)ASSETSInvestment
      property, net
            
            $
            2,008,391
            
            
            $
            1,798,924Investments
      in unconsolidated entities
            
            
            352,979
            
            
            
            361,157Cash
      and cash equivalents
            
            
            51,912
            
            
            
            152,443Restricted
      cash
            
            
            6,701
            
            
            
            3,463Distributions
      receivable
            
            
            5,874
            
            
            
            6,890Tenant
      and other receivables
            
            
            39,665
            
            
            
            28,518Intangible
      lease assets, net
            
            
            359,028
            
            
            
            296,766Deferred
      leasing costs, net
            
            
            38,662
            
            
            
            34,954Deferred
      financing costs, net
            
            
            7,248
            
            
            
            7,638Other
      assets
            
            
            35,298
            
            
            
            12,870TOTAL
      ASSETS
            
            $
            2,905,758
            
            
            $
            2,703,623LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilities:Accounts
      payable and accrued expenses
            
            $
            75,027
            
            
            $
            66,267Due
      to affiliates
            
            
            8,489
            
            
            
            8,968Intangible
      lease liabilities, net
            
            
            97,058
            
            
            
            79,465Other
      liabilities
            
            
            23,830
            
            
            
            17,128Interest
      rate swap contracts
            
            
            57,639
            
            
            
            30,194Participation
      interest liability
            
            
            30,976
            
            
            
            26,771Distributions
      payable
            
            
            26,337
            
            
            
            24,923Notes
      payable
            
            
            1,320,793
            
            
            
            1,216,631Total
      liabilities
            
            
            1,640,149
            
            
            
            1,470,347Minority
      interest
            
            
            —
            
            
            
            —Commitments
      and Contingencies (Note 9)Shareholders’
      equity:Preferred
      shares, $.001 par value; 500,000 preferred shares authorized, none
      issued or outstanding as of March 31, 2008 and December 31,
      2007
            
            
            —
            
            
            
            —Common
      shares, $.001 par value; 1,500,000 common shares authorized as of
      March 31, 2008 and December 31, 2007; 170,329 and 159,409 common shares
      issued and outstanding as of March 31, 2008 and December 31, 2007,
      respectively
            
            
            170
            
            
            
            159Additional
      paid-in capital
            
            
            1,436,823
            
            
            
            1,358,523Retained
      deficit
            
            
            (181,745
            )
            
            
            (137,915
            )Accumulated
      other comprehensive income
            
            
            10,361
            
            
            
            12,509Total
      shareholders’ equity
            
            
            1,265,609
            
            
            
            1,233,276TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            2,905,758
            
            
            $
            2,703,623





See notes
to the condensed consolidated financial statements.


2


HINES
REAL ESTATE INVESTMENT TRUST, INC.


CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


For
the three months ended March 31, 2008 and 2007


(UNAUDITED)





2008
            
            
            2007Revenues:
            
            (In
      thousands, except per share amounts)Rental
      revenue
            
            $
            64,800
            
            
            $
            29,356Other
      revenue
            
            
            5,334
            
            
            
            1,319Total
      revenues
            
            
            70,134
            
            
            
            30,675Expenses:Property
      operating expenses
            
            
            18,283
            
            
            
            7,129Real
      property taxes
            
            
            9,764
            
            
            
            4,736Property
      management fees
            
            
            1,585
            
            
            
            704Depreciation
      and amortization
            
            
            25,381
            
            
            
            11,558Asset
      management and acquisition fees
            
            
            8,410
            
            
            
            6,229Organizational
      and offering expenses
            
            
            1,918
            
            
            
            2,397General
      and administrative expenses
            
            
            1,280
            
            
            
            842Total
      expenses
            
            
            66,621
            
            
            
            33,595Income
      (loss) before other income (expenses), income tax expense and income
      allocated to minority interests
            
            
            3,513
            
            
            
            (2,920
            )Other
      income (expenses):Equity
      in losses of unconsolidated entities, net
            
            
            (1,935
            )
            
            
            (1,136
            )Gain
      (loss) on derivative instruments, net
            
            
            (27,445
            )
            
            
            639Gain
      (loss) on foreign currency transaction
            
            
            (2
            )
            
            
            134Interest
      expense
            
            
            (18,052
            )
            
            
            (9,434
            )Interest
      income
            
            
            1,249
            
            
            
            401Loss
      before income tax expense and loss allocated to minority
      interests
            
            
            (42,672
            )
            
            
            (12,316
            )Provision
      for income taxes
            
            
            (515
            )
            
            
            (66
            )Income
      allocated to minority interests
            
            
            (643
            )
            
            
            (69
            )Net
      loss
            
            $
            (43,830
            )
            
            $
            (12,451
            )Basic
      and diluted loss per common share:Loss
      per common share
            
            $
            (0.27
            )
            
            $
            (0.14
            )Weighted
      average number of common shares outstanding
            
            
            165,144
            
            
            
            88,534





See notes
to the condensed consolidated financial statements.








3


HINES
REAL ESTATE INVESTMENT TRUST, INC.





CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY


For
the Three Months Ended March 31, 2008


(UNAUDITED)





CommonShares
            
            
            Amount
            
            
            Additional
              Paid-InCapital
            
            
            RetainedDeficit
            
            
            AccumulatedOther
              ComprehensiveIncome
            
            
            Shareholders’Equity(In
      thousands)BALANCE,January
      1, 2008
            
            
            159,409
            
            
            $
            159
            
            
            $
            1,358,523
            
            
            $
            (137,915
            )
            
            $
            12,509
            
            
            $
            1,233,276Issuance
      of common shares
            
            
            11,907
            
            
            
            12
            
            
            
            124,817
            
            
            
            —
            
            
            
            —
            
            
            
            124,829Redemption
      of common shares
            
            
            (987
            )
            
            
            (1
            )
            
            
            (9,397
            )
            
            
            —
            
            
            
            —
            
            
            
            (9,398
            )Distributions
      declared
            
            
            —
            
            
            
            —
            
            
            
            (25,694
            )
            
            
            —
            
            
            
            —
            
            
            
            (25,694
            )Selling
      commissions and dealer manager fees
            
            
            —
            
            
            
            —
            
            
            
            (9,870
            )
            
            
            —
            
            
            
            —
            
            
            
            (9,870
            )Other
      offering costs, net
            
            
            —
            
            
            
            —
            
            
            
            (1,556
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,556
            )Comprehensive
      loss:Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (43,830
            )
            
            
            —Other
      comprehensive income — Foreign currency translation
      adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,148
            )Total
      comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (45,978
            )BALANCE,March
      31, 2008
            
            
            170,329
            
            
            $
            170
            
            
            $
            1,436,823
            
            
            $
            (181,745
            )
            
            $
            10,361
            
            
            $
            1,265,609





See notes
to the condensed consolidated financial statements.





4


HINES
REAL ESTATE INVESTMENT TRUST, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three
      Months Ended March 31,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:
            
            (In
      thousands)Net
      loss
            
            $
            (43,830
            )
            
            $
            (12,451
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            24,768
            
            
            
            12,502Non-cash
      compensation expense
            
            
            9
            
            
            
            8Equity
      in losses of unconsolidated entities
            
            
            1,935
            
            
            
            1,136Distributions
      received from unconsolidated entities
            
            
            436
            
            
            
            —Income
      allocated to minority interests
            
            
            643
            
            
            
            69Accrual
      of organizational and offering expenses
            
            
            1,918
            
            
            
            2,397Loss
      (gain) on foreign currency transactions
            
            
            2
            
            
            
            (134
            )Loss
      (gain) on derivative instruments, net
            
            
            27,445
            
            
            
            (639
            )Net
      change in assets and liabilities
            
            
            (12,924
            )
            
            
            (1,442
            )Net
      cash provided by operating activities
            
            
            402
            
            
            
            1,446CASH
      FLOWS FROM INVESTING ACTIVITIES:Distributions
      received from unconsolidated entities in excess of equity in
      earnings
            
            
            7,217
            
            
            
            5,858Investments
      in property
            
            
            (149,700
            )
            
            
            (299,193
            )Investments
      in master leases
            
            
            (1,918
            )
            
            
            (4,186
            )Master
      lease rent receipts
            
            
            1,546
            
            
            
            396Additions
      to other assets
            
            
            (30,000
            )
            
            
            —Settlement
      of foreign currency hedge
            
            
            —
            
            
            
            939Increase
      in restricted cash
            
            
            (3,307
            )
            
            
            (3,134
            )Increase
      in acquired lease intangibles
            
            
            (58,837
            )
            
            
            (22,449
            )Net
      cash used in investing activities
            
            
            (234,999
            )
            
            
            (321,769
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      (decrease) in other liabilities
            
            
            130
            
            
            
            (1,092
            )Proceeds
      from issuance of common stock
            
            
            111,202
            
            
            
            168,751Redemption
      of common shares
            
            
            (9,397
            )
            
            
            (1,019
            )Payments
      of selling commissions and dealer manager fees
            
            
            (9,524
            )
            
            
            (14,524
            )Payments
      of organizational and offering expenses
            
            
            (3,879
            )
            
            
            (6,042
            )Distributions
      paid to shareholders and minority interests
            
            
            (11,305
            )
            
            
            (4,622
            )Proceeds
      from notes payable
            
            
            63,000
            
            
            
            374,415Payments
      on notes payable
            
            
            (4,033
            )
            
            
            (167,000
            )Additions
      to deferred financing costs
            
            
            (1,937
            )
            
            
            (764
            )Payments
      related to interest rate swap contracts
            
            
            —
            
            
            
            (366
            )Net
      cash provided by financing activities
            
            
            134,257
            
            
            
            347,737Effect
      of exchange rate changes on cash
            
            
            (191
            )
            
            
            22Net
      change in cash and cash equivalents
            
            
            (100,531
            )
            
            
            27,436Cash
      and cash equivalents, beginning of period
            
            
            152,443
            
            
            
            23,022Cash
      and cash equivalents, end of period
            
            $
            51,912
            
            
            $
            50,458





See notes
to the condensed consolidated financial statements


5


HINES
REAL ESTATE INVESTMENT TRUST, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


For
the Three Months Ended March 31, 2008 and 2007


(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, 2007 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 March 31, 2008 and December 31,
2007, and the results of operations and cash flows for the three months ended
March 31, 2008 and 2007 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. The Company operates 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 the Company entered into with the Advisor
(the “Advisory Agreement”).





Public
Offerings





On
June 18, 2004, Hines REIT commenced its initial public offering (the
“Initial Offering”). The Company raised $527.5 million in proceeds through the
Initial Offering, which expired on June 18, 2006. On June 19,
2006, the Company commenced its current public offering (the “Current
Offering”), pursuant to which it is offering a maximum of $2.2 billion in
common shares.  The Current Offering is expected to close June 30,
2008 and the Company expects to commence its follow-on offering (the “Third
Offering”) on or about July 1, 2008. See Note 11 for additional
information.





The
following table summarizes the activity from Hines REIT’s current offering (in
millions):





Current Public OfferingPeriod
            
            # of Shares
            
            
            ProceedsJune
      19, 2006 to December 31, 2006
            
            
            27.3
            (a)
            
            $
            282.7
            (a)Year
      ended December 31, 2007
            
            
            80.3
            (b)
            
            $
            834.8
            (b)Three
      Months Ended March 31, 2008
            
            
            11.9
            (c)
            
            
            124.8
            (c)Total
            
            
            119.5
            
            
            $
            1,242.3


__________





(a)
            Amounts
      include $9.3 million of gross proceeds relating to approximately
      944,000 shares issued under the Company’s dividend reinvestment
      plan.(b)
            Amounts
      include $37.4 million of gross proceeds relating to approximately 3.8
      million shares issued under the Company’s dividend reinvestment
      plan.





(c)
            Amounts
      include $13.6 million of gross proceeds relating to approximately 1.4
      million shares issued under the Company’s dividend reinvestment
      plan.





As of
March 31, 2008, approximately $818.1 million in common shares remained
available for sale pursuant to the Current Offering, exclusive of approximately
$139.6 million in common shares available under the Company’s dividend
reinvestment plan.





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 March 31, 2008 and December 31, 2007, Hines REIT owned a 97.6% general
partner interest in the Operating Partnership.





From
April 1 through May 5, 2008, Hines REIT received gross offering proceeds of
approximately $61.0 million from the sale of 5.8 million common shares,
including approximately $14.3 million relating to 1.4 million shares
sold under Hines REIT’s dividend reinvestment plan. As of May 5, 2008, $771.4
million in common shares remained available for sale to the public pursuant to
the Current Offering, exclusive of $125.3 million in common shares
available under the dividend reinvestment plan.


6


Minority
Interests





Hines
2005 VS I LP, an affiliate of Hines, owned a 0.6% and 0.7% interest in the
Operating Partnership as of March 31, 2008 and December 31, 2007, respectively.
As a result of HALP Associates Limited Partnership’s (“HALP”) ownership of the
Participation Interest (see Note 6), HALP’s percentage ownership in the
Operating Partnership was 1.8% and 1.7% as of March 31, 2008 and December 31,
2007, respectively.





Investment
Property





As of
March 31, 2008 , the Company held direct and indirect investments in 44
properties. These properties consisted of 42 office properties located
throughout the United States, one mixed-use office and retail property in
Toronto, Ontario, and a 50% interest in an industrial property in Rio de
Janeiro, Brazil. The Company’s interests in 25 of these properties are owned
indirectly through its investment in Hines US Core Office Fund LP (the
“Core Fund”). As of March 31, 2008 and December 31, 2007, the Company owned an
approximate 28.7% and 32.0% non-managing general partner interest in the Core
Fund, respectively.  See Note 3 for further discussion.





On May 1,
2008, the Company acquired Williams Tower, a 64-story office building located in
the Galleria/West Loop Submarket of Houston, Texas. See Note 11 for further
discussion.





2.  Summary
of Significant Accounting Policies





Use
of Estimates





The
preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and contingencies as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods.  The Company evaluates its assumptions and estimates on an
ongoing basis.  The Company bases its estimates on historical
experience and on various other assumptions that the Company believes to be
reasonable under the circumstances.  Additionally, application of the
Company’s accounting policies involves exercising judgments regarding
assumptions as to future uncertainties.  Actual results may differ
from these estimates under different assumptions or conditions.





Basis
of Presentation





The
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
related amounts of minority interest. All intercompany balances and transactions
have been eliminated in consolidation.





