##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 000-50805
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 (Exact Name of Registrant as Specified in its Charter)
 Maryland(State or Other Jurisdiction of 
Incorporation or Organization)
    
    20-0138854(I.R.S. Employer
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
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    2Item 1. Consolidated Financial Statements (Unaudited)
    
    
    2Consolidated Condensed Balance Sheets As of September 30, 2006 And December 31, 2005
    
    
    2Consolidated Condensed Statements Of Operations For the Three And Nine-Months
Ended September 30, 2006 and 2005
    
    
    3Consolidated Condensed Statement Of Shareholders Equity For the Nine Months Ended
September 30, 2006 and the Year Ended December 31, 2005
    
    
    4Consolidated Condensed Statements Of Cash Flows For the Nine Months Ended
September 30, 2006 and 2005
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    37PART II  OTHER INFORMATION
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39Selected Dealer AgreementReimbursement AgreementAgreement of Purchase and SaleCredit AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906
  1




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited).
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 As of September 30, 2006 And December 31, 2005
 (UNAUDITED)
 September 30,2006
    
    
    December 31, 2005ASSETSInvestment property, at cost:Buildings and improvements, net
    
    $
    335,799,035
    
    
    $
    79,461,108In-place leases, net
    
    
    85,262,318
    
    
    
    25,698,679Land
    
    
    110,604,983
    
    
    
    38,416,834Total investment property
    
    
    531,666,336
    
    
    
    143,576,621Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    207,884,356
    
    
    
    118,574,523Cash and cash equivalents
    
    
    63,886,052
    
    
    
    6,156,285Restricted cash
    
    
    4,336,998
    
    
    
    Distributions receivable
    
    
    4,844,212
    
    
    
    3,598,103Straight-line rent receivable
    
    
    2,177,166
    
    
    
    276,726Tenant and other receivables
    
    
    1,831,818
    
    
    
    807,813Acquired above-market leases, net
    
    
    29,404,331
    
    
    
    15,099,578Deferred offering costs
    
    
    
    
    
    
    1,221,987Deferred leasing costs, net
    
    
    2,648,490
    
    
    
    1,655,534Deferred financing costs, net
    
    
    4,808,197
    
    
    
    851,206Other assets
    
    
    1,752,357
    
    
    
    5,515,934TOTAL ASSETS
    
    $
    855,240,313
    
    
    $
    297,334,310LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses
    
    $
    14,990,299
    
    
    $
    4,280,492Unaccepted subscriptions for common shares
    
    
    638,009
    
    
    
    1,168,441Due to affiliates
    
    
    9,562,290
    
    
    
    10,855,669Acquired below-market leases, net
    
    
    12,775,277
    
    
    
    8,719,488Other liabilities
    
    
    2,352,734
    
    
    
    902,246Interest rate swap contract
    
    
    5,887,597
    
    
    
    Participation interest liability
    
    
    8,244,059
    
    
    
    3,021,780Dividends payable
    
    
    8,754,430
    
    
    
    3,001,754Distributions payable to minority interests
    
    
    301,165
    
    
    
    207,243Notes payable
    
    
    319,031,439
    
    
    
    74,900,000Total liabilities
    
    
    382,537,299
    
    
    
    107,057,113Minority interest
    
    
    998,248
    
    
    
    2,192,831Commitments and ContingenciesShareholders equity:Preferred shares, $.001 par value; 500 million
preferred shares authorized, none issued or
outstanding as of September 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common shares, $.001 par value; 1,500,000,000 common
shares authorized as of September 30, 2006 and
December 31, 2005; 59,555,964 and 23,046,119 common
shares issued and outstanding as of September 30, 2006
and December 31, 2005, respectively
    
    
    59,556
    
    
    
    23,046Additional paid-in capital
    
    
    510,899,306
    
    
    
    199,846,230Retained deficit
    
    
    (39,254,096
    )
    
    
    (11,784,910
    )Total shareholders equity
    
    
    471,704,766
    
    
    
    188,084,366TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    855,240,313
    
    
    $
    297,334,310
  2




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 For the Three And Nine Months Ended September 30, 2006 and 2005
 (UNAUDITED)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental revenue
    
    $
    17,956,833
    
    
    $
    2,044,707
    
    
    $
    41,953,391
    
    
    $
    2,092,315Other revenue
    
    
    709,961
    
    
    
    28,664
    
    
    
    1,600,718
    
    
    
    28,664Total revenues
    
    
    18,666,794
    
    
    
    2,073,371
    
    
    
