##### 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, 2005
 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 Boulevard
Suite 5000
Houston, Texas(Address of principal executive offices)
    
    77056-6118(Zip code)
 Registrants telephone number, including area code: (888) 220-6121
  þ o
  o þ
  o þ




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##### Table of Contents



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1.
Consolidated Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005
and September 30, 2004
    
    4Consolidated Statement of Shareholders Equity (Deficit) for the Nine Months Ended
September 30, 2005 and the Year Ended December 31, 2004
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005
and September 30, 2004
    
    6Notes to Consolidated Financial Statements for the Nine Months Ended September 30, 2005
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    31PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    32Item 6. Exhibits
    
    33SIGNATURES
    
    34Agreement of Sale and Purchase dated 8/9/2005Agreement for Purchase dated 8/12/2005First Amendment to Term Loan AgreementRevolving Line of Credit AgreementUnconditional Guaranty of Payment and PerformanceSubordination Agreement dated 9/9/2005Ownership Interests Pledge and Security AgreementAgreement of SaleLetter AgreementCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO and CFO pursuant to 18 U.S.C., Section 1350
 2




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 Item 1.
Consolidated Financial Statements (Unaudited).
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of September 30, 2005 and December 31, 2004
 (UNAUDITED)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSInvestment property, at cost:Buildings and improvements, net
    
    $
    26,293,661
    
    
    $
    In-place leases, net
    
    
    18,827,022
    
    
    
    Land
    
    
    25,728,854
    
    
    
    Total investment property
    
    
    70,849,537
    
    
    
    Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    104,643,606
    
    
    
    28,181,662Cash
    
    
    9,686,595
    
    
    
    1,536,439Escrowed investor proceeds
    
    
    
    
    
    
    100,000Distributions receivable
    
    
    2,496,418
    
    
    
    247,494Straight-line rent receivable
    
    
    148,784
    
    
    
    Tenant and other receivables
    
    
    76,949
    
    
    
    Acquired above-market leases, net
    
    
    16,003,215
    
    
    
    Other assets
    
    
    704,783
    
    
    
    46,688Deferred financing costs, net
    
    
    896,885
    
    
    
    TOTAL ASSETS
    
    $
    205,506,772
    
    
    $
    30,112,283LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Liabilities:Accounts payable and accrued expenses
    
    $
    2,399,776
    
    
    $
    114,759Escrowed investor proceeds liability
    
    
    
    
    
    
    100,000Unaccepted subscriptions for common shares
    
    
    692,252
    
    
    
    562,200Due to affiliates
    
    
    11,979,288
    
    
    
    25,477,859Acquired below-market leases, net
    
    
    1,035,397
    
    
    
    Other liabilities
    
    
    709,460
    
    
    
    Participation interest liability
    
    
    2,137,748
    
    
    
    409,160Dividends payable
    
    
    2,008,861
    
    
    
    99,149Distributions payable to minority interests
    
    
    197,845
    
    
    
    73,231Notes payable
    
    
    47,300,000
    
    
    
    Total liabilities
    
    
    68,460,627
    
    
    
    26,836,358Minority interest
    
    
    2,517,642
    
    
    
    3,586,629Commitments and ContingenciesShareholders equity (deficit):Preferred shares, $.001 par value; 500,000,000 preferred shares authorized, none issued or
outstanding as of September 30, 2005 and December 31, 2004
    
    
    
    
    
    
    Common shares, $.001 par value; 1,500,000,000 common shares authorized as of
September 30, 2005 and December 31, 2004; 16,661,796 and 2,073,116 common shares
issued and outstanding as of September 30, 2005 and December 31, 2004, respectively
    
    
    16,662
    
    
    
    2,073Additional paid-in capital
    
    
    143,414,467
    
    
    
    9,715,539Retained deficit
    
    
    (8,902,626
    )
    
    
    (10,028,316
    )Total shareholders equity (deficit)
    
    
    134,528,503
    
    
    
    (310,704
    )TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
    
    $
    205,506,772
    
    
    $
    30,112,283
  3




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three and Nine Months Ended September 30, 2005 and September 30, 2004
 (UNAUDITED)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Rental revenue
    