The
Company evaluates the need to consolidate joint ventures based on standards set
forth in Financial Accounting Standards Board (“FASB”) Interpretation
No. 46R, Consolidation of
Variable Interest Entities (“FIN 46R”) and American Institute of
Certified Public Accountants’ Statement of Position 78-9, Accounting for Investments in Real
Estate Ventures (“SOP 78-9”), as amended by Emerging Issues Task Force
Issue No. 04-5, Investor’s Accounting for an
Investment in a Limited
Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain
Rights.  In accordance with this accounting literature, the
Company will consolidate joint ventures that are determined to be variable
interest entities for which it is the primary beneficiary. The Company will also
consolidate joint ventures that are not determined to be variable interest
entities, but for which it exercises control over major operating decisions
through substantive participation rights, such as approval of budgets, selection
of property managers, asset management, investment activity and changes in
financing.





Reportable
Segments





Statement
of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information, 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 operating performance at an individual property level. The
Company has determined it has two reportable segments: one with activities
related to investing in office properties and one with activities related to
investing in industrial properties. The Company’s office properties have similar
economic characteristics, tenants, and products and services. As such, all of
the Company’s office properties have been aggregated into one reportable
segment.





The
Company also owns an indirect investment in one industrial property,
Distribution Park Rio acquired in July 2007, which is accounted for using the
equity method of accounting for investments. As such, the activities of the
industrial property are reflected in investments in unconsolidated entities in
the condensed consolidated balance sheet and equity in losses of unconsolidated
entities in the condensed consolidated statement of operations. See “Investments
in Unconsolidated Entities” in Note 3 for additional discussion.





The
Company’s investments in office properties generate rental revenue and other
income through the leasing of office properties, which constituted 100% of the
Company’s total consolidated revenues for the three months ended March 31, 2008
and 2007.





Comprehensive
Loss





The
Company reports comprehensive loss in its condensed consolidated statements of
shareholders’ equity. Comprehensive loss was approximately $46.0 million for the
three months ended March 31, 2008 resulting from the Company’s net loss of
$43.8 million and its foreign currency translation adjustment of $2.1
million.





7


International
Operations





The
Canadian dollar is the functional currency of the Company’s subsidiaries
operating in Toronto, Ontario and the Brazilian real is the functional currency
of the Company’s subsidiary operating in Rio de Janeiro, Brazil. The Company’s
foreign subsidiaries have translated their financial statements into
U.S. dollars for reporting purposes. Assets and liabilities are translated
at the exchange rate in effect as of the balance sheet date. The Company
translates income statement accounts using the average exchange rate for the
period and significant nonrecurring transactions using the rate on the
transaction date. As described above, these translation gains or losses are
included in accumulated other comprehensive income as a separate component of
shareholders’ equity.





The
Company’s international subsidiaries may have transactions denominated in
currencies other than their functional currency. In these instances, assets and
liabilities are remeasured into the functional currency at the exchange rate in
effect at the end of the period, and income statement accounts are remeasured at
the average exchange rate for the period. These gains or losses are included in
the Company’s results of operations.





The
Company’s subsidiaries also record gains or losses in the income statement when
a transaction with a third party, denominated in a currency other than the
entity’s functional currency, is settled and the functional currency cash flows
realized are more or less than expected based upon the exchange rate in effect
when the transaction was initiated.





Investment
Property and Lease Intangibles





Real
estate assets that the Company owns directly are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method. The estimated useful lives for computing depreciation are generally
10 years for furniture and fixtures, 15-20 years for electrical and
mechanical installations and 40 years for buildings. Major replacements
that extend the useful life of the assets are capitalized. Maintenance and
repair costs are expensed as incurred.





Real
estate assets are reviewed for impairment 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. Such carrying amount would be adjusted, if
necessary, to estimated fair values to reflect impairment in the value of the
asset. At March 31, 2008, management believes no such impairment has
occurred.





Acquisitions
of properties are accounted for utilizing the purchase method and, accordingly,
the results of operations of acquired properties are included in the Company’s
results of operations from their respective dates of acquisition. Estimates of
future cash flows and other valuation techniques that the Company believes are
similar to those used by independent appraisers are used to allocate the
purchase price of acquired property between land, buildings and improvements,
equipment and identifiable intangible assets and liabilities such as amounts
related to in-place leases, acquired above- and below-market leases, tenant
relationships, asset retirement obligations and mortgage notes payable. Initial
valuations are subject to change until such information is finalized, no later
than 12 months from the acquisition date.





The
estimated fair value of acquired in-place leases are the costs the Company would
have incurred to lease the properties to the occupancy level of the properties
at the date of acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be incurred to lease
the properties to such occupancy levels. Additionally, the Company evaluates the
time period over which such occupancy levels would be achieved. Such
evaluation includes an estimate of the net market-based rental revenues and net
operating costs (primarily consisting of real estate taxes, insurance and
utilities) that would be incurred during the lease-up period. Acquired in-place
leases as of the date of acquisition are amortized over the remaining lease
terms.





Acquired
above-and below-market lease values are recorded based on the present value
(using an interest rate that reflects the risks associated with the lease
acquired) of the difference between the contractual amounts to be paid pursuant
to the in-place leases and management’s estimate of fair market value lease
rates for the corresponding in-place leases. The capitalized above- and
below-market lease values are amortized as adjustments to rental revenue over
the remaining terms of the respective leases. Should a tenant terminate its
lease, the unamortized portion of the in-place lease value is charged to
amortization expense and the unamortized portion of out-of-market lease value is
charged to rental revenue.





Acquired
above- and below-market ground lease values are recorded based on the difference
between the present value (using an interest rate that reflects the risks
associated with the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of fair market value of
land under the ground leases. The capitalized above- and below-market lease
values are amortized as adjustments to ground lease expense over the lease
term.





Management
estimates the fair value of assumed mortgage notes payable based upon
indications of current market pricing for similar types of debt with similar
maturities. Assumed mortgage notes payable are initially recorded at their
estimated fair value as of the assumption date, and the difference between such
estimated fair value and the note’s outstanding principal balance is amortized
over the life of the mortgage note payable.





Cash
and Cash Equivalents





The
Company considers all short-term, highly liquid investments that are readily
convertible to cash with an original maturity of three months or less at the
time of purchase to be cash equivalents.





8


Restricted
Cash





As of
March 31, 2008 and December 31, 2007, the Company had restricted cash of
approximately $6.7 million and $3.5 million, respectively, related to
escrow accounts required by certain of the Company’s mortgage
agreements.




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.





The
Company considers a number of different factors to evaluate whether it or the
lessee is the owner of the tenant improvements for accounting purposes. These
factors include: 1) whether the lease stipulates how and on what a tenant
improvement allowance may be spent; 2) whether the tenant or landlord
retains legal title to the improvements; 3) the uniqueness of the
improvements; 4) the expected economic life of the tenant improvements
relative to the term of the lease; and 5) who constructs or directs the
construction of the improvements.





The
determination of who owns the tenant improvements for accounting purposes is
subject to significant judgment. In making that determination, the Company
considers all of the above factors. No one factor, however, necessarily
establishes any determination.





Tenant
inducement amortization was approximately $773,000 and $420,000 for the three
months ended March 31, 2008 and 2007, respectively, and was recorded as an
offset to rental revenue. In addition, the Company recorded approximately
$302,000 and $134,000 as amortization expense related to other direct leasing
costs for the three months ended March 31, 2008 and 2007,
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 funding
$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 a result, the Company has a $9.8 million liability recorded
in accounts payable and accrued expenses in the accompanying balance sheets as
of March 31, 2008.





On March
13, 2008, the Company acquired the Raytheon/DirecTV Buildings, a two-building
office complex located in El Segundo, California. In connection with this
acquisition, the Company assumed a commitment to fund $11.5 million of
construction costs to the Raytheon Corporation. This amount has been recorded in
accounts payable and accrued expenses in the accompanying balance sheets as of
March 31, 2008.





Derivative
Instruments





During
the years ended December 31, 2007 and 2006, the Company entered into
several forward 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 Company has not
designated any of these contracts as cash flow hedges for accounting purposes.
The valuation of the interest rate swaps is determined using widely accepted
valuation techniques including discounted cash flow analysis on the expected
cash flows of each derivative. This analysis reflects the contractual terms of
the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves. The fair values of interest
rate swaps are determined using the market standard methodology of netting the
discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts)
are based on an expectation of future interest rates (forward curves) derived
from observable market interest rate curves. See Note 10 for additional
discussion regarding fair value.





The
interest rate swaps have been recorded at their estimated fair value in the
accompanying consolidated balance sheets as of March 31, 2008 and
December 31, 2007. The loss resulting from the decrease in the fair value
of the interest rate swaps for the three months ended March 31, 2008 of
$27.4 million has been recorded in loss on derivative instruments, net in
the consolidated statements of operations. The gain on derivative instruments
for the three months ended March 31, 2007 of approximately $639,000 was the
result of a $66,000 gain on the fair value of the interest rate swaps, fees of
approximately $366,000 incurred upon entering into these swap transactions and a
gain of approximately $939,000 resulting from the settlement of a foreign
currency contract (described below). The Company will mark the interest rate
swap contracts to their estimated fair value as of each balance sheet date, and
the changes in fair value will be reflected in the condensed consolidated
statements of operations.





The
Company entered into a foreign currency contract in February 2007 related to the
acquisition of Atrium on Bay, a mixed-use office and retail property located in
Toronto, Ontario. The contract was entered into as an economic hedge against the
variability of the foreign currency exchange rate related to the Company’s
equity investment and was settled at the close of this acquisition on
February 26, 2007.





Deferred
Financing Costs





Deferred
financing costs as of March 31, 2008 and December 31, 2007 consist of direct
costs incurred in obtaining debt financing (see Note 4). 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 March 31, 2008 and 2007, approximately $379,000 and
$296,000, respectively, was amortized and recorded in interest expense in the
accompanying condensed consolidated statements of operations.





9


Other
Assets





Other
assets includes the following (in thousands):





March 31,2008
            
            
            December 31,2007Property
      acquisition escrow deposit
            
            $
            30,000
            
            
            $
            10,000Prepaid
      insurance
            
            
            177
            
            
            
            1,056Mortgage
      loan deposits
            
            
            2,739
            
            
            
            904Other
            
            
            2,382
            
            
            
            910Total
            
            $
            35,298
            
            
            $
            12,870




Organizational
and Offering Costs





Current
Offering





The
Company commenced the Current Offering on June 19, 2006. Certain
organizational and offering costs associated with the Current Offering have been
paid by the Advisor on the Company’s behalf. Pursuant to the terms of the
Advisory Agreement, the Company is 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, do not exceed 15% of gross proceeds from the Current Offering. As of March
31, 2008 and December 31, 2007, the Advisor had incurred on the Company’s behalf
organizational and offering costs in connection with the Current Offering of
$32.6 million and $29.1 million, respectively (of which
$13.9 million and $12.1 million, respectively, relates to the Advisor
or its affiliates).





The
Advisor incurred approximately $1.9 million and $2.4 million of internal
offering costs, which have been expensed in the accompanying condensed
consolidated statements of operations for the three months ended March 31, 2008
and 2007, respectively. In addition, $1.6 million and $1.7 million of
third-party offering costs have been offset against net proceeds of the Current
Offering within additional paid-in capital for the three months ended March 31,
2008 and 2007, respectively.





Third
Offering





The
Company expects that the Current Offering will terminate on June 30, 2008,
pursuant to the terms of the offering. Accordingly, the Company expects to
commence the Third Offering on or about July 1, 2008. During the three
months ended March 31, 2008, the Advisor incurred approximately $849,000 of
organizational and offering costs related to the Third Offering. Pursuant to the
anticipated terms of the Third Offering, the Company is not expected to be
obligated to reimburse the Advisor for any of these costs. Additionally, the
Advisor is not a shareholder of the Company. Accordingly, no amounts have been
recorded in the accompanying 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 $16.6 million and $12.7 million as of March 31, 2008 and December
31, 2007, 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.





Stock-based
Compensation





Under the
terms of the Employee and Director Incentive Share Plan, the Company grants each
independent member of its board of directors 1,000 restricted shares of common
stock annually. The restricted shares granted each year fully vest upon
completion of each director’s annual term. In accordance with the provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (as amended), the Company recognizes the expense related to
these shares over the vesting period. The Company granted 1,000 restricted
common shares to each of its independent board members in November 2004, June
2005, June 2006 and July 2007. For the three months ended March 31, 2008 and
2007, amortization of stock compensation expense recorded by the Company was
immaterial.





10


Income
Taxes





Hines
REIT made an election to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with
its taxable year ended December 31, 2004. In addition, as of March 31, 2008
and 2007 the Company owned an investment in the Core Fund, which has invested in
properties through other entities that have elected to be taxed as REITs. Hines
REIT’s management believes that the Company and the applicable entities in the
Core Fund are organized and operate in such a manner as to qualify for treatment
as REITs and intend to operate in the foreseeable future in such a manner so
that they will remain qualified as REITs for federal income tax purposes.
Accordingly, no provision has been made for U.S. federal income taxes for
the three months ended March 31, 2008 and 2007 in the accompanying condensed
consolidated financial statements.





Due to
the acquisition of Atrium on Bay, an office property located in Toronto,
Ontario, the Company has recorded a provision for Canadian income taxes of
approximately $506,000 and $66,000 for the three months ended March 31, 2008 and
2007, in accordance with Canadian tax laws and regulations.





As of
March 31, 2008, the Company had no significant temporary differences, tax
credits, or net operating loss carry-forwards.




Per
Share Data





Loss per
common share is calculated by dividing the net loss 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.