    43,554,109
    
    
    
    2,120,979Expenses:Property operating expenses
    
    
    4,949,372
    
    
    
    752,916
    
    
    
    12,095,563
    
    
    
    766,765Real property taxes
    
    
    3,233,646
    
    
    
    238,531
    
    
    
    6,918,425
    
    
    
    243,872Property management fees
    
    
    472,221
    
    
    
    57,315
    
    
    
    1,071,908
    
    
    
    58,725Depreciation and amortization
    
    
    6,510,375
    
    
    
    1,321,121
    
    
    
    15,335,974
    
    
    
    1,333,822Asset management and acquisition fees
    
    
    2,886,254
    
    
    
    1,186,443
    
    
    
    10,444,558
    
    
    
    3,457,177Organizational and offering expenses
    
    
    1,463,260
    
    
    
    
    
    
    
    3,123,128
    
    
    
    1,479,923Reversal of organizational and
offering expenses
    
    
    
    
    
    
    (7,082,524
    )
    
    
    
    
    
    
    (7,082,524
    )Forgiveness of related party payable
    
    
    
    
    
    
    (1,730,000
    )
    
    
    
    
    
    
    (1,730,000
    )General and administrative expenses
    
    
    513,574
    
    
    
    354,766
    
    
    
    2,041,108
    
    
    
    1,704,108Total expenses
    
    
    20,028,702
    
    
    
    (4,901,432
    )
    
    
    51,030,664
    
    
    
    231,868(Loss) income before equity in losses,
interest expense and loss (income)
allocated to minority interests
    
    
    (1,361,908
    )
    
    
    6,974,803
    
    
    
    (7,476,555
    )
    
    
    1,889,111Equity in losses of Hines-Sumisei
U.S. Core Office Fund, L.P.
    
    
    (925,549
    )
    
    
    (75,758
    )
    
    
    (1,838,751
    )
    
    
    (60,153
    )Loss on interest rate swap contract
    
    
    (7,795,274
    )
    
    
    
    
    
    
    (6,439,597
    )
    
    
    Interest expense
    
    
    (4,935,337
    )
    
    
    (1,206,830
    )
    
    
    (12,708,051
    )
    
    
    (1,245,930
    )Interest income
    
    
    351,469
    
    
    
    19,980
    
    
    
    584,639
    
    
    
    25,059Loss (income) allocated to minority
interests
    
    
    155,157
    
    
    
    (454,269
    )
    
    
    409,129
    
    
    
    517,603Net (loss) income
    
    $
    ( 14,511,442
    )
    
    $
    5,257,926
    
    
    $
    (27,469,186
    )
    
    $
    1,125,690Basic and diluted (loss) income per common
share:(Loss) income per common share
    
    $
    (0.26
    )
    
    $
    0.40
    
    
    $
    (0.66
    )
    
    $
    0.14Weighted average number of common
shares outstanding
    
    
    55,656,525
    
    
    
    13,284,150
    
    
    
    41,333,452
    
    
    
    8,100,986
  3




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
 For the Nine Months Ended September 30, 2006 and the Year Ended December 31, 2005
 (UNAUDITED)
 AdditionalPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    Shareholders'Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity (Deficit)BALANCE,January 1, 2005
    
    
    
    
    
    $
    
    
    
    
    2,073,116
    
    
    $
    2,073
    
    
    $
    9,715,539
    
    
    $
    (10,028,316
    )
    
    $
    (310,704
    )Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    20,973,003
    
    
    
    20,973
    
    
    
    207,642,319
    
    
    
    
    
    
    
    207,663,292Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,637,079
    )
    
    
    
    
    
    
    (6,637,079
    )Selling commissions and
dealer manager fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,055,143
    )
    
    
    
    
    
    
    (15,055,143
    )Other offering costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,180,594
    
    
    
    
    
    
    
    4,180,594Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,756,594
    )
    
    
    (1,756,594
    )BALANCE,December 31, 2005
    
    
    
    
    
    
    
    
    
    
    23,046,119
    
    
    
    23,046
    
    
    
    199,846,230
    
    
    
    (11,784,910
    )
    
    
    188,084,366Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    36,670,118
    
    
    
    36,670
    
    
    
    366,918,871
    
    
    
    
    
    
    
    366,955,541Redemption of common
shares
    
    
    
    
    
    
    
    
    
    
    (160,273
    )
    
    
    (160
    )
    
    
    (1,476,610
    )
    
    
    
    
    
    
    (1,476,770
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,886,545
    )
    
    
    
    
    