    $
    2,044,707
    
    
    $
    
    
    
    $
    2,092,315
    
    
    $
    Other revenue
    
    
    28,664
    
    
    
    
    
    
    
    28,664
    
    
    
    Total revenues
    
    
    2,073,371
    
    
    
    
    
    
    
    2,120,979
    
    
    
    Expenses:Organizational and offering expenses
    
    
    
    
    
    
    
    
    
    
    1,479,923
    
    
    
    Reversal of accrued organizational and
offering expenses
    
    
    (7,082,524
    )
    
    
    
    
    
    
    (7,082,524
    )
    
    
    Other start-up costs
    
    
    
    
    
    
    39,792
    
    
    
    
    
    
    
    409,668Asset management and acquisition fees
    
    
    1,186,443
    
    
    
    
    
    
    
    3,457,177
    
    
    
    General and administrative expenses
    
    
    354,766
    
    
    
    246,549
    
    
    
    1,704,108
    
    
    
    302,452Forgiveness of related party payable
    
    
    (1,730,000
    )
    
    
    
    
    
    
    (1,730,000
    )
    
    
    Depreciation and amortization
    
    
    1,321,121
    
    
    
    
    
    
    
    1,333,822
    
    
    
    Property operating expenses
    
    
    1,048,762
    
    
    
    
    
    
    
    1,069,362
    
    
    
    Total expenses
    
    
    (4,901,432
    )
    
    
    286,341
    
    
    
    231,868
    
    
    
    712,120Income (loss) before equity in losses, interest
expense and
income (loss) allocated to minority interests
    
    
    6,974,803
    
    
    
    (286,341
    )
    
    
    1,889,111
    
    
    
    (712,120
    )Equity in losses of Hines-Sumisei
U.S. Core Office Fund, L.P.
    
    
    (75,758
    )
    
    
    
    
    
    
    (60,153
    )
    
    
    Interest expense
    
    
    (1,206,830
    )
    
    
    
    
    
    
    (1,245,930
    )
    
    
    Interest income
    
    
    19,980
    
    
    
    
    
    
    
    25,059
    
    
    
    (Income) loss allocated to minority interests
    
    
    (454,269
    )
    
    
    
    
    
    
    517,603
    
    
    
    Net income (loss)
    
    $
    5,257,926
    
    
    $
    (286,341
    )
    
    $
    1,125,690
    
    
    $
    (712,120
    )Basic and
diluted income (loss) per common share:Income (loss) per common share
    
    $
    0.40
    
    
    $
    (286.34
    )
    
    $
    0.14
    
    
    $
    (712.12
    )Weighted average number
common shares outstanding
    
    
    13,284,150
    
    
    
    1,000
    
    
    
    8,100,986
    
    
    
    1,000
  4




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HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
 For the Nine Months Ended September 30, 2005 and the Year Ended December 31, 2004
 (UNAUDITED)
 AdditionalPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity (Deficit)BALANCE,
January 1, 2004
    
    
    
    
    
    $
    
    
    
    
    1,000
    
    
    $
    1
    
    
    $
    9,999
    
    
    $
    (20,427
    )
    
    $
    (10,427
    )Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    2,072,116
    
    
    
    2,072
    
    
    
    20,582,905
    
    
    
    
    
    
    
    20,584,977Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,149
    )
    
    
    
    
    
    
    (99,149
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,582,527
    )
    
    
    
    
    
    
    (1,582,527
    )Other offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,195,689
    )
    
    
    
    
    
    
    (9,195,689
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,007,889
    )
    
    
    (10,007,889
    )BALANCE,
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    2,073,116
    
    
    
    2,073
    
    
    
    9,715,539
    
    
    
    (10,028,316
    )
    
    
    (310,704
    )Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    14,588,680
    
    
    
    14,589
    
    
    
    144,181,331
    
    
    
    
    
    
    
    144,195,920Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,635,326
    )
    
    
    
    
    
    
    (3,635,326
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,211,260
    )
    
    
    
    
    
    
    (10,211,260
    )Other offering
costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,364,183
    
    
    
    
    
    
    
    3,364,183Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125,690
    
    
    