Reclassifications





The
Company has revised the presentation of investment property to exclude the value
associated with leases in place at the time an investment property is acquired
as shown in the condensed consolidated balance sheet to be consistent with a
majority of others in the industry. As a result, certain reclassifications have
been made to the 2007 condensed consolidated balance sheet and condensed
consolidated statement of cash flows to be consistent with the 2008
presentation. Specifically, $253.0 million of net book value of in-place leases
has been reclassified from investment property to intangible lease assets as of
December 31, 2007 in the condensed consolidated balance sheet and $44.6 million
was reclassified from investments in property to increase (decrease) in
intangible lease assets, net, in the condensed consolidated statement of cash
flows. Management believes this change in presentation is appropriate given the
practices of many of the Company’s industry peers, although it does not believe
this change is necessary for the fair presentation of the Company’s financial
statements. 
 Recent
Accounting Pronouncements
  In December
2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations(“SFAS
No. 141R”). SFAS No. 141R will significantly change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment for certain specific acquisition-related items
including: (1) expensing acquisition related costs as incurred; (2) valuing
noncontrolling interests at fair value at the acquisition date; and (3)
expensing restructuring costs associated with an acquired business. SFAS No.
141R also includes a substantial number of new disclosure requirements. SFAS No.
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. Management expects SFAS No.
141R could have a material impact if it is determined that real estate
acquisitions fall under the definition of business combinations.
  In December
2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS No. 160”). SFAS No. 160
establishes requirements for ownership interests in subsidiaries held by parties
other than the Company (sometimes called “minority interests”) be clearly
identified, presented, and disclosed in the consolidated statement of financial
position within equity, but separate from the parent’s equity. All changes in
the parent’s ownership interests are required to be accounted for consistently
as equity transactions and any noncontrolling equity investments in
deconsolidated subsidiaries must be measured initially at fair value. SFAS No.
160 is effective, on a prospective basis, for fiscal years beginning after
December 15, 2008. However, presentation and disclosure requirements must be
retrospectively applied to comparative financial statements. Management is
currently assessing the impact of SFAS No. 160 on the Company’s consolidated
statement of operations.


11


3.  Investment
Property and Lease Intangibles





Investment
property consisted of the following as of March 31, 2008 and December 31, 2007
(in thousands):





March
      31, 2008
            
            
            December
      31, 2007Buildings
      and improvements
            
            S
            1,664,092
            
            
            $
            1,481,541Less:
      accumulated depreciation
            
            
            (41,856)
            
            
            
            (32,395)Buildings
      and improvements, net
            
            $
            1,622,236
            
            
            $
            1,449,146Land
            
            
            386,155
            
            
            
            349,778Investment
      property, net
            
            $
            2,008,391
            
            
            $
            1,798,924





Direct
Investments





Properties
that are wholly owned by the Operating Partnership are referred to as “direct
investments.” As of December 31, 2007, the Company owned direct investments in
16 properties through its interest in the Operating Partnership and acquired the
following office properties during the three months ended March 31,
2008:





City
            Property
            Date
      Acquired
            ContractPurchase Price(in
      millions)Kansas
      City, Missouri
            2555
      Grand
            February
      2008
            $
            155.8El
      Segundo, California
            Raytheon/DirecTV
      Buildings
            March
      2008
            $
            120.0





As of
March 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
            $
            363,798
            
            
            $
            68,750
            
            
            $
            112,749Less:
      accumulated amortization
            
            (62,755
            )
            
            
            (10,765
            )
            
            
            (15,691
            )Net
            $
            301,043
            
            
            $
            57,985
            
            
            $
            97,058





As of
December 31, 2007, the cost basis and accumulated amortization related
to lease intangibles was as follows (in thousands):





Lease
      IntangiblesIn-PlaceLeases
            
            
            Out-of-Market
              Lease Assets
            
            
            Out-of-Market
              Lease LiabilitiesCost
            $
            302,530
            
            
            $
            52,450
            
            
            $
            91,455Less:
      accumulated amortization
            
            (49,564
            )
            
            
            (8,650
            )
            
            
            (11,990
            )Net
            $
            252,966
            
            
            $
            43,800
            
            
            $
            79,465





Amortization
expense was $15.4 million and $7.3 million for in-place leases for the
three months ended March 31, 2008 and 2007, respectively. Amortization of
out-of-market leases, net, was an increase to rental revenue of approximately
$2.0 million for the three months ended March 31, 2008 and a decrease to rental
revenue of approximately $155,000 for the three months ended  March
31, 2007.





Anticipated
amortization of in-place, out-of-market leases, net and out-of-market ground
leases for the period from April 1 through December 31, 2008 and for
each of the years ended December 31, 2009 through 2012 is as follows
(in thousands):





In-PlaceLeases
            
            
            Out-of-Market
              Leases, netApril 1
      through December 31, 2008
            
            $
            50,381
            
            
            $
            1,3842009
            
            
            52,209
            
            
            
            (9,179
            )2010
            
            
            44,116
            
            
            
            (8,213
            )2011
            
            
            37,966
            
            
            
            (7,651
            )2012
            
            
            28,792
            
            
            
            (6,686
            )





12


In
connection with its direct investments, the Company has entered into lease
agreements with tenants for office and retail space. As of March 31, 2008, the
approximate fixed future minimum rentals for the period from April 1 through
December 31, 2008, and each of the years ending December 31, 2009
through 2012 and thereafter are as follows (in thousands):





Fixed
      Future
              MinimumRentalsApril 1
      through December 31, 2008
            
            $
            150,9932009
            
            
            183,1742010
            
            
            164,0912011
            
            
            150,5762012
            
            
            126,787Thereafter
            
            
            532,617Total
            
            $
            1,308,238





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. The fixed future minimum rentals expected to be received for such
services for the period from April 1, 2008 through December 31, 2008 are
approximately $1.8 million. In addition, the fixed future minimum rentals
expected to be received for such services for each of the years ended December
31, 2009 through December 31, 2012 and thereafter are approximately $1.9
million, $1.6 million, $1.3 million, $684,000 and $633,000, 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 April 1, 2008
through December 31, 2008 are approximately $688,000. In addition, the fixed
future minimum payments for such services for each of the years ended
December 31, 2009 through December 31, 2012 and thereafter are
approximately $799,000, $640,000, $432,000, $270,000 and $179,000,
respectively.





During
the three months ended March 31, 2008, no tenant leased space representing
more than 10% of the total rental revenue of the Company. Approximately 10% of
the rental revenue recognized during the three months ended March 31, 2007 was
earned from a tenant in the software industry, whose lease expires in
2013. No other tenant provided more than 10% of the Company’s total rental
revenue for the three months ended March 31, 2007.





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 rentals to be paid under the ground lease
for the period from April 1, 2008 through December 31, 2008 are approximately
$304,000. In addition, the fixed future minimum rentals for each of the years
ended December 31, 2009 through December 31, 2012 and thereafter are
approximately $412,000, $420,000, $428,000, $438,000 and $10.3 million,
respectively. Ground lease expense for the three months ended March 31,
2008 was approximately $139,000.




Investments
in Unconsolidated Entities





The
Company owns indirect interests in real estate through its investments in the
Core Fund and HCB II River LLC. The carrying values of its investments in these
entities as of March 31, 2008 and December 31, 2007 are as follows (in
thousands):





March
      31, 2008
            
            
            December
      31, 2007Investment
      in the Core Fund
            
            $
            322,196
            
            
            $
            330,441Investment
      in HCB II River LLC
            
            
            30,783
            
            
            
            30,716Total
      investments in unconsolidated entities
            
            $
            352,979
            
            
            $
            361,157





The equity in losses of
the Company’s unconsolidated entities for the three months ended March 31, 2008
and 2007, was as follows (in thousands):





Three
      Months Ended March 31, 2008
            
            
            Three
      Months Ended March 31, 2007Equity
      in losses of the Core Fund
            
            $
            (2,371
            )
            
            $
            (1,136
            )Equity
      in earnings of HCB II River LLC
            
            
            436
            
            
            
            —Total
      equity in losses of unconsolidated entities
            
            $
            (1,935
            )
            
            $
            (1,136
            )





13


Investment
in the Core Fund





The Core
Fund is a partnership organized in August 2003 by Hines to invest in existing
office properties in the United States that Hines believes are desirable
long-term holdings. The Core Fund owns interests in real estate assets through
certain limited liability companies and limited partnerships which have mortgage
financing in place. As of December 31, 2007, the Company owned a 32.0%
non-managing general partnership interest in the Core Fund, which held ownership
interests in 24 properties across the United States.





During
the three months ended March 31, 2008, the Core Fund acquired an interest in one
property, One North Wacker, through one of its subsidiaries. One North Wacker is
a 51-story office building located in the West Loop submarket of the
central business district of Chicago, Illinois. One North Wacker consists of
approximately 1.4 million square feet and is approximately 98% leased. The
contract purchase price of One North Wacker was $540.0 million, exclusive
of transaction costs, financing fees and working capital reserves. As of March
31, 2008, the Company owned a 28.7% non-managing general partnership interest in
the Core Fund, which held ownership interests in 25 properties across the United
States.





Condensed
consolidated financial information of the Core Fund as of March 31, 2008 and
December 31, 2007 and for the three months ended March 31, 2008 and 2007 is
summarized below (in thousands):





ASSETS





March 31,2008
            
            
            December 31,2007Cash
            
            $
            83,551
            
            
            $
            112,211Property,
      net
            
            
            4,014,723
            
            
            
            3,481,975Other
      assets
            
            
            367,516
            
            
            
            351,577Total
      Assets
            
            $
            4,465,790
            
            
            $
            3,945,763





LIABILITIES
AND PARTNERS’ CAPITAL





Debt
            
            $
            2,603,200
            
            
            $
            2,313,895Other
      liabilities
            
            
            248,740
            
            
            
            264,705Minority
      interest
            
            
            537,642
            
            
            
            426,128Partners’
      capital
            
            
            1,076,208
            
            
            
            941,035Total
      Liabilities and Partners’ Capital
            
            $
            4,465,790
            
            
            $
            3,945,763





OPERATIONS





Three
      Months Ended March 31,2008
            
            
            Three
      Months Ended March 31,2007Revenues,
      other income and interest income
            
            $
            120,468
            
            
            $
            91,704Operating
      expenses
            
            
            (50,704
            )
            
            
            (41,964
            )Interest
      expense
            
            
            (32,259
            )
            
            
            (21,948
            )Depreciation
      and amortization
            
            
            (44,576
            )
            
            
            (29,189
            )Income
      allocated to minority interest
            
            
            (113
            )
            
            
            (1,800
            )Net
      Loss
            
            $
            (7,184
            )
            
            $
            (3,197
            )





During
the three months ended March 31, 2008, no tenant leased space representing
more than 10% of the total rental revenue of the Core Fund. During the three
months ended March 31, 2007, approximately 11% of the rental revenue was earned
from a tenant in the legal services industry, whose lease expires on October 31,
2018. No other tenant provided more than 10% of the Core Fund's total
rental revenue for the three months ended March 31, 2007.





14


4.  Debt
Financing





The
following table includes all of the Company’s outstanding notes payable as of
March 31, 2008 and December 31, 2007 (in thousands, except interest
rates):





Description
            OriginationDate
            Maturity Date
            
            Interest Rate
            
            Principal
      Outstanding at
              March
      31,2008
            
            Principal
      Outstanding at December 31,2007SECURED
      MORTGAGE DEBTWells
      Fargo Bank, N.A. — Airport Corporate Center
            1/31/2006
            3/11/2009
            
            
            4.775
            %
            
            90,243
            (4)
            
            90,039Metropolitan
      Life Insurance Company — 1515 S. Street
            4/18/2006
            5/1/2011
            
            
            5.680
            %
            
            45,000
            
            
            45,000Capmark
      Finance, Inc. — Atrium on Bay
            2/26/2007
            2/26/2017
            
            
            5.330
            %
            
            185,877
            (3)
            
            193,686The
      Prudential Insurance Company ofAmerica
      — 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
            %
            
            52,937
            (6)
            
            —HSH
      POOLED MORTGAGE FACILITYHSH
      Nordbank — Citymark, 321 North Clark, 1900 and 2000
      Alameda
            8/1/2006
            8/1/2016
            
            
            5.8575
            %
      (2)
            
            185,000
            
            
            185,000HSH
      Nordbank — 3400 Data Drive, Watergate Tower IV
            1/23/2007
            1/12/2017
            
            
            5.2505
            %
      (2)
            
            98,000
            
            
            98,000HSH
      Nordbank — Daytona and Laguna Buildings
            5/2/2007
            5/2/2017
            
            
            5.3550
            %
      (2)
            
            119,000
            
            
            119,000HSH
      Nordbank — 3 Huntington Quadrangle
            7/19/2007
            7/19/2017
            
            
            5.9800
            %
      (2)
            
            48,000
            
            
            48,000HSH
      Nordbank — Seattle Design Center / 5th
      and Bell
            8/14/2007
            8/14/2017
            
            
            6.0300
            %
      (2)
            
            70,000
            
            
            70,000MET
      LIFE SECURED MORTGAGE FACILITYMet
      Life — JPMorgan Chase Tower/Minneapolis
            12/20/2007
            12/20/2012
            
            
            5.70
            %
            
            205,000
            
            
            205,000Office/Flex
      PortfolioOTHER
      NOTES PAYABLEKey
      Bank National Association — Revolving Credit Facility
            9/9/2005
            10/31/2009
            
            Variable
            (1)
            
            59,000
            
            
            —Atrium
      Note Payable
            9/1/2004
            10/1/2011
            
            
            7.390
            %
            
            3,236
            (5)
            
            3,406$
            1,320,793
            
            $
            1,216,631


__________





(1)
            The
      revolving credit facility with KeyBank National Association (“KeyBank”)
      provides a maximum aggregate borrowing capacity of $250.0 million,
      which may be increased to $350.0 million upon the Company’s election.
      Borrowings under the revolving credit facility are at variable interest
      rates based on LIBOR plus 125 to 200 basis points based on prescribed
      leverage ratios. The weighted average interest rate on outstanding
      borrowings under this facility was 4.022% as of March 31,
      2008.(2)
            The
      Company entered into an interest rate swap agreement which effectively
      fixed the interest rate of this borrowing at the specified
      rate.(3)
            The
      Company entered into mortgage financing in connection with its acquisition
      of Atrium on Bay. The mortgage agreement provides for an interest only
      loan with a principal amount of $190.0 million Canadian dollars as of
      March 31, 2008. This amount was translated to U.S. dollars at a rate
      of $0.9783 as of March 31, 2008.(4)
            This
      mortgage is an interest-only loan in the principal amount of $91.0
      million, which the Company assumed in connection with its acquisition of
      Airport Corporate Center. At the time of acquisition, the fair value of
      this mortgage was estimated to be $88.5 million, resulting in a premium of
      $2.5 million. The premium is being amortized over the term of the
      mortgage.(5)
            Note
      with 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 $0.9783 as of March 31, 2008.(6)
            The
      Company assumed a mortgage note in the principal amount of $54.2 million
      in connection with its acquisition of the Raytheon/DirecTV Buildings. The
      mortgage agreement provides for monthly payments of principal and
      interest. This mortgage agreement contains customary events of default,
      with corresponding grace periods, including payment defaults,
      cross-defaults to other agreements and bankruptcy-related defaults, and
      customary covenants, including limitations on liens and indebtedness and
      maintenance of certain financial ratios. At the time of acquisition, the
      fair value of this mortgage was estimated to be $52.9 million, resulting
      in a premium of $1.3 million. The premium is being amortized over the term
      of the mortgage.