    
    (18,886,545
    )Selling commissions and
dealer manager fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,406,964
    )
    
    
    
    
    
    
    (28,406,964
    )Other offering costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,095,676
    )
    
    
    
    
    
    
    (7,095,676
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,469,186
    )
    
    
    (27,469,186
    )BALANCE,September 30, 2006
    
    
    
    
    
    $
    
    
    
    
    59,555,964
    
    
    $
    59,556
    
    
    $
    510,899,306
    
    
    $
    (39,254,096
    )
    
    $
    471,704,766
  4




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2006 and 2005
 (UNAUDITED)
 Nine MonthsNine Months
    
    
    EndedEnded September
    
    
    September 30,30, 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (27,469,186
    )
    
    $
    1,125,690Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    17,105,235
    
    
    
    2,160,274Non-cash compensation expense
    
    
    23,289
    
    
    
    31,775Equity in losses of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    1,838,751
    
    
    
    60,153Loss allocated to minority interests
    
    
    (409,129
    )
    
    
    (517,603
    )Accrual of organizational and offering expenses
    
    
    3,123,128
    
    
    
    1,479,923Reversal of organizational and offering expenses
    
    
    
    
    
    
    (7,082,524
    )Forgiveness of related party payable
    
    
    
    
    
    
    (1,730,000
    )Loss on forward interest rate swap
    
    
    6,439,597
    
    
    
    Changes in assets and liabilities:Increase in other assets
    
    
    (197,346
    )
    
    
    (117,671
    )Increase in straight-line rent receivable
    
    
    (1,900,440
    )
    
    
    (148,784
    )Increase in tenant and other receivables
    
    
    (1,027,455
    )
    
    
    (58,147
    )Increase in deferred lease costs
    
    
    (1,038,723
    )
    
    
    Increase in accounts payable and accrued expenses
    
    
    1,994,291
    
    
    
    1,013,140Increase in participation interest liability
    
    
    5,222,279
    
    
    
    1,728,588(Decrease) increase in other liabilities
    
    
    (55,058
    )
    
    
    385,842Increase (decrease) in due to affiliates
    
    
    512,380
    
    
    
    (99,987
    )Net cash provided by (used in) operating activities
    
    
    4,161,613
    
    
    
    (1,769,331
    )CASH FLOWS FROM INVESTING ACTIVITIES:Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (102,360,000
    )
    
    
    (81,552,923
    )Distributions received from Hines-Sumisei U.S. Core Office Fund,
L.P. in excess of equity in losses
    
    
    9,965,107
    
    
    
    2,781,902Investments in property
    
    
    (300,363,665
    )
    
    
    (70,817,574
    )Additions to other assets
    
    
    
    
    
    
    (503,926
    )Increase in restricted cash
    
    
    (4,336,998
    )
    
    
    Increase in acquired out-of-market leases, net
    
    
    (10,334,553
    )
    
    
    (15,400,881
    )Net cash used in investing activities
    
    
    (407,430,109
    )
    
    
    (165,493,402
    )CASH FLOWS FROM FINANCING ACTIVITIES:Increase in escrowed investor proceeds
    
    
    
    
    
    
    (100,000
    )Increase in escrowed investor proceeds liability
    
    
    
    
    
    
    100,000(Decrease) increase in unaccepted subscriptions for common shares
    
    
    (530,432
    )
    
    
    130,052Proceeds from issuance of common stock
    
    
    358,908,390
    
    
    
    143,204,801Redemption of common shares
    
    
    (1,476,770
    )
    
    
    Payments of selling commissions and dealer manager fees
    
    
    (28,384,101
    )
    
    
    (9,778,454
    )Payments of organizational and offering expenses
    
    
    (11,262,323
    )
    
    
    (4,500,000
    )Proceeds from advances from affiliate
    
    
    1,670,147
    
    
    
    1,740,394Payments on advances from affiliate
    
    
    (1,275,000
    )
    
    
    (375,000
    )Dividends paid to shareholders
    
    
    (5,110,003
    )
    
    
    (766,271
    )Dividends paid to minority interests
    
    
    (691,543
    )
    
    
    (426,770
    )
 5




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##### Table of Contents



Nine MonthsNine Months
    
    
    EndedEnded September
    
    
    September 30,30, 2006
    
    
    2005Proceeds from notes payable
    
    
    630,220,000
    
    
    
    138,300,000Payments on notes payable
    
    
    (475,120,000
    )
    
    
    (91,000,000
    )Net decrease in security deposit liability
    
    
    (23,898
    )
    
