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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
    FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
the transition period from
                to
 Commission file number: 333-108780 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)
    
    75056-6118(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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ As
of May 12, 2005, there were 192,930,128 outstanding common shares of the common
stock of Hines Real Estate Investment Trust, Inc.




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TABLE OF CONTENTS  
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited).Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004Consolidated Statement of Shareholders Equity (Deficit) for the Three Months Ended March 31, 2005 and for the Year ended December 31, 2004Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004Notes to Consolidated Financial Statements  March 31, 2005Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 4. Submission of Matters to a Vote of Security Holders.Item 6. Exhibits.SIGNATURESCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Statement of CEO and CFO pursuant to Section 906Sixth Amended and Restated AgreementAgreement of SaleCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO and CFO pursuant to Section 906
  2




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PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements. HINES REAL ESTATE INVESTMENT TRUST, INC. 
 CONSOLIDATED BALANCE SHEETS
 As of March 31, 2005 and December 31, 2004
 (UNAUDITED)
 March 31, 2005
    
    
    December 31, 2004ASSETSCash
    
    $
    3,497,884
    
    
    $
    1,536,439Escrowed investor proceeds
    
    
    433,557
    
    
    
    100,000Distributions receivable
    
    
    917,483
    
    
    
    247,494Due from affiliate
    
    
    204,594
    
    
    
    Prepaid insurance and other assets
    
    
    5,700
    
    
    
    46,688Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    55,504,023
    
    
    
    28,181,662TOTAL ASSETS
    
    $
    60,563,241
    
    
    $
    30,112,283LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Liabilities:Accounts payable and accrued expenses
    
    $
    465,946
    
    
    $
    114,759Escrowed investor proceeds liability
    
    
    433,557
    
    
    
    100,000Unaccepted subscriptions for common shares
    
    
    442,082
    
    
    
    562,200Due to affiliates
    
    
    28,273,402
    
    
    
    25,477,859Participation interest liability
    
    
    736,219
    
    
    
    409,160Dividends payable
    
    
    534,652
    
    
    
    99,149Distributions payable to minority interests
    
    
    170,907
    
    
    
    73,231Total liabilities
    
    
    31,056,765
    
    
    
    26,836,358Minority interest
    
    
    2,709,286
    
    
    
    3,586,629Commitments and ContingenciesShareholders
equity (deficit):Preferred shares, $.001 par value; 500,000,000
preferred shares authorized as of March 31, 2005 and
December 31, 2004; no preferred shares
issued or outstanding as of March 31, 2005 and
December 31, 2004
    
    
    
    
    
    
    Common shares, $.001 par value; 1,500,000,000
common shares authorized as of March 31, 2005 and
December 31, 2004; 5,450,602 and 2,073,116
common shares issued and outstanding, respectively,
as of March 31, 2005 and December 31, 2004
    
    
    5,451
    
    
    
    2,073Additional paid-in capital
    
    
    39,056,635
    
    
    
    9,715,539Retained deficit
    
    
    (12,264,896
    )
    
    
    (10,028,316
    )Total shareholders equity (deficit)
    
    
    26,797,190
    
    
    
    (310,704
    )TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
    
    $
    60,563,241
    
    
    $
    30,112,283
 See notes to the consolidated financial statements. 3




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HINES REAL ESTATE INVESTMENT TRUST, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended March 31, 2005 and March 31, 2004
 (UNAUDITED)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2005
    
    
    March 31, 2004Revenues
    
    $
    
    
    
    $
    Expenses:Organizational and offering expenses
    
    
    1,479,923
    
    
    
    Asset management and acquisition fees
    
    
    654,118
    
    
    
    Other start-up costs
    
    
    
    
    
    
    155,865General and administrative expenses
    
    
    780,103
    
    
    
    Total Expenses
    
    
    2,914,144
    
    
    
    155,865Loss before equity in losses, interest
income and loss allocated to minority interests
    
    
    (2,914,144
    )
    
    
    (155,865
    )Equity in losses of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (28,944
    )
    
    
    Interest income
    
    
    1,564
    
    
    
    Loss allocated to minority interests
    
    
    704,944
    
    
    
    Net Loss
    
    $
    (2,236,580
    )
    
    $
    (155,865
    )Loss per common share
    
    $
    (0.62
    )
    
    $
    (155.87
    )Weighted average number common shares outstanding
    
    
    3,613,838
    
    
    
    1,000
 See notes to the consolidated financial statements. 4




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HINES REAL ESTATE INVESTMENT TRUST, INC. 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
 For the Three Months Ended March 31, 2005 and the Year Ended December 31, 2004
 (UNAUDITED)
 Preferred Shares
    
    
    
    
    
    
    Common Shares
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalPreferred
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    3,377,486
    
    
    