15


On April
24, 2008, the Company borrowed $86.0 million from the New York State Teachers’
Retirement System secured by 2555 Grand. See Note 11 for further
discussion.




The
Company is contractually obligated to make principal payments on its
outstanding notes payable for each of the period from April 1, 2008 through
December 31, 2008 and for the years ended December 31, 2009 through December 31,
2013 and for the period thereafter of approximately $114,000, $150.1 million,
$157,000, $47.8 million, $159.5 million and $965.0 million.




The
Company has complied with all covenants of our various debt facilities as of
March 31, 2008.




5.  Distributions





The
Company began declaring distributions (as authorized by its board of directors)
in November 2004, after the Company commenced business operations. 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 declared the following quarterly distributions to
its shareholders and minority interests for the year ended December 31, 2007 and
the three months ended March 31, 2008 (in thousands):





Distribution for the Quarter
      Ended
            Date Paid
            
            TotalDistributionMarch
      31, 2008
            April 15,
      2008
            
            $
            26,337December 31,
      2007
            January 16,
      2008
            
            $
            24,923September
      30, 2007
            October
      15, 2007
            
            $
            23,059June
      30, 2007
            July
      20, 2007
            
            $
            18,418March
      31, 2007
            April 16,
      2007
            
            $
            14,012




6.  Related
Party Transactions





Due
to Affiliates





Due to
affiliates includes the following (in thousands):





March 31,2008
            
            
            December 31,2007Organizational
      and offering costs related to the Current Offering
            
            $
            1,855
            
            
            $
            2,260Dealer
      manager fees and selling commissions
            
            
            952
            
            
            
            605Asset
      management, acquisition fees and property-level fees and
      reimbursements
            
            
            4,711
            
            
            
            5,319Other
            
            
            971
            
            
            
            784Total
            
            $
            8,489
            
            
            $
            8,968





Advisory
Agreement





Pursuant
to the Advisory Agreement, the Company is required to pay the following fees and
expense reimbursements:





Acquisition Fees — The
Company pays an acquisition fee to the Advisor for services related to the due
diligence, selection and acquisition of direct or indirect real estate
investments. The acquisition fee is payable following the closing of each
acquisition in an amount equal to 0.50% of (i) the purchase price of real
estate investments acquired directly by the Company, including any debt
attributable to such investments, or (ii) when the Company makes an
investment indirectly through another entity, such investment’s pro rata share
of the gross asset value of the real estate investments held by that entity. The
Advisor earned cash acquisition fees totaling $1.4 million and $1.6 million for
the three months ended March 31, 2008 and 2007, respectively, which have been
recorded as an expense in the accompanying condensed consolidated statements of
operations. See discussion of the Participation Interest below for additional
information concerning acquisition fees. As of March 31, 2008, the Company had
liabilities for incurred and unpaid acquisition fees of approximately
$668,000 which have been included in the accompanying condensed consolidated
balance sheets. As of December 31, 2007, the Company had no liabilities for
incurred and unpaid acquisition fees.





Asset Management Fees —
The Company pays asset management fees to the Advisor for services related to
managing, operating, directing and supervising the operations and administration
of the Company and its assets. The asset management fee is earned by the Advisor
monthly in an amount equal to 0.0625% multiplied by the net equity capital the
Company has invested in real estate investments as of the end of the applicable
month. The Advisor earned cash asset management fees totaling $2.8 million and
$1.5 million during the three months ended March 31, 2008 and 2007,
respectively, which have been recorded as an expense in the accompanying
condensed consolidated statements of operations. See discussion of the
Participation Interest below for additional information concerning acquisition
fees. As of March 31, 2008 and December 31, 2007, the Company had liabilities
for incurred and unpaid asset management fees of approximately $970,000 and
$2.5 million, respectively, which have been included in the accompanying
condensed consolidated balance sheets.





16


Dealer
Manager Agreement





The
Company has retained HRES, an affiliate of the Advisor, to serve as dealer
manager for the Initial Offering and the Current Offering. The dealer
manager agreement for the Current Offering provides that HRES earns selling
commissions equal to 7.0% of the gross proceeds from sales of common stock, all
of which is reallowed to participating broker dealers, and earns no selling
commissions related to shares issued pursuant to the dividend reinvestment plan.
It also provides that HRES earns a dealer manager fee equal to 2.2% of gross
proceeds from the sales of common stock other than issuances pursuant to the
dividend reinvestment plan, a portion of which may be reallowed to participating
broker dealers. HRES earned selling commissions of $7.4 million and $11.3
million and earned dealer manager fees of $2.4 million and $3.7 million for the
three months ended March 31, 2008 and 2007, respectively, which have been
offset against additional paid-in capital in the accompanying condensed
consolidated statements of shareholders’ equity.




Property
Management and Leasing Agreements





The
Company has entered into property management and leasing agreements with Hines
to manage the leasing and operations of properties in which it directly invests.
As compensation for its services, Hines receives the following:





•
            A
      property management fee equal to the lesser of 2.5% of the annual gross
      revenues received from the properties or the amount of property management
      fees recoverable from tenants of the property under the leases. The
      Company incurred property management fees of approximately $1.5 million
      and $704,000 for the three months ended March 31, 2008 and 2007,
      respectively. As of March 31, 2008 and December 31, 2007, the Company had
      liabilities for incurred and unpaid property management fees of
      approximately $350,000 and $260,000, respectively, which have been
      included in the accompanying condensed consolidated balance
      sheets.





•
            A
      leasing fee of 1.5% of gross revenues payable over the term of each
      executed lease, including any lease renewal, extension, expansion or
      similar event and certain construction management and re-development
      construction management fees, in the event Hines renders such services.
      The Company incurred leasing, construction management or redevelopment
      fees of approximately $1.6 million and $62,000 during the three months
      ended March 31, 2008 and 2007, respectively. As of March 31, 2008 and
      December 31, 2007, respectively, the Company had a related liability of
      approximately $1.0 million and $654,000, which is included in due to
      affiliates in the accompanying condensed consolidated balance
      sheet.





•
            The
      Company generally will be required to reimburse Hines for certain
      operating costs incurred in providing property management and leasing
      services pursuant to the property management and leasing agreements.
      Included in this reimbursement of operating costs are the cost of
      personnel and overhead expenses related to such personnel who are located
      at the property as well as off-site personnel located in Hines’
      headquarters and regional offices, to the extent the same relate to or
      support the performance of Hines’ duties under the agreement. However, the
      reimbursable cost of these off-site personnel and overhead expenses are
      limited to the lesser of the amount that is recovered from the tenants
      under their leases and/or a limit calculated based on the rentable square
      feet covered by the agreement. The Company incurred reimbursable expenses
      of $3.1 million and $1.3 million for the three months ended March 31,
      2008 and 2007, respectively. As of March 31, 2008 and December 31, 2007,
      the Company had related liabilities of $1.7 million which was included in
      due to affiliates in the accompanying condensed consolidated balance
      sheets.





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
“Participation Interest”). The percentage interest in the Operating Partnership
attributable to the Participation Interest was 1.8% and 1.7% as of March 31,
2008 and December 31, 2007, 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.





As the
percentage interest of the Participation Interest is adjusted, the value
attributable to such adjustment related to acquisition fees and asset management
fees is charged against earnings and recorded as a liability until such time as
the Participation Interest is repurchased for cash or converted into common
shares of Hines REIT. This liability totaled $31.0 million and
$26.8 million as of March 31, 2008 and December 31, 2007, respectively, and
is included in the participation interest liability in the accompanying
condensed consolidated balance sheets. The related expense for asset management
and acquisition fees of $4.2 million and $3.1 million for the three months
ended March 31, 2008 and 2007, respectively, is included in asset management and
acquisition fees in the accompanying condensed consolidated statements of
operations.





17


7.  Changes
in Assets and Liabilities





The
effect of changes in asset and liability accounts on cash flows from operating
activities for the three months ended March 31, 2008 and 2007 is as follows
(in thousands):





2008
            
            
            2007Changes
      in assets and liabilities:(Increase)
      decrease in other assets
            
            $
            364
            
            
            $
            (755
            )Increase
      in tenant and other receivables
            
            
            (6,412
            )
            
            
            (2,463
            )Additions
      to deferred leasing costs
            
            
            (4,921
            )
            
            
            (1,546
            )Increase
      (decrease) in accounts payable and accrued expenses
            
            
            (8,285
            )
            
            
            863Increase
      in participation interest liability
            
            
            4,205
            
            
            
            3,115Increase
      in other liabilities
            
            
            2,444
            
            
            
            387Decrease
      in due to affiliates
            
            
            (319
            )
            
            
            (1,043
            )Changes
      in assets and liabilities
            
            $
            (12,924
            )
            
            $
            (1,442
            )




8.  Supplemental
Cash Flow Disclosures





Supplemental
cash flow disclosures for the three months ended March 31, 2008 and 2007 are as
follows (in thousands):





2008
            
            
            2007Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
            
            $
            17,845
            
            
            $
            9,306Cash
      paid for income taxes
            
            $
            196
            
            
            $
            —Supplemental
      Schedule of Non-Cash ActivitiesUnpaid
      selling commissions and dealer manager fees
            
            $
            952
            
            
            $
            1,407Deferred
      offering costs offset against additional paid-in-capital
            
            $
            1,556
            
            
            $
            1,736Distributions
      declared and unpaid
            
            $
            26,337
            
            
            $
            14,012Distributions
      receivable
            
            $
            5,874
            
            
            $
            5,978Distributions
      reinvested
            
            $
            13,618
            
            
            $
            6,659Non-cash
      net liabilities acquired upon acquisition of property
            
            $
            15,929
            
            
            $
            1,714Accrual
      of deferred financing costs
            
            $
            8
            
            
            $
            —Assumption
      of mortgage upon acquisition of property
            
            $
            52,938
            
            
            $
            —Accrued
      additions to deferred leasing costs
            
            $
            3,182
            
            
            $
            792Accrued
      additions to investment property
            
            $
            803
            
            
            $
            123





9.  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. The
discussion below provides information about the fair value hierarchy established
by SFAS No. 157 and the Company's interest rate swap contracts, which are
recorded at fair value in the condensed consolidated financial
statements.





10. Fair Value
Disclosures





As of
January 1, 2008 we adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements.The standard defines fair value, establishes a framework
for measuring fair value and also expands disclosures about fair value
measurements. The
discussion below presents information about the fair value hierarchy described
in SFAS No. 157 and the valuation techniques utilized by the Company to
determine the fair value of its interest rate swaps.





In
general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities we have
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. Our 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


As of March
31, 2008, the Company recorded a liability of $57.6 million related to the fair
value of its interest rate swap contracts in accordance with SFAS No. 157. The
fair value of these derivative instruments was determined using pricing models.
Pricing models take into account the contract terms as well as other inputs
where applicable, such as interest rate yield curves. Although we have
determined the majority of the inputs used to value our derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation adjustments associated
with our derivatives utilize Level 3 inputs, such as estimates of current credit
spreads to evaluate the likelihood of default by us and our counterparty, HSH
Nordbank. In adjusting the fair value of its derivative contracts for the effect
of nonperformance risk, we have considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds and
guarantees. However, as of March 31, 2008, we have assessed the
significance of the impact of the credit valuation adjustments on the overall
valuation of our derivative positions and have determined that the credit
valuation adjustments are not significant to the overall valuation of our
derivatives. As a result, we have determined our derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.




To obtain
fair values, observable market prices are used if available. In some instances,
observable market prices are not readily available for certain financial
instruments and fair value is determined using present value or other techniques
appropriate for a particular financial instrument. These techniques involve some
degree of judgment and as a result are not necessarily indicative of the amounts
the Company would realize in a current market exchange. The use of different
assumptions or estimation techniques may have a material effect on the estimated
fair value amounts.




11.  Subsequent
Events





Williams Tower





On May 1,
2008, the Company acquired Williams Tower, a 64-story office building
located in the Galleria/West Loop submarket of Houston, Texas. The building
consists of approximately 1.5 million square feet of rentable area that is
approximately 94% leased. The contract purchase price for Williams Tower
was $271.5 million, exclusive of transaction costs, financing fees and working
capital reserves.





The
Company entered into a rate-lock agreement with the New York State Teachers’
Retirement System (“NYSTRS”) related to a $165.0 million interest-only mortgage
loan that will be secured by a mortgage and related assignments and
security interests in Williams Tower. The Company expects to close on this
financing on or about May 23, 2008.





4050/4055Corporate Drive





On April
21, 2008, the Company entered into a contract to acquire 4050 and 4055 Corporate
Drive (“Corporate Drive”), a two-building industrial complex located in the
DFW Trade Center submarket of Dallas, Texas. The buildings consist of
643,429 square feet of rentable area that is 100% leased. The contract
purchase price of Corporate Drive is expected to be $42.8 million, exclusive of
transaction costs, financing fees and working capital reserves and this
acquisition is expected to be completed on or about May 22, 2008.





2555 Grand Mortgage
Loan





On April
24, 2008, a subsidiary of the Operating Partnership borrowed $86.0 million from
the NYSTRS. The mortgage agreement provides for an interest-only loan and is
secured by a mortgage and related assignments and security interests in 2555
Grand. The borrowing matures on April 24, 2013 and bears interest at a rate of
5.375%.





KeyBank
Activity





On April
28, 2008, the Company borrowed $165.0 million under the revolving credit
facility with KeyBank in anticipation of its acquisition of Williams Tower, as
described above. From April 1, 2008 through May 5, 2008, the Company repaid
$59.0 million under its revolving credit facility with KeyBank resulting in an
outstanding principal balance of $165.0 million.





Shareholder
Redemptions





From
April 1, 2008 through May 5, 2008, in accordance with its share redemption plan,
the Company redeemed approximately 397,000 common shares and made corresponding
payments totaling $4.0 million to shareholders who had requested these
redemptions. The shares redeemed were cancelled and will have the status of
authorized, but unissued shares.




Price
Change/Extension of Offering





In April
2008, the board of directors of the Company authorized the extension of its
Current Offering until June 30, 2008. Additionally, the board of directors of
the Company authorized the following terms for its Third Offering, which is
expected to commence on July 1, 2008:





·
              The
      Company expects to offer shares to the public initially at a price of
      $10.66 per share subject to any volume and other discounts in effect for
      the Third Offering; the current offering price is $10.58 per
      share.