    
    Payments for interest rate swap contract
    
    
    (552,000
    )
    
    
    Additions to deferred financing costs
    
    
    (5,374,204
    )
    
    
    (1,115,863
    )Net cash provided by financing activities
    
    
    460,998,263
    
    
    
    175,412,889Net change in cash and cash equivalents
    
    
    57,729,767
    
    
    
    8,150,156Cash and cash equivalents, beginning of period
    
    
    6,156,285
    
    
    
    1,536,439Cash and cash equivalents, end of period
    
    $
    63,886,052
    
    
    $
    9,686,595Supplemental Disclosure of Cash Flow InformationCash paid for interest
    
    $
    9,878,421
    
    
    $
    845,102Supplemental Disclosure of Non-Cash ActivitiesUnpaid selling commissions and dealer manager fees
    
    $
    1,131,261
    
    
    $
    769,563Deferred offering costs offset against additional paid-in capital
    
    $
    7,095,676
    
    
    $
    1,140,567Reversal of deferred offering costs offset against additional
paid-in capital
    
    $
    
    
    
    $
    (4,504,750
    )Distributions receivable
    
    $
    4,844,212
    
    
    $
    2,496,418Dividends declared and unpaid
    
    $
    8,754,430
    
    
    $
    2,008,861Distributions declared and unpaid to minority interests
    
    $
    301,165
    
    
    $
    197,846Dividends reinvested
    
    $
    8,023,867
    
    
    $
    959,642Assumption of mortgage upon acquisition of property
    
    $
    88,494,864
    
    
    $
    Non-cash assets acquired upon acquisition of property
    
    $
    9,253,368
    
    
    $
    1,365,787Accrued additions to investment property
    
    $
    570,248
    
    
    $
    Accrual of deferred financing costs
    
    $
    220,565
    
    
    $
    174,410
  6




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 1. Organization
 The accompanying interim unaudited consolidated condensed 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, 2005 included in
Hines Real Estate Investment Trust, Inc.s Annual Report on Form 10-K . In the opinion of
management, all adjustments and eliminations, consisting only of normal recurring adjustments,
necessary to present fairly and in conformity with GAAP the financial position of Hines Real Estate
Investment Trust, Inc. as of September 30, 2006 and December 31, 2005, the results of operations
for the three and nine months ended September 30, 2006 and 2005 and the cash flows for the nine
months ended September 30, 2006 and 2005 have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
  Public Offerings
    Minority Interests
  7




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##### Table of Contents



Investment Property
  2. Summary of Significant Accounting Policies
 Basis of Presentation
   Investment Property
     8




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##### Table of Contents



Cash and Cash Equivalents
  Restricted Cash
  Deferred Leasing Costs
  Other Assets
  September 30,
    
    
    December 31,2006
    
    
    2005Property acquisition escrow deposit
    
    $
    
    
    
    $
    5,000,000Prepaid insurance
    
    
    429,752
    
    
    
    110,155Mortgage loan deposits
    
    
    920,000
    
    
    
    Other
    
    
    402,605
    
    
    
    405,779Total
    
    $
    1,752,357
    
    
    $
    5,515,934
 Deferred Financing Costs
  9




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##### Table of Contents



Interest Rate Swap Contract
     Unaccepted Subscriptions for Common Shares
  Due to Affiliates
  September 30,
    
    
    December 31,2006
    
    
    2005Organizational and offering costs related to the Initial Offering
    
    $
    
    
    
    $
    6,900,000Organizational and offering costs related to the Current Offering
    
    
    6,112,500
    
    
    
    1,477,732Dealer manager fees and selling commissions
    
    
    1,131,261
    
    
    
    1,108,398Asset management, acquisition fees and property-level fees and
reimbursements
    
    
    878,336
    
    
    
    324,493General, administrative and other expenses
    
    
    1,440,193
    
    
    
    1,045,046Total
    
    $
    9,562,290
    
    
    $
    10,855,669
 10




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##### Table of Contents



Organizational and Offering Costs
 Initial Offering
      Current Offering
  11




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##### Table of Contents



Revenue Recognition
  Stock-based Compensation
  Income Taxes
   Per Share Data
  12




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##### Table of Contents



3. Real Estate Investments
 Direct Investments
   Acquired
    
    
    AcquiredBuildings and
    
    
    
    
    
    
    Above-Market
    
    
    Below-MarketImprovements
    
    
    In-Place Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    341,261,480
    
    
    $
    98,406,185
    
    
    $
    32,707,156
    
    
    $
    15,240,794Less: accumulated
depreciation and
amortization
    
    
    (5,462,445
    )
    