    1,125,690BALANCE,
September 30, 2005
    
    
    
    
    
    $
    
    
    
    
    16,661,796
    
    
    $
    16,662
    
    
    $
    143,414,467
    
    
    $
    (8,902,626
    )
    
    $
    134,528,503
  5




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2005 and September 30, 2004
 (UNAUDITED)
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,125,690
    
    
    $
    (712,120
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    2,160,274
    
    
    
    Non-cash compensation expense
    
    
    31,775
    
    
    
    Equity in losses of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    60,153
    
    
    
    Loss allocated to minority interests
    
    
    (517,603
    )
    
    
    Accrual of organizational and offering expenses
    
    
    1,479,923
    
    
    
    Reversal of accrual of organizational and offering expenses
    
    
    (7,082,524
    )
    
    
    Forgiveness of related party payable
    
    
    (1,730,000
    )
    
    
    Changes in assets and liabilities:Increase in other assets
    
    
    (117,671
    )
    
    
    (97,874
    )Increase in straight-line rent receivable
    
    
    (148,784
    )
    
    
    Increase in tenant and other receivables
    
    
    (58,147
    )
    
    
    Increase in accounts payable and accrued expenses
    
    
    1,013,140
    
    
    
    139,772Increase in participation interest liability
    
    
    1,728,588
    
    
    
    Increase in other liabilities
    
    
    385,842
    
    
    
    Decrease in due to affiliates
    
    
    (99,987
    )
    
    
    Net cash used in operating activities
    
    
    (1,769,331
    )
    
    
    (670,222
    )CASH FLOWS FROM INVESTING ACTIVITIES:Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (81,552,923
    )
    
    
    Distributions received from Hines-Sumisei U.S. Core Office Fund, L.P.
in excess of equity in earnings
    
    
    2,781,902
    
    
    
    Investments in property
    
    
    (70,817,574
    )
    
    
    Additions to other assets
    
    
    (503,926
    )
    
    
    Increase in acquired out-of-market leases, net
    
    
    (15,400,881
    )
    
    
    Net cash used in investing activities
    
    
    (165,493,402
    )
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Increase (decrease) in escrowed investor proceeds
    
    
    (100,000
    )
    
    
    2,497,423(Increase) decrease in escrowed investor proceeds liability
    
    
    100,000
    
    
    
    (2,497,423
    )Increase in unaccepted subscriptions for common shares
    
    
    130,052
    
    
    
    Proceeds from issuance of common stock
    
    
    143,204,801
    
    
    
    Payments of selling commissions and dealer manager fees
    
    
    (9,778,454
    )
    
    
    Payments of organizational and offering expenses
    
    
    (4,500,000
    )
    
    
    Proceeds from advances from affiliate
    
    
    1,740,394
    
    
    
    675,222Payment on advances from affiliate
    
    
    (375,000
    )
    
    
    Dividends paid to shareholders
    
    
    (766,271
    )
    
    
    Dividends paid to minority interests
    
    
    (426,770
    )
    
    
    Proceeds from notes payable
    
    
    138,300,000
    
    
    
    Payments on notes payable
    
    
    (91,000,000
    )
    
    
    Additions to deferred financing costs
    
    
    (1,115,863
    )
    
    
    Additions to deferred offering costs
    
    
    
    
    
    
    (5,000
    )Net cash provided by financing activities
    
    
    175,412,889
    
    
    
    670,222Net change in cash
    
    
    8,150,156
    
    
    
    Cash, beginning of period
    
    
    1,536,439
    
    
    
    211,000Cash, end of period
    
    $
    9,686,595
    
    
    $
    211,000Supplemental Disclosure of Cash Flow InformationCash paid for interest
    
    $
    845,102
    
    
    $
    Supplemental Schedule of Non-Cash Financing ActivitiesUnpaid selling commissions and dealer manager fees
    
    $
    769,563
    
    
    $
    Deferred offering costs offset against additional paid-in capital
    
    $
    1,140,567
    
    
    $
    Reversal of deferred offering costs against additional paid-in capital
    
    $
    (4,504,750
    )
    