    3,378
    
    
    
    33,647,095
    
    
    
    
    
    
    
    33,650,473Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (534,652
    )
    
    
    
    
    
    
    (534,652
    )Selling commissions and dealer manager fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,630,780
    )
    
    
    
    
    
    
    (2,630,780
    )Other offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,140,567
    )
    
    
    
    
    
    
    (1,140,567
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,236,580
    )
    
    
    (2,236,580
    )BALANCE, March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    5,450,602
    
    
    $
    5,451
    
    
    $
    39,056,635
    
    
    $
    (12,264,896
    )
    
    $
    26,797,190
 See notes to the consolidated financial statements. 5




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HINES REAL ESTATE INVESTMENT TRUST, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Three Months Ended March 31, 2005 and March 31, 2004
(UNAUDITED)
 For the Three
    
    
    For the ThreeMonths Ended
    
    
    Months EndedMarch 31, 2005
    
    
    March 31, 2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,236,580
    )
    
    $
    (155,865
    )Adjustments to reconcile net loss to net cash used in
operating activities:Equity in losses of Hines-Sumisei U.S. Core Office
Fund, L.P.
    
    
    28,944
    
    
    
    Loss allocated to minority interests
    
    
    (704,944
    )
    
    
    Accrual of organizational and offering expenses
    
    
    1,479,923
    
    
    
    Decrease in prepaid insurance
    
    
    46,688
    
    
    
    Increase in accounts payable and accrued expenses
    
    
    345,487
    
    
    
    67,152Increase in participation interest liability
    
    
    327,059
    
    
    
    Increase in due from affiliates
    
    
    (204,594
    )
    
    
    Decrease in due to affiliates
    
    
    (162,027
    )
    
    
    Net cash used in operating activities
    
    
    (1,080,044
    )
    
    
    (88,713
    )CASH FLOWS FROM INVESTING ACTIVITIES:Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (28,268,788
    )
    
    
    Distributions received from Hines-Sumisei U.S. Core Office
Fund, L.P.
    
    
    247,494
    
    
    
    Net cash used in investing activities
    
    
    (28,021,294
    )
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Increase in escrowed investor proceeds
    
    
    (333,557
    )
    
    
    Increase in escrowed investor proceeds liability
    
    
    333,557
    
    
    
    Decrease in unaccepted subscriptions for common shares
    
    
    (120,118
    )
    
    
    Proceeds from issuance of common stock
    
    
    33,603,635
    
    
    
    Payments of selling commissions and dealer manager fees
    
    
    (2,669,522
    )
    
    
    Proceeds from advances from affiliate
    
    
    375,821
    
    
    
    88,713Dividends paid to shareholders
    
    
    (52,311
    )
    
    
    Dividends paid to minority interests
    
    
    (74,722
    )
    
    
    Net cash provided by financing activities
    
    
    31,062,783
    
    
    
    88,713Net change in cash
    
    
    1,961,445
    
    
    
    Cash, beginning of period
    
    
    1,536,439
    
    
    
    211,000Cash, end of period
    
    $
    3,497,884
    
    
    $
    211,000Supplemental Schedule of Non-Cash Financing ActivitiesUnpaid selling commissions and dealer manager fees
    