    
    (13,143,867
    )
    
    
    (3,302,825
    )
    
    
    (2,465,517
    )Net
    
    $
    335,799,035
    
    
    $
    85,262,318
    
    
    $
    29,404,331
    
    
    $
    12,775,277As of December 31, 2005, accumulated depreciation and amortization related to direct investments in
real estate assets and related lease intangibles were as follows:Acquired
    
    
    AcquiredBuildings and
    
    
    
    
    
    
    Above-Market
    
    
    Below-MarketImprovements
    
    
    In-Place Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    79,999,888
    
    
    $
    28,489,886
    
    
    $
    16,207,234
    
    
    $
    9,075,427Less: accumulated
depreciation and
amortization
    
    
    (538,780
    )
    
    
    (2,791,207
    )
    
    
    (1,107,656
    )
    
    
    (355,939
    )Net
    
    $
    79,461,108
    
    
    $
    25,698,679
    
    
    $
    15,099,578
    
    
    $
    8,719,488
   In-place
    
    Out-of-MarketLeases
    
    Leases, netOctober 1 through December 31, 2006
    
    $
    4,222,214
    
    
    $
    99,8982007
    
    
    15,871,849
    
    
    
    481,5002008
    
    
    14,285,160
    
    
    
    613,2672009
    
    
    12,301,845
    
    
    
    1,486,8162010
    
    
    6,997,204
    
    
    
    1,237,785
  13




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##### Table of Contents



Fixed FutureMinimumRentalsOctober 1 through December 31, 2006
    
    $
    12,941,6512007
    
    
    48,919,8622008
    
    
    43,579,5152009
    
    
    37,176,4382010
    
    
    22,370,400Thereafter
    
    
    106,839,227Total
    
    $
    271,827,093
  Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
      14




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##### Table of Contents



Consolidated Condensed Balance Sheets of the Core Fund
as of September 30, 2006 and December 31, 2005
(unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCash
    
    $
    50,841,958
    
    
    $
    42,044,377Property, net
    
    
    1,947,481,714
    
    
    
    1,382,492,862Other assets
    
    
    509,235,356
    
    
    
    275,102,476Total Assets
    
    $
    2,507,559,028
    
    
    $
    1,699,639,715LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    1,475,000,000
    
    
    $
    915,030,000Other liabilities
    
    
    133,784,277
    
    
    
    106,125,932Minority interest
    
    
    290,833,730
    
    
    
    260,929,015Partners capital
    
    
    607,941,021
    
    
    
    417,554,768Total Liabilities and Partners Capital
    
    $
    2,507,559,028
    
    
    $
    1,699,639,715
 Consolidated Condensed Statements of Operations of the Core Fund
For the Nine Months Ended September 30, 2006 and 2005
(unaudited)
 September 30,
    
    
    September 30,2006
    
    
    2005Revenues and interest income
    
    $
    194,045,186
    
    
    $
    146,858,043Operating expenses
    
    
    (89,268,395
    )
    
    
    (65,681,613
    )Interest expense
    
    
    (46,003,985
    )
    
    
    (34,474,048
    )Depreciation and amortization
    
    
    (59,281,689
    )
    
    
    (41,008,526
    )Minority interest
    
    
    (5,346,279
    )
    
    
    (5,852,436
    )Net Loss
    
    $
    (5,855,162
    )
    
    $
    (158,580
    )
  
    
    12% and 15%, respectively, was earned from two tenants in the oil and gas
industry that are affiliated with each other, whose leases expire on December 31, 2015;
and
    
    36% and 39%, respectively, was earned from several tenants in the legal
services industry, whose leases expire at various times during the years 2007 through
2027.
   15




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##### Table of Contents



4. Debt Financing
 Revolving Credit Facility with KeyBank National Association
   Term Loan
  Debt Secured by Investment Property
    16




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##### Table of Contents



5. Dividends
   17




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##### Table of Contents



Dividends For the Quarter Ended
    
    Date Paid
    
    Total DividendsSeptember 30, 2006
    
    October 13, 2006
    
    $
    8,754,430June 30, 2006
    
    July 14, 2006
    
    $
    6,144,848March 31, 2006
    
    April 13, 2006
    
    $
    3,987,267December 31, 2005
    
    January 13, 2006
    
    $
    3,001,754September 30, 2005
    
    October 14, 2005
    
    $
    2,008,861June 30, 2005
    
    July 15, 2005
    
    $
    1,091,813March 31, 2005
    
    April 7, 2005
    
    $
    534,652December 31, 2004(1)
    