    $
    Dividends declared and unpaid
    
    $
    2,008,861
    
    
    $
    Distributions receivable
    
    $
    2,496,418
    
    
    $
    Distributions declared and unpaid to minority interests
    
    $
    197,846
    
    
    $
    Dividends reinvested
    
    $
    959,342
    
    
    $
    Non-cash net assets acquired upon acquisition of property
    
    $
    1,365,787
    
    
    $
    Accrual of deferred financing costs
    
    $
    174,410
    
    
    $
    
  6




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2005
(UNAUDITED)
 1. Organization
 The accompanying interim unaudited 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, 2004 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, 2005 and December 31, 2004, the results of operations for the three and
nine months ended September 30, 2005 and 2004, and the cash flows for the nine months ended
September 30, 2005 and 2004 have been included. The results of operations for such interim periods
are not necessarily indicative of the results for the full year.
  Public Offering
    Minority Interests
  7




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Investment Property
   2. Summary of Significant Accounting Policies
 Basis of Presentation
   Fair Value of Financial Instruments
   Revenue Recognition
  Investment Property
   8




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
       In-place
    
    
    Out-of-MarketLeases
    
    
    Leases, netOctober 1 through December 31, 2005
    
    $
    1,170,532
    
    
    $
    487,7602006
    
    
    3,783,857
    
    
    
    1,212,3532007
    
    
    3,665,031
    
    
    
    1,318,0452008
    
    
    3,587,856
    
    
    
    1,404,3632009
    
    
    3,005,498
    
    
    
    1,497,415
 9




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Deferred Financing Costs
  Other Assets
  September 30,
    
    
    December 31,2005
    
    
    2004Property acquisition escrow deposit
    
    $
    500,000
    
    
    $
    Prepaid insurance
    
    
    150,601
    
    
    
    46,688Other
    
    
    54,182
    
    
    
    Total
    
    $
    704,783
    
    
    $
    46,688
 Cash and Cash Equivalents
  Escrowed Investor Proceeds
  Unaccepted Subscriptions for Common Shares
  Due to Affiliates
  September 30,
    
    
    December 31,2005
    
    
    2004Organizational and Offering Costs
    
    $
    22,087,275
    
    
    $
    23,966,785Reversal of Organizational and Offering Costs
    
    
    (11,587,274
    )
    
    
    Dealer Manager Fees and Selling Commissions
    
    
    769,563
    
    
    
    336,757Other
    
    
    2,439,724
    
    
    
    1,174,317Forgiveness of related party payable
    
    
    (1,730,000
    )
    
    
    Total
    
    $
    11,979,288
    
    
    $
    25,477,859
  10




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Organizational and Offering Costs
    Other Start-up Costs
  Per Share Data
  Income Taxes
  11




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
  Stock-based Compensation
 Accounting for Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to
Employees,
 3. Real Estate Investments
  Ownership bytheProperty
    

Location
    
Company(1)(2)1900 and 2000 Alameda de las Pulgas
    
    San Mateo, California
    
    100.00%Citymark
    
    Dallas, Texas
    
    100.00%425 Lexington Avenue
    
    New York City, New York
    
    10.07%499 Park Avenue
    
    New York City, New York
    
    10.07%600 Lexington Avenue
    
    New York City, New York
    
    10.07%1200 19th Street
    
    Washington D.C.
    
    10.07%One Shell Plaza
    
    Houston, Texas
    
    11.37%Two Shell Plaza
    
    Houston, Texas
    
    11.37%The KPMG Building
    
    San Francisco, California
    
    22.74%101 Second Street
    
    San Francisco, California
    
    22.74%Three First National Plaza
    
    Chicago, Illinois
    
    18.19%525 B Street
    
    San Diego, California
    
    22.74%
 
 (1)
    
    This percentage shows the effective ownership of the Operating Partnership
in the properties listed. As of September 30, 2005, we owned a 92.58% interest in the
Operating Partnership and were its sole general partner. Affiliates of Hines owned the
remaining 7.42% interest in the Operating Partnership. We own interests in all of the
properties other than the Dallas and San Mateo buildings as a result of our interest in the
Core Fund, in which we owned a 24.80% non-managing
general partner interest as of September 30, 2005. The Core Fund does not own 100% of these buildings; its ownership interest in
its buildings ranges from 40.6% to 90.1%.(2)
    