·
              The
      Company expects to offer shares through its dividend reinvestment plan at
      a price of $10.13 per share; the current dividend reinvestment plan price
      is $10.051 per share.





·
              The
      Company expects that shares redeemed under its share redemption program
      will be redeemed at a price of $9.68 per share; the current redemption
      price is $9.52 per share.


19


Advisory
Agreement Extension
 
 In
conjunction with the extension of the Current Offering to June 30, 2008, the
board of directors of the Company determined on May 14, 2008 to extend the term
of the current Advisory Agreement between the Operating Partnership, the Company
and the Advisor on identical terms through June 30, 2008.
  Distribution
Increase





In April
2008, the board of directors of the Company declared distributions for the
months of May and June 2008. The distributions will be calculated based on
shareholders of record each day during such months in an amount equal to
$0.00175233 per share, per day.  This distribution rate represents an
approximate 2.5% increase from the distribution rate declared for the period
from July 1, 2006 through April 30, 2008. The distributions for the months of
May and June will be paid in cash in July 2008.




20




Item 2.Management’s Discussion and Analysisof 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, the notes
thereto, and the other unaudited financial data 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,
2007.





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
our advisor, 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 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, although not all of the risks
and uncertainties, which could cause actual results to differ materially from
those presented in certain forward-looking statements:





•
            Our
      ability to invest offering and dividend reinvestment plan proceeds to
      acquire properties or other 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;





•
            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;





21


•
            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, 2007.





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
have invested and continue to 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 March 31, 2008, we had direct and indirect
interests in 44 properties. These properties consist of 42 office properties
located throughout the United States, one mixed-use office and retail property
in Toronto, Ontario, and one industrial property in Rio de Janeiro, Brazil. In
addition, we have and may make other real estate investments including, but not
limited to, properties outside of the United States, non-office properties,
mortgage loans and ground leases. Our principal targeted assets are office
properties that have quality construction, desirable locations and quality
tenants. We intend to invest in properties which will be diversified by
location, lease expirations and tenant industries.





In order
to provide capital for these investments, we sold shares to the public through
our initial public offering (the “Initial Offering”), which commenced on
June 18, 2004 and terminated on June 18, 2006 and we continue to sell
common shares through our follow-on public offering of a maximum of
$2.2 billion in common shares (the “Current Offering”). We commenced
the Current Offering on June 19, 2006, and we intend to continue raising
significant amounts of capital through our Current Offering prior to its
termination on June 30, 2008. We expect to commence a follow-on offering on or
about July 1, 2008 (the “Third Offering”), through which we plan to offer a
maximum of $3.5 billion in common shares.




22


The following table
provides summary information regarding the properties in which the
Operating Partnership owned interests as of March 31, 2008:





Direct
      InvestmentsProperty
            
            City
            LeasableSquare
      Feet
            
            
            PercentLeased
            
            
            Our
      Effective
                Ownership(1)321
      North Clark
            Chicago,
      Illinois
            
            885,664
            
            
            99
            %
            
            
            100
            %JPMorgan
      Chase Tower
            Dallas,
      Texas
            
            1,242,800
            
            
            91
            %
            
            
            100
            %Citymark
            Dallas,
      Texas
            
            220,079
            
            
            100
            %
            
            
            100
            %Raytheon/DirectTV
      Buildings
            El
      Segundo, California
            
            550,579
            
            
            100
            %
            
            
            100
            %Watergate
      Tower IV
            Emeryville,
      California
            
            344,433
            
            
            100
            %
            
            
            100
            %2555
      Grand
            Kansas
      City, Missouri
            
            595,607
            
            
            100
            %
            
            
            100
            %One
      Wilshire
            Los
      Angeles, California
            
            661,553
            
            
            99
            %
            
            
            100
            %3
      Huntington Quadrangle
            Melville,
      New York
            
            407,731
            
            
            87
            %
            
            
            100
            %Airport
      Corporate Center
            Miami,
      Florida
            
            1,021,397
            
            
            90
            %
            
            
            100
            %Minneapolis
      Office/Flex Portfolio
            Minneapolis,
      Minnesota
            
            766,240
            
            
            85
            %
            
            
            100
            %3400
      Data Drive
            Rancho
      Cordova, California
            
            149,703
            
            
            100
            %
            
            
            100
            %Daytona
      Buildings
            Redmond,
      Washington
            
            251,313
            
            
            93
            %
            
            
            100
            %Laguna
      Buildings
            Redmond,
      Washington
            
            464,701
            
            
            100
            %
            
            
            100
            %1515
      S Street
            Sacramento,
      California
            
            348,881
            
            
            100
            %
            
            
            100
            %1900
      and 2000 Alameda
            San Mateo,
      California
            
            253,141
            
            
            97
            %
            
            
            100
            %Seattle
      Design Center
            Seattle,
      Washington
            
            390,684
            
            
            86
            %
            
            
            100
            %5th
      and Bell
            Seattle,
      Washington
            
            197,135
            
            
            100
            %
            
            
            100
            %Atrium
      on Bay
            Toronto,
      Ontario
            
            1,070,287
            
            
            96
            %
            
            
            100
            %Total
      for Directly-Owned Properties
            
            9,821,928
            
            
            95
            %Indirect
      InvestmentsJoint VentureDistribution
      Park Rio
            Rio
      de Janeiro, Brazil
            
            693,115
            
            
            100
            %
            
            
            50
            %Core Fund InvestmentsOne
      Atlantic Center
            Atlanta,
      Georgia
            
            1,100,312
            
            
            84
            %
            
            
            23.27
            %The
      Carillon Building
            Charlotte,
      North Carolina
            
            470,726
            
            
            98
            %
            
            
            23.27
            %Charlotte
      Plaza
            Charlotte,
      North Carolina
            
            625,026
            
            
            95
            %
            
            
            23.27
            %One
      North Wacker
            Chicago,
      Illinois
            
            1,373,754
            
            
            98
            %
            
            
            23.27
            %Three
      First National Plaza
            Chicago,
      Illinois
            
            1,419,978
            
            
            94
            %
            
            
            18.62
            %333 West
      Wacker
            Chicago,
      Illinois
            
            844,773
            
            
            92
            %
            
            
            18.57
            %One
      Shell Plaza
            Houston,
      Texas
            
            1,228,160
            
            
            99
            %
            
            
            11.64
            %Two
      Shell Plaza
            Houston,
      Texas
            
            566,982
            
            
            95
            %
            
            
            11.64
            %425
      Lexington Avenue
            New
      York, New York
            
            700,034
            
            
            100
            %
            
            
            11.67
            %499
      Park Avenue
            New
      York, New York
            
            288,722
            
            
            100
            %
            
            
            11.67
            %600
      Lexington Avenue
            New
      York, New York
            
            283,995
            
            
            98
            %
            
            
            11.67
            %Renaissance
      Square
            Phoenix,
      Arizona
            
            965,508
            
            
            93
            %
            
            
            23.27
            %Riverfront
      Plaza
            Richmond,
      Virginia
            
            949,791
            
            
            100
            %
            
            
            23.27
            %Johnson
      Ranch Corporate Center
            Roseville,
      California
            
            179,990
            
            
            72
            %
            
            
            18.57
            %Roseville
      Corporate Center
            Roseville,
      California
            
            111,418
            
            
            94
            %
            
            
            18.57
            %Summit
      at Douglas Ridge
            Roseville,
      California
            
            185,140
            
            
            87
            %
            
            
            18.57
            %Olympus
      Corporate Center
            Roseville,
      California
            
            191,494
            
            
            58
            %
            
            
            18.57
            %Douglas
      Corporate Center
            Roseville,
      California
            
            214,606
            
            
            82
            %
            
            
            18.57
            %Wells
      Fargo Center
            Sacramento,
      California
            
            502,365
            
            
            95
            %
            
            
            18.57
            %525
      B Street
            San Diego,
      California
            
            447,159
            
            
            90
            %
            
            
            23.27
            %The
      KPMG Building
            San Francisco,
      California
            
            379,328
            
            
            100
            %
            
            
            23.27
            %101
      Second Street
            San Francisco,
      California
            
            388,370
            
            
            94
            %
            
            
            23.27
            %720
      Olive Way
            Seattle,
      Washington
            
            300,710
            
            
            93
            %
            
            
            18.57
            %1200
      19th Street
            Washington, D.C.
            
            328,154
            (2)
            
            28
            %
            
            
            11.67
            %Warner
      Center
            Woodland
      Hills, California
            
            808,274
            
            
            96
            %
            
            
            18.57
            %Total
      for Core Fund Properties
            
            14,854,769
            
            
            92
            %Total
      for All Properties
            
            
            25,369,812
            
            
            94
            %


__________




23


(1)
            This
      percentage shows the effective ownership of the Operating Partnership in
      the properties listed. On March 31, 2008, Hines REIT owned a 97.6%
      interest in the Operating Partnership as its sole general partner.
      Affiliates of Hines owned the remaining 2.4% interest in the Operating
      Partnership. As of March 31, 2008, we owned interests in the 25 Core Fund
      investments through our interest in the Core Fund, in which we owned an
      approximate 28.7% non-managing general partner interest as of March 31,
      2008. The Core Fund does not own 100% of these buildings; its ownership
      interest in its buildings ranges from 40.6% to 81.0%. In addition, we
      owned a 50% interest in Distribution Park Rio through a joint venture with
      an affiliate of Hines.(2)
            This
      square footage amount includes three floors which are being added to the
      building and are currently under construction. The construction is
      expected to be completed in 2009.





As of
March 31, 2008, we had primarily invested in institutional-quality office
properties in the United States. 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 have expanded our focus to include other
real estate investments such as our investment in Toronto, Ontario and our
international joint venture investment in Rio de Janeiro, Brazil. We intend to
continue to pursue institutional-quality office properties as well as 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. 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.





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. In addition to the
policies set forth below, please see “Note 2 — Summary of Significant
Accounting Policies” in our unaudited condensed consolidated financial
statements included elsewhere in this Form 10-Q for a description of some
of these policies. 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. Under different conditions or
assumptions, materially different amounts could be reported related to the
accounting policies described below. 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.





Investment
Property and Lease Intangibles





Real
estate assets that we own directly are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method. The
estimated useful lives for computing depreciation are generally 10 years
for furniture and fixtures, 15-20 years for electrical and mechanical
installations and 40 years for buildings. Major replacements that extend
the useful life of the assets are capitalized. Maintenance and repair costs are
expensed as incurred.





Real
estate assets are reviewed for impairment 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. Such carrying amount would be adjusted, if
necessary, to estimated fair values to reflect impairment in the value of the
asset. At March 31, 2008, we believe no such impairment has
occurred.





Acquisitions
of properties are accounted for utilizing the purchase method and, accordingly,
the results of operations of acquired properties are included in our results of
operations from their respective dates of acquisition. Estimates of future cash
flows and other valuation techniques that we believe are similar to those used
by independent appraisers are used to allocate the purchase price of acquired
property between land, buildings and improvements, equipment and identifiable
intangible assets and liabilities such as amounts related to in-place leases,
acquired above- and below-market leases, tenant relationships, asset retirement
obligations and mortgage notes payable. Initial valuations are subject to change
until such information is finalized, no later than 12 months from the
acquisition date.





The
estimated fair value of acquired in-place leases are the costs we would have
incurred to lease the properties to the occupancy level of the properties at the
date of acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be incurred to lease
the properties to such occupancy levels. Additionally, we evaluate the time
period over which such occupancy levels would be achieved. Such
evaluation includes an estimate of the net market-based rental revenues and
net operating costs (primarily consisting of real estate taxes, insurance and
utilities) that would be incurred during the lease-up period. Acquired in-place
leases as of the date of acquisition are amortized over the remaining lease
terms.





Acquired
above-and below-market lease values are recorded based on the present value
(using an interest rate that reflects the risks associated with the lease
acquired) of the difference between the contractual amounts to be paid pursuant
to the in-place leases and management’s estimate of fair market value lease
rates for the corresponding in-place leases. The capitalized above- and
below-market lease values are amortized as adjustments to rental revenue over
the remaining terms of the respective leases. Should a tenant terminate its
lease, the unamortized portion of the in-place lease value is charged to
amortization expense and the unamortized portion of out-of-market lease value is
charged to rental revenue.





24


Acquired
above- and below-market ground lease values are recorded based on the difference
between the present value (using an interest rate that reflects the risks
associated with the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of fair market value of
land under the ground leases. The capitalized above- and below-market lease
values are amortized as adjustments to ground lease expense over the lease
term.





We
estimate the fair value of assumed mortgage notes payable based upon indications
of current market pricing for similar types of debt with similar maturities.
Assumed mortgage notes payable are initially recorded at their estimated fair
value as of the assumption date, and the difference between such estimated fair
value and the note’s outstanding principal balance is amortized over the life of
the mortgage note payable. 
 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.





We
consider a number of different factors to evaluate whether we or the
lessee is the owner of the tenant improvements for accounting purposes.
These factors include: 1) whether the lease stipulates how and on what a
tenant improvement allowance may be spent; 2) whether the tenant or
landlord retains legal title to the improvements; 3) the uniqueness of the
improvements; 4) the expected economic life of the tenant improvements
relative to the term of the lease; and 5) who constructs or directs the
construction of the improvements.





The
determination of who owns the tenant improvements for accounting purposes is
subject to significant judgment. In making that determination, we consider all
of the above factors. No one factor, however, necessarily establishes any
determination.





Organizational
and Offering Costs





Certain
organizational and offering costs related to our public offerings have been paid
by our Advisor on our behalf. Organizational and offering costs incurred by our
Advisor have been analyzed and segregated between those which are organizational
in nature, those which are offering-related salaries and other general and
administrative expenses of the Advisor and its affiliates, and those which
qualify as offering expenses in accordance with Staff Accounting Bulletin
(“SAB”) Topic 5.A, Miscellaneous Accounting —
Expenses of Offering. Organizational costs are expensed as incurred in
accordance with Statement of Position 98-5, Reporting on the Costs of Start-up
Activities. Offering-related salaries and other general and
administrative expenses of the Advisor and its affiliates are expensed as
incurred, and third-party offering expenses are taken as a reduction against the
net proceeds of the offerings within additional paid-in capital in accordance
with SAB Topic 5.A. In addition to the offering costs to be paid to the
Advisor, selling commissions and dealer manager fees are paid to Hines Real
Estate Securities, Inc. (“HRES” or the “Dealer Manager”). Such costs are netted
against the net offering proceeds within additional paid-in capital as
well.