    January 14, 2005
    
    $
    99,149
 
 (1)
    
    The Company commenced operations on November 23, 2004. Dividends for the quarter ended
December 31, 2004 were declared for the period from November 23, 2004 through December 31,
2004.  6. Related Party Transactions
 Advisory Agreement
  Acquisition Fees
 Asset Management Fees
 Expense Reimbursements
 18




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##### Table of Contents



Dealer Manager Agreements
  Property Management and Leasing Agreements
  
    
    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 $472,000 and $1.1 million for the quarter and
nine months ended September 30, 2006, respectively. As of September 30, 2006 and
December 31, 2005, the Company had a liability for incurred and unpaid property
management fees of approximately $98,000 and $31,000, respectively, which has been
included in due to affiliates in the accompanying consolidated condensed balance
sheets. The Company incurred property management fees of approximately $57,000 and
$59,000 for the quarter and nine months ended September 30, 2005, respectively.
    
    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 commissions of
approximately $6,100 and $28,000 for the quarter and nine months ended September 30,
2006, respectively, all of which were paid to Hines prior to September 30, 2006. In
addition, the Company had an outstanding liability as of September 30, 2006 of
approximately $86,000 related to leasing commissions payable to Hines that were assumed
upon acquisition of 321 North Clark. The Company incurred no leasing, construction
management or redevelopment fees during the quarter or nine months ended September 30,
2005.
    
    The Company reimburses Hines for certain operating costs incurred in
providing property management and leasing services pursuant to the property management
and leasing agreements. The Company incurred reimbursable expenses of approximately
$734,000 and $2.5 million for the quarter and nine months ended September 30, 2006.
These amounts, net of payments, resulted in liabilities of approximately $399,000 and
$100,000 as of September 30, 2006 and December 31, 2005, respectively, which have been
included in the accompanying consolidated condensed balance sheets. The Company
incurred reimbursable expenses of approximately $171,000 and $173,000 for the quarter
and nine months ended September 30, 2005.
 19




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##### Table of Contents



The Participation Interest
   7. Commitments and Contingencies
  8. Subsequent Events
      20




---



##### Table of Contents



Current Public Offering
  21




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##### Table of Contents



Item 2A. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Explanatory Note
  Cautionary Note Regarding 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, may affect the
markets in which we and our tenants operate;
 22




---



##### Table of Contents




    
    Catastrophic events, such as hurricanes, earthquakes and terrorist attacks;
and our ability to secure adequate insurance at reasonable and appropriate rates;
    
    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-Sumisei U.S. Core Office Fund,
L.P. (the Core Fund), such as its reliance on Hines for its operations and
investments, and our potential liability for Core Fund obligations;
    
    The lack of liquidity associated with our assets;
    
    Our reliance on our Advisor, Hines and affiliates of Hines for our
day-to-day operations and the selection of real estate investments, and our Advisors
ability to attract and retain high-quality personnel who can provide service at a level
acceptable to us;
    
    Risks associated with conflicts of interests that result from our
relationship with our Advisor and Hines, as well as conflicts of interests certain of
our officers and directors face relating to the positions they hold with other
entities; and
    
    Our ability to continue to qualify as a real estate investment trust
(REIT) for federal income tax purposes.
   Executive Summary
   23




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##### Table of Contents



Leasable
    
    Percent
    
    Ownership byProperty
    
    Market
    
    Square Feet
    
    Leased
    
    the Company(1)Direct Investments:Citymark
    
    Dallas, Texas
    
    
    218,096
    
    
    
    100
    %
    
    
    100.00
    %1515 S Street
    
    Sacramento, California
    
    
    348,881
    
    
    
    100
    %
    
    
    100.00
    %1900 and 2000 Alameda
    
    San Mateo, California
    
    
    253,377
    
    
    
    76
    %
    
    
    100.00
    %Airport Corporate Center
    
    Miami, Florida
    
    
    1,018,477
    
    
    
    94
    %
    
    
    100.00
    %321 North Clark
    
    Chicago, Illinois
    
    
    885,664
    
    
    
    94
    %
    
    
    100.00
    %Total for Direct Investments
    
    
    
    
    2,724,495
    
    
    
    94
    %Indirect Investments:Three First National Plaza
    
    Chicago, Illinois
    
    
    1,419,010
    
    
    
    92
    %
    
    
    23.17
    %333 West Wacker
    
    Chicago, Illinois
    
    
    843,023
    
    
    
    91
    %
    
    
    23.11
    %425 Lexington Avenue
    
    New York, New York
    
    
    700,034
    
    
    
    100
    %
    
    
    12.78
    %499 Park Avenue
    
    New York, New York
    
    
    288,184
    
    
    
    95
    %
    
    
    12.78
    %600 Lexington Avenue
    
    New York, New York
    
    
    280,956
    
    
    
    100
    %
    
    
    12.78
    %1200 19th Street
    
    Washington D.C.
    