    Real estate investments which are owned 100% by the Company are
referred to as direct investments. 12




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##### Table of Contents





HINES REAL ESTATE INVESTMENT TRUST, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)


Direct real estate investments










Acquired
    
    
    AcquiredBuildings and
    
    
    In-Place
    
    
    Above- Market
    
    
    Below-MarketImprovements
    
    
    Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    26,451,138
    
    
    $
    20,003,367
    
    
    $
    16,525,414
    
    
    $
    1,124,533Less:
Accumulated depreciation and amortization
    
    
    (157,477
    )
    
    
    (1,176,345
    )
    
    
    (522,199
    )
    
    
    (89,136
    )Net
    
    $
    26,293,661
    
    
    $
    18,827,022
    
    
    $
    16,003,215
    
    
    $
    1,035,397




Fixed FutureMinimum RentalsOctober 1 through December 31, 2005
    
    $
    2,872,9842006
    
    
    9,285,1402007
    
    
    9,289,5742008
    
    
    9,155,3772009
    
    
    8,709,020Thereafter
    
    
    40,199,532Total
    
    $
    79,511,627



    57% was earned from a tenant in the insurance industry, whose
    leases representing 36% of their space expire in December 2005
and whose remaining space expires in May 2018; and
    25% was earned from a tenant in the construction industry,
    whose leases representing 43% of their space expire in November
2009 and whose remaining space expires in November 2010. Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
      Consolidated Condensed Balance Sheet of the Core Fund
as of September 30, 2005
(unaudited)
 ASSETSCash
    
    $
    41,701,161Property, net
    
    
    1,399,905,483Other assets
    
    
    255,517,883Total Assets
    
    $
    1,697,124,527LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    953,770,000Other liabilities
    
    
    88,104,630Minority interest
    
    
    265,300,512Partners capital
    
    
    389,949,385Total Liabilities and Partners Capital
    
    $
    1,697,124,527
 13




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Consolidated Condensed Statement of Operations of the Core Fund
For the Nine Months Ended September 30, 2005
(unaudited)
 Revenues and interest income
    
    $
    146,858,043Operating expenses
    
    
    (65,681,613
    )Interest expense
    
    
    (34,474,048
    )Depreciation and amortization
    
    
    (41,008,526
    )Minority interest
    
    
    (5,852,436
    )Net Loss
    
    $
    (158,580
    )
  
    
    15% was earned from two affiliated tenants in the oil and gas industry, whose leases
expire on December 31, 2015; and
    
    39% was earned from several tenants in the legal services industry, whose leases expire
at various times during the years 2007 through 2027.
 14




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 4. Debt Financing
     15




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 5. Dividends
  AnnualizedRatePeriod
    
    Declared(1)
    
    Date PaidJanuary, February and March 2005
    
    
    6.0
    %
    
    April 2005April, May and June 2005
    
    
    6.0
    %
    
    July 2005July, August and September 2005
    
    
    6.0
    %
    
    October 2005October and November 2005
    
    
    6.0
    %
    
    January 2006(2)
 
 (1)
    
    Dividends were declared in the amount of $0.00164384 per share per day,
representing an annualized rate of 6.0% based on a price of $10.00 per share.(2)
    
    Anticipated payment date. 6. Related Party Transactions
 Advisory Agreement
  Acquisition Fees
 Asset Management Fees
 Expense Reimbursements
 16




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Reimbursement to the Company
 Dealer Manager Agreement
  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. Hines earned property management fees of
approximately $57,000 and $59,000 for the quarter and nine months ended September 30, 2005,
respectively. These amounts, net of payments, resulted in a liability of approximately
$11,000 as of September 30, 2005, which has been included in the accompanying 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. Hines earned no leasing, construction management or redevelopment fees during
the quarter and nine months ended September 30, 2005.
    
    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s duties under the agreement. However, the reimbursable cost of these
off-site personnel and overhead expenses will be 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 approximately $171,000 and $173,000 for the quarter and nine months
ended September 30, 2005, respectively. These
amounts, net of payments, resulted in a liability of approximately
$58,000 as of September
30, 2005, which has been included in the accompanying consolidated balance sheets.
 