We
commenced the Current Offering on June 19, 2006, and on June 26, 2006,
we entered into a new advisory agreement with the Advisor (the “Advisory
Agreement”). The Advisory Agreement was renewed in June 2007 for an additional
one-year term. Certain organizational and offering costs associated with the
Current Offering have been paid by the Advisor on our behalf. Pursuant to the
terms of our current Advisory Agreement, we are obligated to reimburse the
Advisor for the actual organizational and offering costs incurred, so long as
such costs, together with selling commissions and dealer-manger fees, do not
exceed 15% of gross proceeds from the Current Offering.





Our
Current Offering will terminate on June 30, 2008, pursuant to the terms of
the offering. Accordingly, we expect to commence the Third Offering on or about
July 1, 2008. Pursuant to the anticipated terms of the Third Offering, we are
not expected to be obligated to reimburse the Advisor for organizational and
offering costs related to the Third Offering. Additionally, the Advisor is not a
shareholder of Hines REIT. Accordingly, no amounts of organizational and
offering costs incurred by the Advisor in connection with the Third Offering
during the three months ended March 31, 2008 have been recorded in the
accompanying consolidated financial statements.





Revenue
Recognition and Valuation of Receivables





We
recognize minimum rent revenues on a straight-line basis over the terms of
tenant leases, including rent holidays, if any. Revenues associated with tenant
reimbursements are recognized in the period in which the expenses are incurred
based upon the tenant’s lease provision. Revenues relating to lease termination
fees are recognized at the time that the tenant’s right to occupy the space is
terminated and when we have satisfied all obligations under the lease. To the
extent our leases provide for rental increases at specified intervals, we will
record a receivable for rent not yet due under the lease terms. Accordingly, our
management must determine, in its judgment, to what extent the unbilled rent
receivable applicable to each specific tenant is collectible. We review unbilled
rent receivables on a quarterly basis and take into consideration 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. In the event that the collectability of unbilled
rent with respect to any given tenant is in doubt, we would be required to
record an increase in our allowance for doubtful accounts or record a direct
write-off of the specific rent receivable, which would have an adverse effect on
our net income for the year in which the reserve is increased or the direct
writeoff is recorded and would decrease our total assets and shareholders’
equity.





25


Derivative
Instruments





During
the years ended December 31, 2007 and 2006, we entered into several forward
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. We have not designated any of these contracts as
cash flow hedges for accounting purposes. The valuation of the interest rate
swaps is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves. The fair values of interest rate swaps are determined using the
market standard methodology of netting the discounted future fixed cash receipts
(or payments) and the discounted expected variable cash payments (or receipts).
The variable cash payments (or receipts) are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate
curves.





The
interest rate swaps have been recorded at their estimated fair value in the
accompanying consolidated balance sheets as of March 31, 2008 and
December 31, 2007. Changes
in the fair value of the interest rate swaps have been recorded in the
accompanying condensed consolidated statements of operations for the three
months ended March 31, 2008 and 2007.We mark
the interest rate swaps to their estimated fair value as of each balance sheet
date, and the changes in fair value are reflected in our consolidated statements
of operations.




We
entered into a foreign currency contract in February 2007 related to the
acquisition of Atrium on Bay, a mixed-use office and retail property located in
Toronto, Ontario. The contract was entered into as an economic hedge against the
variability of the foreign currency exchange rate related to our equity
investment and was settled at the close of this acquisition on February 26,
2007.





Treatment of Management
Compensation, Expense Reimbursements and Operating Partnership Participation
Interest





We
outsource management of our operations to the Advisor and certain other
affiliates of Hines. Fees related to these services are accounted for based on
the nature of the service and the relevant accounting literature. Fees for
services performed that represent period costs of the Company are expensed as
incurred. Such fees include acquisition fees and asset management fees paid to
the Advisor and property management fees paid to Hines. In addition to cash
payments for acquisition fees and asset management fees paid to the Advisor, an
affiliate of the Advisor has received a participation interest, which represents
a profits interest in the Operating Partnership related to these services. As
the percentage interest of the participation interest is adjusted, the value
attributable to such adjustment is charged against earnings, and the
participation interest will be recorded as a liability until it is repurchased
for cash or converted into common shares of the Company. The conversion and
redemption features of the participation interest are accounted for in
accordance with the guidance in Emerging Issues Task Force (“EITF”) publication
95-7, Implementation Issues
Related to the Treatment of Minority Interests in Certain Real Estate Investment
Trusts. Redemptions for cash will be accounted for as a reduction to the
liability discussed above to the extent of such liability, with any additional
amounts recorded as a reduction to equity. Conversions into common shares of the
Company will be recorded as an increase to the outstanding common shares and
additional paid-in capital accounts and a corresponding reduction in the
liability discussed above. Redemptions and conversions of the participation
interest will result in a corresponding reduction in the percentage attributable
to the participation interest and will have no impact on the calculation of
subsequent increases in the participation interest.





Hines may
perform construction management services for us for both re-development
activities and tenant construction. These fees are considered incremental to the
construction effort and will be capitalized as incurred in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 67, Accounting for Costs and
Initial Rental Operations of
Real Estate Projects.  These costs will be capitalized to the
associated real estate project as incurred. Costs related to tenant construction
will be depreciated over the estimated useful life. Costs related to
redevelopment activities will be depreciated over the estimated useful life of
the associated project. Leasing activities are generally performed by Hines on
our behalf. Leasing fees are capitalized and amortized over the life of the
related lease in accordance with the provisions of SFAS No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.





Income
Taxes





We
elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code beginning with our taxable year ended December 31, 2004.
In addition, we hold an investment in the Core Fund, which has invested in
properties through a structure that includes entities that have elected to be
taxed as REITs. In order to qualify as a REIT, an entity must meet certain
organizational and operational requirements, including a requirement to
distribute at least 90% of its annual ordinary taxable income to shareholders.
REITs are generally not subject to federal income tax on taxable income that
they distribute to their shareholders. It is our intention to adhere to these
requirements and maintain our REIT status, as well as to ensure that the
applicable entities in the Core Fund structure also maintain their REIT status.
As such, no provision for U.S. federal income taxes has been included in
the accompanying consolidated financial statements. As a REIT and indirectly
through our investment in the Core Fund, we still may be subject to certain
state, local and foreign taxes on our income and property and to federal income
and excise taxes on our undistributed taxable income. In addition, we are and
will indirectly be required to pay federal and state income tax on the net
taxable income, if any, from the activities conducted through the taxable REIT
subsidiary of the Core Fund.





26


Due to
the acquisition of Atrium on Bay, an office property located in Toronto,
Ontario, we have recorded a provision for Canadian income taxes of approximately
$506,000 and $66,000, respectively, for the three months ended March 31, 2008
and 2007 in accordance with Canadian tax laws and regulations.





As of
March 31, 2008, we had no significant temporary differences, tax credits, or net
operating loss carry-forwards.




International
Operations





The
Canadian dollar is the functional currency of our subsidiaries operating in
Toronto, Ontario and the Brazilian real is the functional currency of our
subsidiary operating in Rio de Janeiro, Brazil. Our foreign subsidiaries have
translated their financial statements into U.S. dollars for reporting
purposes. Assets and liabilities are translated at the exchange rate in effect
as of the balance sheet date. We translate income statement accounts using the
average exchange rate for the period and significant nonrecurring transactions
using the rate on the transaction date. These gains or losses are included in
accumulated other comprehensive income as a separate component of shareholders’
equity.





Our
international subsidiaries may have transactions denominated in currencies other
than their functional currency. In these instances, assets and liabilities are
remeasured into the functional currency at the exchange rate in effect at the
end of the period, and income statement accounts are remeasured at the average
exchange rate for the period. These gains or losses are included in our results
of operations.





Our
subsidiaries also record gains or losses in the income statement when a
transaction with a third party, denominated in a currency other than the
entity’s functional currency, is settled and the functional currency cash flows
realized are more or less than expected based upon the exchange rate in effect
when the transaction was initiated.




Financial
Condition, Liquidity and Capital Resources





General





Our
principal cash requirements are for property acquisitions, property-level
operating expenses, capital improvements, debt service, organizational and
offering expenses, corporate-level general and administrative expenses and
distributions. 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.





For the
three months ended March 31, 2008, our cash needs for acquisitions 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.





We raised
significant funds from our Current Offering during 2007 and for the three months
ended March 31, 2008, and we expect to continue to raise significant funds from
our Current Offering and potential future follow-on offerings. We intend to
continue making real estate investments with these funds and funds available to
us under our credit facilities and other permanent debt. For mortgage debt
expiring in the near term, we intend to refinance such debt with new mortgage
financing or our revolving credit facility. We also intend to continue to pay
distributions to our shareholders on a quarterly basis. Debt capital has
recently become more expensive and less available as a result of escalating
defaults in residential sub-prime mortgages and the current state of the
economy, and future potential weakening of the economy could negatively impact
office fundamentals, potentially resulting in lower occupancy, rental rates and
values of our assets. Should
the reduced availability of debt and/or the increased cost of borrowings
continue, either by increases in the index rates or by increases in lender
spreads, we will need to consider such factors in the evaluation of future
acquisitions.




Additionally,
we have experienced, and may continue to experience, delays between raising
capital and acquiring real estate investments. We temporarily invest unused
proceeds from our public offering in investments that typically yield lower
returns when compared to our real estate investments, which may put downward
pressure on our distributions 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.





27


Net
cash provided by operating activities was approximately $402,000 and $1.4
million for the three months ended March 31, 2008 and 2007, respectively. Our
operating net cash flows are primarily the result of the net loss for the period
partially offset by non-cash components of our net loss such as depreciation and
amortization, equity in losses of the Core Fund, accrued costs of our Current
Offering, loss on derivative instruments, and changes in other asset and
liability accounts.




Cash
Flows from Investing Activities





During
the three months ended March 31, 2008, we had cash outflows of $208.5 million
primarily related to our acquisition of two properties
and their related lease intangibles. During the three months ended March 31,
2007, we made payments of $321.6 million related to our acquisitions of two
properties.




As of March 31, 2008, we owned an approximate 28.7% non-managing general
partner interest in the Core Fund, compared to the approximate
34.0% interest we owned at March 31, 2007. During the three months
ended March 31, 2008 and  2007, we received distributions from
the Core Fund totaling $6.9 million and $5.9 million,
respectively.


As of March 31, 2008, we owned an approximate 50% interest in HCB II River LLC,
a joint venture with an affiliate of Hines. During the three months ended
March 31, 2008, we received distributions from HCB II River LLC totaling
approximately $763,000, of which approximately $327,000 was recorded in cash
flows from investing activities as it exceeded our equity in earnings of the
joint venture.




During the three months ended March 31, 2008, we had cash outflows in other
assets of $30.0 million as a result of an earnest money deposit paid in
connection with the acquisition of Williams Tower on May 1, 2008. No such
deposits were paid and outstanding during the three months ended March 31,
2007.




During the three months ended March 31, 2008 and 2007, we had increases in
restricted cash of approximately $3.3 million and $3.1 million,
respectively, related to certain escrows required by our mortgage
agreements.




During the three months ended March 31, 2008 and 2007, respectively, we had cash
outflows of approximately $372,000 and $3.8 million, net of receipts, for master
leases entered into in connection with certain of our acquisitions.





Cash
Flows from Financing Activities





Equity
Offerings





We offer
shares of our common stock for sale to the public, which provides us with the
ability to raise capital on a continual basis. On June 18,
2004,  we commenced our Initial Offering. We raised $527.5 million in
proceeds through the Initial Offering, which expired on June 18, 2006.
On June 19, 2006, we commenced our Current Offering, pursuant to which we
are offering a maximum of $2.2 billion in common shares.  The
Current Offering is expected to close June 30, 2008 and we expect to commence
our Third Offering on or about July 1, 2008.





The
following table summarizes the activity from our Current Offering (in
millions):








Period
            
            Current Public Offering# of Shares
            
            
            ProceedsJune
      19, 2006 to December 31, 2006
            
            
            27.3
            (a)
            
            $
            282.7
            (a)Year
      ended December 31, 2007
            
            
            80.3
            (b)
            
            
            834.8
            (b)Three
      Months Ended March 31, 2008
            
            
            11.9
            (c)
            
            
            124.8
            (c)Total
            
            
            119.5
            
            
            $
            1,242.3


__________





(a)
            Amounts
      include $9.3 million of gross proceeds relating to approximately
      944,000 shares issued under the Company’s dividend reinvestment
      plan.(b)
            Amounts
      include $37.4 million of gross proceeds relating to approximately 3.8
      million shares issued under the Company’s dividend reinvestment
      plan.





(c)
            Amounts
      include $13.6 million of gross proceeds relating to approximately 1.4
      million shares issued under the Company’s dividend reinvestment
      plan.




As of
March 31, 2008, $818.8 million in common shares remained available for sale
pursuant to our Current Offering, exclusive of $139.6 million in common
shares available under our dividend reinvestment plan. From April 1 through
May 5, 2008, we received gross offering proceeds of approximately
$61.0 million from the sale of 5.8 million common shares, including
approximately $14.3 million relating to 1.4 million shares sold under
our dividend reinvestment plan. As of May 5, 2008, $771.4 million in common
shares remained available for sale to the public pursuant to the Current
Offering, exclusive of $125.3 million in common shares available under our
dividend reinvestment plan.





28


Payment
of Offering and Other Costs and Expenses





In
addition to making investments in accordance with our investment objectives, we
use our capital resources to pay our Dealer Manager and our Advisor for services
they provide to us during the various phases of our organization and operations.
During the offering stage, we pay the Dealer Manager selling commissions and
dealer manager fees, and we reimburse the Advisor for organizational and
offering costs.





For the
three months ended March 31, 2008 and 2007, we paid the Dealer Manager selling
commissions of $7.0 million and $10.9 million, respectively, and we paid
dealer manager fees of $2.5 million and $3.6 million, respectively.
All such selling commissions and a portion of such dealer manager fees were
reallowed by HRES to participating broker dealers for their services in selling
our shares. The amount of commissions and dealer-manager fees we paid
during the three months ended March 31, 2008 decreased, as compared to the three
months ended March 31, 2007, as a result of a decrease in capital raised through
our Current Offering during the period.