    
    235,404
    
    
    
    100
    %
    
    
    12.78
    %One Shell Plaza
    
    Houston, Texas
    
    
    1,227,889
    
    
    
    96
    %
    
    
    14.48
    %Two Shell Plaza
    
    Houston, Texas
    
    
    566,202
    
    
    
    94
    %
    
    
    14.48
    %The KPMG Building
    
    San Francisco, California
    
    
    379,328
    
    
    
    96
    %
    
    
    28.96
    %101 Second Street
    
    San Francisco, California
    
    
    388,370
    
    
    
    99
    %
    
    
    28.96
    %525 B Street
    
    San Diego, California
    
    
    447,159
    
    
    
    89
    %
    
    
    28.96
    %720 Olive Way
    
    Seattle, Washington
    
    
    300,710
    
    
    
    82
    %
    
    
    23.11
    %One Atlantic Center
    
    Atlanta, Georgia
    
    
    1,100,808
    
    
    
    81
    %
    
    
    28.96
    %Total for Indirect
Investments
    
    
    
    
    8,177,077
    
    
    
    92
    %
 
 (1)
    
    This percentage shows the effective ownership by the Operating Partnership in the properties
listed. As of September 30, 2006, Hines REIT owned a 96.77% interest in the Operating
Partnership and was its sole general partner. Affiliates of Hines owned the remaining 3.23%
interest in the Operating Partnership. Real estate investments owned 100% by the Operating
Partnership are referred to as direct investments. We own interests in the properties shown
as indirect investments through our interest in the Core Fund, in which we owned an
approximate 31.5% non-managing general partner interest as of September 30, 2006. The Core
Fund does not own 100% of these buildings; its ownership interests in its buildings ranged
from 40.6% to 93.0% as of September 30, 2006.   24




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##### Table of Contents



Financial Condition, Liquidity and Capital Resources
 General
  
    
    proceeds from our public offerings, including our dividend reinvestment plan;
    
    debt financings, including secured or unsecured facilities;
    
    cash flow generated by our real estate investments and operations; and
    
    advances from affiliates.
   Cash Flows from Operating Activities
  25




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##### Table of Contents




    
    a full nine-month period of operations for each of 1900 and 2000 Alameda
and Citymark, which were acquired in June and August 2005, respectively;
    
    cash flow from 1515 S Street, Airport Corporate Center and 321 North Clark,
all of which were acquired after September 30, 2005;
 Cash Flows from Investing Activities
     Cash Flows from Financing Activities
 Equity Offerings
    Payment of Offering and Other Costs and Expenses
  26




---



##### Table of Contents



Debt Financings
   Our Revolving Credit Facility
   27




---



##### Table of Contents



Our Term Loan
  Debt Secured by our Properties
       28




---



##### Table of Contents



Advances from affiliates
    Dividends
   29




---



##### Table of Contents



Distributions from the Core Fund(1)
    
    $
    11,211,000Cash flows from operating activities
    
    $
    4,162,000Acquisition
fees (previously deducted from cash flows from operating activities)(2)
    
    $
    3,334,000Acquisition-related items (previously deducted from cash flows from operating activities)(3)
    
    $
    5,004,000
 
 (1)
    
    Cash distributions earned during the nine months ended September 30,
2006 related to our investment in the Core Fund.(2)
    
    Acquisition fees paid to our Advisor reduce cash flows from
operating activities in our consolidated statements of cash flows. However, we fund
such payments with offering proceeds and related acquisition indebtedness as such
payments are transaction costs associated with our acquisitions of real estate
investments. As a result, we considered the payment of acquisition fees in our
analysis of cash flow available to pay distributions.(3)
    
    Acquisition-related items include cash payments to settle net
liabilities assumed upon acquisition of properties. These payments reduce cash
flows from operating activities in our consolidated statements of cash flows.
However, we consider these payments to be related to the acquisition, as opposed to
the operations, of these properties, and we fund such payments with offering
proceeds and acquisition-related indebtedness. As a result, we considered the
payment of these items in our analysis of cash flow available to pay distributions.
For the nine months ended September 30, 2006, these amounts consisted primarily of
property tax liabilities assumed upon the acquisition of 321 North Clark.    30