 17




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 The Participation Interest
   Acquisition of Interests in the Core Fund
  7. Subsequent Events
 Entry into a Material Definitive Agreement
   18




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
 Acquisition of 1515 S Street
   Capital Commitment to the Core Fund
  19




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
 
 Item 2. 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;
    
    Our ability to secure adequate insurance at reasonable and appropriate rates against
catastrophic events, such as earthquakes and terrorist attacks;
    
    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;
 
 20




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued
 
    
    The lack of liquidity associated with our assets;
    
    Our reliance on Hines Advisors Limited Partnership (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 acceptable service levels 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.
  Overview
   21




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS, continued
  Ownership byLeasable
    
    
    
    theProperty
    
    Location
    
    Square Feet
    
    % Leased
    

Company(1)(2)1900 and 2000 Alameda de las Pulgas
    
    San Mateo,
California
    
    253,377
    
    84%
    
    100.00%Citymark
    
    Dallas, Texas
    
    218,943
    
    100%
    
    100.00%425 Lexington Avenue
    
    New York
City, New York
    
    699,048
    
    100%
    
    10.07%499 Park Avenue
    
    New York
City, New York
    
    280,919
    
    100%
    
    10.07%600 Lexington Avenue
    
    New York
City, New York
    
    280,634
    
    95%
    
    10.07%1200 19th Street
    
    Washington D.C.
    
    236,436
    
    100%
    
    10.07%One Shell Plaza
    
    Houston,
Texas
    
    1,225,786
    
    96%
    
    11.37%Two Shell Plaza
    
    Houston,
Texas
    
    564,843
    
    92%
    
    11.37%The KPMG Building
    
    San
Francisco, California
    
    379,330
    
    88%
    
    22.74%101 Second Street
    
    San
Francisco, California
    
    387,866
    
    94%
    
    22.74%Three First National Plaza
    
    Chicago,
Illinois
    
    1,439,367
    
    87%
    
    18.19%525 B Street
    
    San Diego,
California
    
    423,546
    
    98%
    
    22.74%
 
 (1)
    
    This percentage shows the effective ownership of the Operating Partnership
in the properties listed. As of September 30, 2005, we owned a 92.58% interest in the
Operating Partnership and were its sole general partner. Affiliates of Hines owned the
remaining 7.42% interest in the Operating Partnership. We own interests in all of the
properties other than the Dallas and San Mateo buildings as a result of our interest in the
Core Fund, in which we owned a 24.80% non-managing general partner
interest as of September 30, 2005. The Core Fund does not own 100% of these buildings; its ownership interest in
its buildings ranges from 40.6% to 90.1%.(2)
    
    Real estate investments which are owned 100% by the Company which are
referred to as direct investments.   Critical Accounting Policies
  Basis of Presentation
  22




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
   Revenue Recognition
  Investment Property
      23




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Organizational and Offering Costs
  Financial Condition, Liquidity and Capital Resources
  
    
    proceeds from our current and potential follow-on offerings, as well as our dividend reinvestment plan;
    
    proceeds from debt financings, including secured or unsecured facilities;
    
    cash flow generated by our real estate investments and operations; and
    
    advances from affiliates.
 Sources of Funds
 Our public offering
   24




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Debt financings
       25




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Cash flow from real estate investments and operations
  
    
    We earned distributions of approximately $2.5 million and $5.0 million, respectively,
related to our investment in the Core Fund, and
    
    We earned distributions of approximately $1.0 million related to properties we own
directly.
 Advances from affiliates
   Uses of Funds
 Real estate investments
      26




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Payment of offering and other costs and expenses
      27




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 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. Hines earned 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. Hines has earned no leasing, construction management or redevelopment fees during
the quarter and nine months ended September 30, 2005.
    