During
the three months ended March 31, 2008 and 2007, the Advisor incurred
organizational and internal offering costs related to the Current Offering
totaling approximately $1.9 million and $2.4 million, respectively, and
third-party offering costs of approximately $1.6 million and $1.7 million,
respectively. During the three months ended March 31, 2008 we made payments
totaling $3.9 million for Current Offering organizational and offering
costs, of which $3.8 million were reimbursements made to our Advisor. During the
three months ended March 31, 2007, we made payments of $6.0 million to our
Advisor for reimbursement of Current Offering organizational and offering costs.




See
“Critical Accounting Policies — Organizational and Offering Costs” above
for additional information.





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.





Subject
to market conditions and other factors we may consider, we expect that our debt
financing will generally be in the range of approximately 40 – 60% of
management’s estimate of the aggregate value of our real estate investments. The
amount of debt we place on an individual property, or the amount of debt
incurred by an individual entity in which we invest, however, may be less than
40% or more than 60% of the value of such property or the value of the assets
owed by such entity, depending on market conditions and other factors. In
addition, depending on market conditions and other factors, we may choose not to
use debt financing for our operations or to acquire properties. Our articles of
incorporation limit our borrowing to 300% of our net assets (equivalent to 75%
of the cost of our assets) unless any excess borrowing is approved by a majority
of our independent directors and is disclosed to our shareholders in our next
quarterly report. As of March 31, 2008 and December 31, 2007, our debt financing
was approximately 52% and 54%, respectively, of the aggregate value of our real
estate investments (including our pro rata share of the Core Fund’s real estate
assets and related debt).





29


The
following table includes all of our outstanding notes payable as of March 31,
2008 and December 31, 2007 (in thousands, except interest rates):





Description
            Origination Date
            Maturity Date
            
            Interest Rate
            
            
            Principal
      Outstanding at
              March
      31,2008
            
            
            Principal
      Outstanding at December 31,2007SECURED
      MORTGAGE DEBTWells
      Fargo Bank, N.A. — Airport Corporate Center
            1/31/2006
            3/11/2009
            
            
            4.775
            %
            
            
            90,243
            (4)
            
            
            90,039Metropolitan
      Life Insurance Company — 1515 S. Street
            4/18/2006
            5/1/2011
            
            
            5.680
            %
            
            
            45,000
            
            
            
            45,000Capmark
      Finance, Inc. — Atrium on Bay
            2/26/2007
            2/26/2017
            
            
            5.330
            %
            
            
            185,877
            (3)
            
            
            193,686The
      Prudential Insurance Company ofAmerica
      — 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
            %
            
            
            52,937
            (6)
            
            
            —HSH
      POOLED MORTGAGE FACILITYHSH
      Nordbank — Citymark, 321 North Clark, 1900 and 2000
      Alameda
            8/1/2006
            8/1/2016
            
            
            5.8575
            %
      (2)
            
            
            185,000
            
            
            
            185,000HSH
      Nordbank — 3400 Data Drive, Watergate Tower IV
            1/23/2007
            1/12/2017
            
            
            5.2505
            %
      (2)
            
            
            98,000
            
            
            
            98,000HSH
      Nordbank — Daytona and Laguna Buildings
            5/2/2007
            5/2/2017
            
            
            5.3550
            %
      (2)
            
            
            119,000
            
            
            
            119,000HSH
      Nordbank — 3 Huntington Quadrangle
            7/19/2007
            7/19/2017
            
            
            5.9800
            %
      (2)
            
            
            48,000
            
            
            
            48,000HSH
      Nordbank — Seattle Design Center / 5th
      and Bell
            8/14/2007
            8/14/2017
            
            
            6.0300
            %
      (2)
            
            
            70,000
            
            
            
            70,000MET
      LIFE SECURED MORTGAGE FACILITYMet
      Life — JPMorgan Chase Tower/Minneapolis
            12/20/2007
            12/20/2012
            
            
            5.70
            %
            
            
            205,000
            
            
            
            205,000Office/Flex
      PortfolioOTHER
      NOTES PAYABLEKey
      Bank National Association — Revolving Credit Facility
            9/9/2005
            10/31/2009
            
            Variable
            (1)
            
            
            59,000
            
            
            
            —Atrium
      Note Payable
            9/1/2004
            10/1/2011
            
            
            7.390
            %
            
            
            3,236
            (5)
            
            
            3,406$
            1,320,793
            
            
            $
            1,216,631


__________





(1)
            The
      revolving credit facility with KeyBank National Association (“KeyBank”)
      provides a maximum aggregate borrowing capacity of $250.0 million,
      which may be increased to $350.0 million upon our election.
      Borrowings under the revolving credit facility are at variable interest
      rates based on LIBOR plus 125 to 200 basis points based on prescribed
      leverage ratios. The weighted average interest rate on outstanding
      borrowings under this facility was 4.022% as of March 31,
      2008.(2)
            We
      entered into an interest rate swap agreement which effectively fixed the
      interest rate of this borrowing at the specified rate.(3)
            We
      entered into mortgage financing in connection with our acquisition of
      Atrium on Bay. The mortgage agreement provides for an interest only loan
      with a principal amount of $190.0 million Canadian dollars as of March 31,
      2008. This amount was translated to U.S. dollars at a rate of $0.9783
      as of March 31, 2008.(4)
            This
      mortgage is an interest-only loan in the principal amount of $91.0
      million, which we assumed in connection with our acquisition of Airport
      Corporate Center. At the time of acquisition, the fair value of this
      mortgage was estimated to be $88.5 million, resulting in a premium of $2.5
      million. The premium is being amortized over the term of the
      mortgage.(5)
            Note
      with 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 $0.9783 as of March 31, 2008.(6)
            We
      assumed a mortgage note in the principal amount of $54.2 million in
      connection with our acquisition of the Raytheon/DirecTV Buildings. The
      mortgage agreement provides for monthly payments of principal and
      interest. This mortgage agreement contains customary events of default,
      with corresponding grace periods, including payment defaults,
      cross-defaults to other agreements and bankruptcy-related defaults, and
      customary covenants, including limitations on liens and indebtedness and
      maintenance of certain financial ratios. At the time of acquisition, the
      fair value of this mortgage was estimated to be $52.9 million, resulting
      in a premium of $1.3 million. The premium is being amortized over the term
      of the mortgage.





30


On April
24, 2008, we borrowed $86.0 million from the New York State Teachers’ Retirement
System secured by 2555 Grand. See “Subsequent Events” below for further
discussion.




We are
contractually obligated to make principal payments on our outstanding notes
payable for each of the period from April 1, 2008 through December 31, 2008 and
for the years ended December 31, 2009 through December 31, 2013 and for the
period thereafter of approximately $114,000, $150.1 million, $157,000, $47.8
million, $159.5 million and $965.0 million.





We have
complied with all covenants of our various debt facilities as of March 31,
2008.





Advances
from Affiliates





Certain
costs and expenses associated with our organization and public offerings have
been paid by our Advisor on our behalf. See “Financial Condition, Liquidity and
Capital Resources — Payment of Offering Costs and Other Expenses” above for
a discussion of these advances and our repayment of the same.





To the
extent that our operating expenses in any four consecutive fiscal quarters
exceed the greater of 2% of average invested assets or 25% of Net Income (as
defined in our Articles of Incorporation), our Advisor is required to reimburse
us the amount by which the total operating expenses paid or incurred exceed the
greater of the 2% or 25% threshold, unless our independent directors determine
that such excess was justified. For the quarter ended March 31, 2008, we did not
exceed this limitation.





31


How
Management Evaluates Distributions to our Shareholders and Minority
Interests





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 and intend 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 March 31, 2008, we declared distributions (as
authorized by our board of directors) equal to $0.00170959 per share, per
day. 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.




Aggregate
distributions declared to our shareholders and minority interests related to the
three months ended March 31, 2008 were $26.3 million. The amount of our
distributions is based on funds generated by the operations of our real estate
investments. The table below summarizes the funds generated by the operations of
our real estate investments for the three months ended March 31, 2008, including
items that management considers in evaluating the performance of our real estate
investments and determining the amount of distributions to shareholders and
minority interests, and a reconciliation of such amount to our net loss for the
period (in thousands):





Revenues
            
            $
            70,134ExpensesProperty
      operating expenses, real property taxes and property management
      fees
            
            
            (29,632
            )Interest
      expense, net of interest income
            
            
            (16,803
            )General
      and administrative expenses
            
            
            (1,280
            )Cash
      asset management fees
            
            
            (2,758
            )OtherMaster
      lease rents (1)
            
            
            3,463Non-cash
      components of revenues and expenses (2)
            
            
            (4,578
            )Equity
      in losses of unconsolidated entities as adjusted for non-cash components
      (3)
            
            
            7,839Provision
      for income taxes
            
            
            (515
            )Total
            
            
            25,870Reconciliation
      to Net Loss:Depreciation
      and amortization (4)
            
            
            (25,381
            )Loss
      on derivative instruments and foreign currency transactions
      (4)
            
            
            (27,447
            )Organizational
      and offering expenses (5)
            
            
            (1,918
            )Acquisition
      fees (5)
            
            
            (1,447
            )Participation
      Interest expense (6)
            
            
            (4,205
            )Income
      allocated to minority interests
            
            
            (643
            )Other
      non-cash components of net loss (7)
            
            
            (8,659
            )Net
      Loss
            
            $
            (43,830
            )





1)
            Includes
      master lease rent 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
      determining the amount of distributions to our shareholders and minority
      interests.


2)
            Includes
      non-cash components of revenue such as straight-line rent adjustments of
      approximately $(3.9) million, amortization of lease incentives of
      approximately $773,000 and out-of-market lease amortization of
      approximately $(2.0) million as well as non-cash components of expenses
      such as amortization of deferred financing costs of approximately $379,000
      and other non-cash components of approximately
  $250,000.


3)
            Represents
      equity in losses of our unconsolidated entities of approximately $1.9
      million offset by approximately $9.7 million of depreciation and
      amortization and other non-cash components such as those described in Note
      2 above.


4)
            These
      amounts represent non-cash components of net loss that we do not consider
      in determining the amount of distributions to our shareholders and
      minority interests.


5)
            Organizational
      and offering expenses and acquisition fees paid to our Advisor are
      expensed in our condensed consolidated statement of operations. We fund
      such costs with proceeds from our offering and acquisition-related
      indebtedness and do not consider these expenses in the evaluation of the
      performance of our real estate investments and in determining the amount
      of distributions to our shareholders and minority
    interests.


6)
            This
      represents the non-cash component of the acquisition and asset management
      fee, which we do not consider in determining the amount of distributions
      to our shareholders and minority interests. See “Critical Accounting
      Policies – Treatment of Management Compensation, Expense Reimbursements
      and Operating Partnership Participation Interest” for additional
      information.


7)
            This
      includes the master lease rents as described in Note 1 above, the non-cash
      components of revenues and expenses described in Note 2 above as well as
      the non-cash components adjusting the equity in losses of our
      unconsolidated entities as described in Note 3
  above.





32


In
conjunction with our condensed consolidated financial statements, we believe
this analysis provides our shareholders with a clear description of how our
management evaluates the performance of our real estate investments and
determines the amount of distributions to our shareholders and minority
interests.  For the three months ended March, 31, 2008, funds
generated from the operations of our real estate investments
were approximately $467,000 less than our distributions; therefore, we used
operating cash flows in excess of distributions from prior periods to fund this
amount.





Results
of Operations




Property-level
      Operating Results




We owned
18 properties directly that were 95% leased as of March 31, 2008 compared to 10
properties that were 93% leased as of March 31, 2007. The following table
presents the property-level revenues and expenses for the three months ended
March 31, 2008, as compared to the same period in 2007. Same store
properties include all properties owned as of January 1, 2007 as well as the
Laguna Buildings, which were acquired on January 3, 2007. Revenues and expenses
for properties acquired after January 3, 2007 are included in “Recent
Acquisitions.” All amounts are in thousands, except for
percentages:





Three
      Months Ended March 31,
            
            Change2008
            
            2007
            
            $
            
            %Property
      revenuesSame
      store properties
            $
            28,339
            
            $
            27,733
            
            $
            606
            
            2.2%Recent
      acquisitions
            
            41,795
            
            
            2,942
            
            
            38,853
            
            1,320.6%Total
      property revenues
            $
            70,134
            
            $
            30,675
            
            $
            39,459
            
            128.6%Property
      expenses (1)Same
      store properties
            $
            21,426
            
            $
            21,423
            
            $
            3
            
            0.0%Recent
      acquisitions
            
            33,587
            
            
            2,704
            
            
            30,883
            
            1,142.1%Total property
      expenses
            $
            55,013
            
            $
            24,127
            
            $
            30,886
            
            128.0%





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





As
indicated above, revenues and expenses from our same-store properties remained
fairly constant between both periods presented. Therefore, increases in total
revenues and property-level expenses between the periods are due to acquisitions
consummated after January 3, 2007. We expect to continue raising capital through
our public offerings and to utilize these proceeds in the acquisitions of
additional properties. Therefore, our results of operations for the three
months ended March 31, 2008 are not indicative of what we expect our results of
operations will be in future periods as we expect that our operating revenues
and expenses will continue to increase as a result of (i) owning the real
estate investments we acquired during the last 12 months for an entire
period, and (ii) our future real estate investments, which we expect to be
substantial.





Our
Interest in the Core Fund





As of
March 31, 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. By
comparison, we owned a 34.0% interest in the Core Fund as of March 31, 2007,
which held interests in 15 properties that were 94% leased.





Our
equity in losses related to our investment in the Core Fund for the three months
ended March 31, 2008 and 2007 was $2.4 million and $1.1 million, respectively.
The increase is due to the increase in the net loss of the Core Fund, which
increased to $7.2 million from $3.2 million.




Our
Interest in HCB II River LLC





As of
March 31, 2008, we owned a 50.0% non-managing interest in HCB II River LLC.
Our equity in earnings related to our investment in HCB II River LLC for the
quarter ended March 31, 2008 was approximately $436,000. For the quarter
ended March 31, 2008, HCB II River LLC had net income of approximately
$849,000 on revenues of $1.9 million.




Asset
Management and Acquisition Fees





Asset
management fees earned by our advisor for the three months ended March 31, 2008
and 2007 were $5.5 million and $2.9 million, respectively. The increase in
asset management fees reflects the fact that we have a larger portfolio of
assets under management. Acquisition fees for the three months ended March 31,
2008 and 2007 were $2.9 million and $3.3 million, respectively. The
decrease in acquisition fees is the result of a lower aggregated purchase price
of assets acquired during the three months ended March 31, 2008 compared to that
of the three months ended March 31, 2007.