---



##### Table of Contents



Results of Operations
     Direct Investments
   31




---



##### Table of Contents



Our Interest in the Core Fund
    Asset Management and Acquisition Fees
   General, Administrative and Other Expenses
   32




---



##### Table of Contents



Loss on Interest Rate Swap Contract
  Interest Expense
  Interest Income
  Loss Allocated to Minority Interests
  Related-Party Transactions and Agreements
  Off-Balance Sheet Arrangements
  Subsequent Events
   33




---



##### Table of Contents



Current Public Offering
  Critical Accounting Policies
  Organizational and Offering Costs
 Miscellaneous Accounting  Expenses of Offering Reporting on the Costs of
Start-up Activities
 34




---



##### Table of Contents



Revenue Recognition and Valuation of Receivables
  Interest rate swap contract
    Treatment of Management Compensation, Expense Reimbursements and Operating Partnership
Participation Interest
  35




---



##### Table of Contents



Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate
Investment Trusts
 Costs and Initial Rental Operations of Real Estate Projects
 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases
  
 Item 3A. Quantitative and Qualitative Disclosures About Market Risk.
    36




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##### Table of Contents



Item 4A. Controls and Procedures.
    
 PART II   OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   Maximum Number(or ApproximateTotal Number of
    
    Dollar Value) ofTotal
    
    
    
    
    
    Shares Purchased
    
    Shares that MayNumber of
    
    Average Price
    
    as Part of Publicly
    
    Yet be PurchasedShares
    
    Paid per Share
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    or Programs
    
    Programs(1)July 1, 2006 to July 31, 2006
    
    
    129,096
    
    
    
    9.36
    
    
    
    129,096
    
    
    
    992,033August 1, 2006 to August 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    992,033September 1 to September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    992,033Total
    
    
    129,096
    
    
    
    9.36
    
    
    
    129,096
 37




---



##### Table of Contents



(1)
    
    During the quarter ended September 30, 2006, the number of shares available for redemption
was limited to 5% of our common shares outstanding at the end of 2005. Our board of directors
approved a revision to the program, effective January 1, 2007, relating to the number of
shares we may redeem. After January 1, 2007, we may redeem shares under the program so long
as the total number of shares redeemed during any calendar year does not exceed, as of the
date we commit to any redemption, 10% of our shares outstanding as of the same date during the
prior calendar year. For the remainder of 2006, we may redeem shares subject to the
limitation of 5% of our common shares outstanding at the end of 2005. 
 Item 6. Exhibits.
  38




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##### Table of Contents



SIGNATURES
  HINES REAL ESTATE INVESTMENT TRUST, INC.November 10, 2006
    By:
    /s/ Charles M. BaughnCharles M. BaughnChief Executive OfficerNovember 10, 2006
    By:
    /s/ Sherri W. SchugartSherri W. SchugartChief Financial Officer 39




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation of Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 3.1 to Amendment
No. 5 to the registrants Registration Statement on Form S-11,
File No. 333-108780, on May 25, 2004 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*
    
    
    Selected Dealer Agreement, dated July 20, 2006, by and among Hines
Real Estate Investment Trust, Inc., Hines Real Estate Securities,
Inc., Hines Advisors Limited Partnership, Hines Interests Limited
Partnership and Ameriprise Financial Services, Inc.10.2*
    
    
    Reimbursement Agreement, dated July 20, 2006, by and between Hines
Interests Limited Partnership and Hines Real Estate Investment
Trust, Inc.10.3*
    
    
    Agreement of Purchase and Sale, dated as of September 27, 2006,
between MP Warner Center, LLC, MP Warner Center III, LLC, and
Hines-Sumisei US Core Office Properties LP, a Delaware (as amended
by Amendments No 1, dated September 15, 2006, and No. 2, dated
September 27, 2006).10.4*
    
    
    Credit Agreement, dated as of August 1, 2006, among Hines REIT
3100 McKinnon Street LP, Hines REIT 1900/2000 Alameda de las
Pulgas LLC, Hines REIT 321 North Clark Street LLC and the
Borrowing Base Subsidiaries party thereto from time to time, as
Borrowers, Hines REIT Properties, L.P., as Sponsor, and HSH
Nordbank AG, New York Branch and the Lenders party thereto from
time to time, as Lenders.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