    We 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s duties under the agreement. However, the reimbursable cost of these
off-site personnel and overhead expenses is 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. We incurred reimbursable expenses of
approximately $171,000 and $173,000 for the quarter and nine months
ended September 30, 2005, respectively.
 Dividends
     Results of Operations
  Direct Investments
  28




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Our Interest in the Core Fund
   Asset Management and Acquisition Fees
  General and Administrative Expenses
 .
 (Income) Loss Allocated to Minority Interests
  29




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Subsequent Events
 Entry into a Material Definitive Agreement
   Acquisition of 1515 S Street
   Capital Commitment to the Core Fund
  30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures.
   31




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##### Table of Contents



PART II- OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    Type of Expense
    
    AmountUnderwriting discounts and commissions
    
    $
    7,901,482Finders fees
    
    
    Expenses paid to or for underwriters
    
    
    Other expenses paid to affiliates
    
    
    7,622,743Other expenses paid to non-affiliates
    
    
    Total expenses
    
    $
    15,524,225
  32




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##### Table of Contents



Type of Expense
    
    AmountConstruction of plant, building and facilities
    
    $
    Purchase of real estate interests
    
    
    107,179,175Acquisition of other businesses
    
    
    Repayment of indebtedness
    
    
    34,700,000
    (1)Working capital (as of September 30, 2005)
    
    
    7,358,048Temporary investments
    
    
    Other uses
    
    
    Total uses
    
    $
    149,227,223
 (1)
    
    These were principal payments made on our Term Loan and Credit Facility which were put in place to provide
bridge equity for the purpose of acquiring our real estate investments.  
 Item 6. Exhibits.
  33




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##### Table of Contents



SIGNATURES
  HINES REAL ESTATE INVESTMENT TRUST, INC.November 14, 2005
    By:
    /s/ Charles M. BaughnCharles M. BaughnChief Executive Officer November 14, 2005
    By:
    /s/ Sherri W. SchugartSherri W. SchugartChief Financial Officer 34




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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
    
    Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.2 to
Amendment No. 4 to the registrants Registration Statement on Form S-11, File No. 333-108780, on May 4,
2004 and incorporated herein by reference).10.1
    
    Purchase and Sale Agreement, dated as of July 25, 2005, by and among Hines US Core LLC, as seller, Hines
REIT Properties, L.P., as buyer, and acknowledged by Hines U.S. Core Office Capital LLC, the managing
general partner of Hines-Sumisei U.S. Core Office, L.P. (filed as Exhibit 99.1 to the registrants
Current Report on Form 8-K dated July 25, 2005 and incorporated herein by reference).10.2*
    
    Agreement of Sale and Purchase dated as of August 9, 2005 between Centex Office Citymark I, L.P. and
Hines REIT Properties, L.P.10.3*
    
    Agreement for Purchase of Office Building dated effective as of August 12, 2005, between Hines REIT
Properties, L.P. and JB Management L.P., as amended.10.4*
    
    First Amendment to Term Loan Agreement dated August 23, 2005 between Hines REIT Properties, L.P. and
KeyBank National Association, in its capacity as administrative agent, and the other lenders from time
to time parties to that certain Credit Agreement dated September 9, 2005.10.5*
    
    Revolving Line of Credit Agreement dated September 9, 2005, by and between Hines REIT Properties, L.P.,
and KeyBank National Association, in its capacity as administrative agent, and the other lenders from
time to time parties to that certain Credit Agreement dated September 9, 2005.10.6*
    
    Unconditional Guaranty of Payment and Performance of Hines Real Estate Investment Trust, Inc. in favor
of KeyBank National Association, in its capacity as administrative agent, and the other lenders from
time to time parties to that certain Credit Agreement dated September 9, 2005.10.7*
    
    Subordination Agreement, dated September 9, 2005, among Hines REIT Properties, L.P., Hines Advisors
Limited Partnership, Hines Interests Limited Partnership and KeyBank National Association.10.8*
    
    Ownership Interests Pledge and Security Agreement of Hines REIT Properties, L.P. dated September 9, 2005.10.9*
    
    Agreement of Sale dated October 12, 2005 by and between Miami RPFIV Airport
Corporate Center Associates Limited Liability Company and Hines REIT
Properties, L.P., as amended.10.10*
    
    Letter Agreement dated
November 9, 2005 among Hines-Sumisei U.S. Core Office Fund,
L.P., Hines US Core Office Capital LLC and Hines REIT Properties, L.P.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 35