33


These
amounts include both the cash portion of the fees payable to our Advisor as well
as the corresponding increase in the Participation Interest. See
“Note 6 — Related Party Transactions” in our unaudited condensed
consolidated financial statements included elsewhere in this Form 10-Q for
a description of the Participation Interest.




General
and Administrative Expenses





General
and administrative expenses were approximately $1.3 million and $842,000,
respectively, for the three months ended March 31, 2008 and 2007. These costs
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 and may increase in the future as we
continue to raise capital and make additional real estate investments. The
increases in general and administrative expenses during the periods are
primarily due to increased costs of shareholder communications and audit fees as
the Company’s activities and shareholder base continue to grow as well as
additional costs related to compliance with the Sarbanes-Oxley Act of
2002.





Gain/Loss
on Derivative Instruments





During
the years ended December 31, 2007 and 2006, we entered into several forward
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 our variable interest rate
borrowings with HSH Nordbank. 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 March 31, 2008 and
December 31, 2007. The loss resulting from the decrease in the fair value
of the interest rate swaps for the three months ended March 31, 2008 of
$27.4 million has been recorded in loss on derivative instruments, net in
the consolidated statements of operations. The gain on derivative instruments
for the three months ended March 31, 2007 of approximately $639,000 included a
loss of approximately $300,000 resulting from a $66,000 gain on the fair value
of the interest rate swaps, fees of approximately $366,000 incurred upon
entering into these swap transactions and a gain of approximately $939,000
resulting from the settlement of a foreign currency contract. We will mark the
interest rate swap contracts to their estimated fair value as of each balance
sheet date, and the changes in fair value will be reflected in the condensed
consolidated statements of operations.





In
addition, on February 8, 2007, we entered into a foreign currency contract
related to the acquisition of Atrium on Bay, an office property located in
Toronto, Ontario. The contract was entered into as an economic hedge against the
variability of the foreign currency exchange rate related to our equity
investment and was settled at the close of this acquisition on February 26,
2007, as described above.





Gain
on Foreign Currency Transactions





During
the three months ended March 31, 2007, certain of our subsidiaries which own
Atrium on Bay, our property located in Toronto, Ontario, had transactions
denominated in currencies other than their functional currency (CAD). In these
instances, non-monetary assets and liabilities are reflected at the historical
exchange rate, monetary assets and liabilities are remeasured into the
functional currency at the exchange rate in effect at the end of the period, and
income statement accounts are remeasured at the average exchange rate for the
period. We recorded a loss of approximately $2,000 and a gain of approximately
$134,000 in the accompanying condensed consolidated statement of operations for
the three months ended March 31, 2008 and 2007, respectively, as a result
of such foreign currency transactions.





Interest
Expense





Interest
expense was $18.1 million and $9.4 million, respectively, for the three
months ended March 31, 2008 and 2007. The increase in interest expense during
the periods is primarily due to increased borrowings used to fund our
acquisitions of directly-owned properties. Average debt outstanding during the
three months ended March 31, 2008 and 2007 was $1.3 billion and $585.4 million,
respectively.





Interest
Income





Interest
income was approximately $1.2 million and $401,000, respectively, for the three
months ended March 31, 2008 and 2007. The increases in interest income are
primarily due to increased cash we held in short-term investments during delays
between raising capital and acquiring real estate investments. Average cash on
hand was $102.2 million during the three months ended March 31, 2008, up from
$36.7 million during the three months ended March 31, 2007.




Income
Tax





The
provision for income taxes for the three months ended March 31, 2008 and 2007
was approximately $515,000 and $66,000, respectively, and was primarily related
to our property in Toronto, Ontario, which we acquired during February
2007.




Income Allocated to Minority Interests





As of
March 31, 2008 and 2007, Hines REIT owned a 97.6% and a 97.3% interest,
respectively, in the Operating Partnership, and affiliates of Hines owned the
remaining 2.4% and 2.7% interests, respectively. We allocated income of
approximately $643,000 and $69,000 to minority interests for the three months
ended March 31, 2008 and  2007, respectively.





34


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, construction management fees, reimbursement of
organizational and offering costs, and reimbursement of certain operating costs.
See “Note 6 — Related Party Transactions” in our unaudited condensed
consolidated financial statements included elsewhere in this Form 10-Q for
a discussion of the various related-party transactions, agreements and
fees.





Off-Balance
Sheet Arrangements





As of
March 31, 2008 and December 31, 2007, 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





Williams Tower





On May 1,
2008, we acquired Williams Tower, a 64-story office building located in the
Galleria/West Loop submarket of Houston, Texas. The building consists of
approximately 1.5 million square feet of rentable area that is
approximately 94% leased. The contract purchase price for Williams Tower
was $271.5 million, exclusive of transaction costs, financing fees and working
capital reserves.





We
entered into a rate-lock agreement with the New York State Teachers’ Retirement
System (“NYSTRS”) related to a $165.0 million interest-only mortgage loan that
will be secured by the mortgage and related assignments and security interests
in Williams Tower. We expect to close on this financing on or about May 23,
2008.




4050/4055Corporate Drive





On April
21, 2008, we entered into a contract to acquire 4050 and 4055 Corporate Drive
(“Corporate Drive”), a two-building industrial complex located in the
DFW Trade Center submarket of Dallas, Texas. The buildings consist of
643,429 square feet of rentable area that is 100% leased. The contract
purchase price of Corporate Drive is expected to be $42.8 million, exclusive of
transaction costs, financing fees and working capital reserves. We expect to
consummate this acquisition on or about May 22, 2008.





2555 Grand Mortgage
Loan





On April
24, 2008, we borrowed $86.0 million from the NYSTRS. The mortgage agreement
provides for an interest-only loan with a principal amount of $86.0 million and
is secured by a mortgage and related assignments and security interests in 2555
Grand. The borrowing matures on April 24, 2013 and bears interest at a rate of
5.375%.





KeyBank
Activity





On April
28, 2008, we borrowed $165.0 million under the revolving credit facility with
KeyBank in anticipation of our acquisition of Williams Tower, as described
above. From April 1, 2008 through May 5, 2008, we repaid $59.0 million under our
revolving credit facility with KeyBank resulting in an outstanding principal
balance of $165.0 million.





Shareholder
Redemptions





From
April 1, 2008 through May 5, 2008, in accordance with our share redemption
plan,  we redeemed approximately 397,000 common shares and made
corresponding payments totaling $4.0 million to shareholders who had
requested these redemptions. The shares redeemed were cancelled and will have
the status of authorized, but unissued shares.




Price
Change/Extension of Offering





In April
2008, our board of directors authorized the extension of its Current Offering
until June 30, 2008. Additionally, our board of directors authorized the
following terms to its Third Offering, which is expected to commence on July 1,
2008:





·
              We expect
      to offer shares to the public initially at a price of $10.66 per share
      subject to any volume and other discounts in effect for the Third
      Offering; our current offering price is $10.58 per
  share.





·
              We
      expect to offer shares through our dividend reinvestment plan at a price
      of $10.13 per share; the current dividend reinvestment plan price is
      $10.051 per share.





·
              We
      expect that shares redeemed under our share redemption program will be
      redeemed at a price of $9.68 per share; our current redemption price is
      $9.52 per share.


35
 Advisory
Agreement Extension
 
 In
conjunction with the extension of the Current Offering to June 30,
2008, our board of directors determined on May 14, 2008 to extend the term
of the current Advisory Agreement between the Operating Partnership, the Company
and the Advisor on identical terms through June 30,
2008.


Distribution
Increase





In April
2008, our board of directors declared distributions for the months of May and
June 2008. The distributions will be calculated based on shareholders of record
each day during such months in an amount equal to $0.00175233 per share, per
day.  This distribution rate represents an approximate 2.5% increase
from the distribution rate declared for the period from July 1, 2006 through
April 30, 2008. The distributions for the months of May and June will be paid in
cash in July 2008.




Item 3.Quantitative and Qualitative Disclosures About Market
Risk.





Market
risk includes risks relating to changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. We are exposed to both interest rate risk
and foreign currency exchange rate risk.





The
commercial real estate debt markets have recently been experiencing volatility
as a result of 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. This has
resulted in lenders decreasing the availability of debt financing as well as
increasing the cost of debt financing. As our existing debt is either fixed rate
debt or floating rate debt with a fixed spread over LIBOR, we do not believe
that our current portfolio is materially impacted by the current debt market
environment. However, should the reduced availability of debt and/or the
increased cost of borrowings continue, either by increases in the index rates or
by increases in lender spreads, we will need to consider such factors in the
evaluation of future acquisitions. For example, during 2007, we borrowed
$893.2 million through various secured permanent financing vehicles at a
weighted average interest rate of 5.62%. If, in the future, interest rates of
these secured permanent financing vehicles increase by 1.0% and we obtained the
same level of financing as in 2007, we would incur additional interest charges
of $8.9 million annually. This may result in future acquisitions generating
lower overall economic returns and potentially reducing future cash flow
available for distribution.





In
addition, the state of the debt markets could have an impact on the overall
amount of capital investing in real estate which may result in price or value
decreases of real estate assets. Although this may benefit us for future
acquisitions, it could negatively impact the current value of our existing
assets.





We are
also exposed to the effects of interest rate changes primarily through
variable-rate debt, which we use to maintain liquidity and fund expansion of our
real estate investment portfolio and operations. Our interest rate risk
management objectives are to monitor and manage the impact of interest rate
changes on earnings and cash flows, and to use derivative financial instruments
such as interest rate swaps and caps in order to mitigate our interest rate risk
on variable rate debt. We do not enter into derivative or interest rate
transactions for speculative purposes. Please see “Debt Financings” above for
more information concerning the Company’s outstanding debt.




As of
March 31, 2008, we 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%.





Our total
variable-rate debt outstanding as of March 31, 2008 consisted of $59.0 million
in borrowings under our revolving credit facility with KeyBank. This debt is
subject to a variable interest rate through its maturity date on October 31,
2009. An increase in the variable interest rate would increase our interest
payments due under the Revolving Credit Facility and therefore decrease our cash
flows available for distribution to shareholders. Based on our variable rate
outstanding as of March 31, 2008, a 1% change in interest rate would result in a
change of interest expense of approximately $590,000 per
year.




Derivative
financial instruments expose us to credit risk in the event of non-performance
by the counterparties under the terms of the interest rate swap agreements. We
minimized our credit risk on these transactions by dealing with
HSH Nordbank, a major creditworthy financial institution. We believe the
likelihood of realized losses from counterparty non-performance is
remote.





We are
exposed to foreign currency exchange rate variations resulting from the
remeasurement and translation of the financial statements of our subsidiaries
located in Toronto, Ontario and Rio de Janeiro, Brazil. As of March 31,
2008, $10.4 million of accumulated other comprehensive income related to
our international subsidiaries is included in our consolidated statement of
shareholders’ equity. Based on the Company’s current operational strategies,
management does not believe that variations in the foreign currency exchange
rates pose a significant risk to our consolidated results of operations or
financial position.


36


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 March 31, 2008, 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.





Other
than those described below, no change occurred in our internal controls over
financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
during the three months ended March 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





During
the three months ended March 31, 2008, we continued the implementation of
an upgrade to our financial and accounting systems and a new enterprise-wide
accounting and lease management system for Hines. We anticipate this
implementation will be completed by mid-2008. This new software has affected
many aspects of our accounting and financial systems and procedures and has
resulted in significant changes to our internal controls. The implementation of
these systems upgrades had a material impact on our internal control over
financial reporting, but these upgrades were not implemented in response to an
identified significant control deficiency or material weakness. We believe that
these changes have improved and strengthened our overall system of internal
control.




The
Company’s property-level accounting has historically been performed as a
decentralized function, with many of the associated accounting controls
performed at each property. Management has undertaken an initiative to evaluate
full or partial centralization of property accounting to identify potential
opportunities for efficiencies and/or control enhancements. The process is
currently in a pilot phase, with a select number of properties being converted
to the centralized accounting environment. The company is taking the necessary
steps to monitor and maintain appropriate internal controls during this period
of change. These steps include deploying resources to mitigate internal control
risks and performing additional verifications and testing to ensure data
integrity.




37


PART II – OTHER
INFORMATION





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





During
the three months ended March 31, 2008, we did not sell any equity securities
that were not registered under the Securities Act of 1933.





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





Period
            
            TotalNumber
      of
              SharesPurchased
            
            
            Average
      Price
              Paid
      per Share
            
            
            Total
      Number of
              Shares
      Purchased as
              Part
      of Publicly
              Announced
      Plans orPrograms
            
            
            Maximum
      Numberof Sharesthat
      May Yet bePurchased
      Under thePlans
      orPrograms(1)January
      1, 2008 to January 31, 2008
            
            
            594,685
            
            
            
            9.52
            
            
            
            594,685
            
            
            
            8,031,511February
      1, 2008 to February 29, 2008
            
            
            194,961
            
            
            
            9.52
            
            
            
            194,961
            
            
            
            8,303,834March
      1, 2008 to March 31, 2008
            
            
            197,441
            
            
            
            9.52
            
            
            
            197,441
            
            
            
            8,719,503Total
            
            
            987,087
            
            
            
            9.52
            
            
            
            987,087


__________





(1)
            We
      may redeem shares under the program so long as the total number of shares
      redeemed during the calendar year does not exceed, as of the date of the
      redemption, 10% of our shares outstanding on the same date during the
      prior year. 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.





Item 6.Exhibits.





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





38


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.





May 15,
2008                                                                           By:             /s/ CHARLES N.
HAZEN


Charles N. Hazen


President and Chief Executive
Officer








May 15,
2008                                                                           By:         /s/ SHERRIW.
SCHUGART


Sherri W. Schugart


Chief Financial Officer








39


EXHIBIT 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 herein by
      reference).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 herein by
      reference).10.1
            
            —
            Agreement
      of Sale between Crown Center Redevelopment Corporation and Hines REIT 2555
      Grand LLC, dated February 29, 2008 (filed as Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K on March 6, 2008, and incorporated
      by reference herein).10.2
            
            —
            Contract
      of Sale between Transco Tower Limited and Hines REIT Properties L.P. dated
      March 18, 2008 (filed as Exhibit 10.95 to Amendment No. 10 to
      registrant’s Registration Statement on Form S-11, and incorporated by
      reference herein).31.1
            *
            —
            Certification
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            *
            —
            Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            *
            —
            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





40