    $
    298,016
    
    
    $
    Deferred offering costs offset against additional paid-in capital
    
    $
    1,140,567
    
    
    $
    Dividends declared and unpaid
    
    $
    534,652
    
    
    $
    Distributions declared and unpaid to minority interests
    
    $
    172,398
    
    
    $
    Dividends reinvested
    
    $
    46,838
    
    
    $
    
 See notes to the consolidated financial statements. 6




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HINES REAL ESTATE INVESTMENT TRUST, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2005
 (UNAUDITED)
 1. Organization The accompanying interim unaudited 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 generally
accepted accounting principles 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. Management believes that the disclosures included are adequate to make the information
presented not misleading. In the opinion of management, all adjustments and eliminations,
consisting only of normal recurring adjustments, necessary to present fairly the financial position
of Hines Real Estate Investment Trust, Inc. as of March 31, 2005, the results of operations for the
three months ended March 31, 2005 and 2004, and the cash flows for the three months ended March 31,
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. Hines Real Estate Investment Trust, Inc., a Maryland corporation (Hines REIT and, together
with the Operating Partnership (as defined below), 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 commercial real estate. The Company operates and
intends to continue to operate in a manner to qualify for real estate investment trust (REIT)
status for federal income tax purposes and intends to elect REIT status in connection with the
filing of its 2004 federal tax return. 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 a 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 Operating Partnership entered into with the Advisor (the
Advisory Agreement). Public Offering On June 18, 2004, Hines REIT commenced its initial public offering pursuant to which it is offering
a minimum of 1,000,000 and a maximum of 220,000,000 common shares for sale to the public (the
Offering). Through March 31, 2005, the Company had received gross offering proceeds of $54,657,994 from
the sale of 5,490,902 common shares, including $433,000 of gross proceeds relating to 43,300 shares
sold to investors in Pennsylvania (see Note 2) and $46,838 of gross proceeds relating to 4,930
shares sold under Hines REITs dividend reinvestment plan. As of March 31, 2005, 194,511,028 common
shares remained available for sale to the public pursuant to the Offering, exclusive of common
shares available under the Companys dividend reinvestment plan. Hines REIT contributes all net
proceeds from the Offering to the Operating Partnership in exchange for partnership units in the
Operating Partnership. As of March 31, 2005, Hines REIT owned an 82.13% general partner interest in
the Operating Partnership. From
April 1 through May 12, 2005, Hines REIT received gross offering
proceeds of $15,995,080 from the sale of 1,611,057 common shares, including
$115,200 of gross proceeds relating to 11,520 shares
sold to investors in Pennsylvania and $286,487 of gross proceeds relating to 30,157 shares sold
under the dividend reinvestment plan. As of May 12,
2005, 192,930,128 common shares remained available
for sale to the public pursuant to the Offering, exclusive of common shares available under Hines
REITs dividend reinvestment plan. Minority Interests Hines Real Estate Holdings Limited Partnership, (HREH), an affiliate of Hines, owned a
16.68% and 34.33% interest in the Operating Partnership as of March 31, 2005 and December 31, 2004,
respectively. As a result of HALP Associates Limited 7




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Partnerships (HALP) ownership of the Participation Interest (see Note 5), HALPs percentage
ownership in the Operating Partnership was 1.19% and 1.38% as of March 31, 2005 and December 31,
2004, respectively. Investment in Hines-Sumisei U.S. Core Office Fund, L.P. As of March 31, 2005 and December 31, 2004, the Company owned a 13.87% and 12.51% non-managing
general partner interest in the Core Fund (as defined below), respectively. As of March 31, 2005,
the Core Fund owned indirect interests in nine office properties. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Hines REIT and the Operating
Partnership (over which Hines REIT exercises financial and operating control) and the related
amount of minority interest. All intercompany balances and transactions have been eliminated in
consolidation. Investments in real estate partnerships where Hines REIT has the ability to exercise
significant influence, but does not exercise financial and operating control, are accounted for
using the equity method. See further discussion in Note 3. 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. At March 31, 2005 and December 31, 2004, the Company did not have any cash
equivalents. Escrowed Investor Proceeds Escrowed investor proceeds and the related liability include gross proceeds relating to shares
sold to investors in Pennsylvania, which are being held in escrow until the Company raises at least
$73,000,000 of gross proceeds in the Offering. Unaccepted Subscriptions for Common Shares Unaccepted subscriptions for common shares include proceeds related to subscriptions which had
not been accepted by the Company as of March 31, 2005 and December 31, 2004. Due to affiliates Due to affiliates includes the following: March 31, 2005
    
    
    December 31, 2004Organizational and Offering Costs
    
    $
    26,587,275
    
    
    $
    23,966,785Dealer Manager Fees and Selling Commissions
    
    
    298,016
    
    
    
    336,757Other
    
    
    1,388,111
    
    
    
    1,174,317Total
    
    $
    28,273,402
    
    
    $
    25,477,859
 Organizational and Offering Costs Certain organizational and offering costs of the Company have been paid by the Advisor on
behalf of the Company. Pursuant to the Advisory Agreement, the Company is obligated to reimburse
the Advisor in an amount equal to the lesser of actual organizational and offering costs incurred
or 3.0% of the gross proceeds raised from the Offering. In no event will the Company have any
obligation to reimburse the Advisor for organizational and offering costs totaling in excess of
3.0% of the gross proceeds from the Offering. 8




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As of March 31, 2005 and December 31, 2004, the Advisor had incurred on behalf of the Company
organizational and offering costs of approximately $26.6 million and $24.0 million, respectively
(of which approximately $16.1 million and $14.8 million as of March 31, 2005 and December 31, 2004,
respectively, relates to the Advisor or its affiliates). These amounts include approximately $16.3
million and $14.8 million as of March 31, 2005 and December 31, 2004, respectively, of
organizational and internal offering costs, and approximately $10.3 million and $9.2 million as of
March 31, 2005 and December 31, 2004, respectively, of third-party offering costs. For the quarter
ended March 31, 2005, organizational and internal offering costs of approximately $1.5 million were
expensed and included in the accompanying consolidated statement of operations and third-party

offering costs of approximately $1.1 million were offset against additional paid-in capital on the
accompanying consolidated statement of shareholders deficit. Other Start-up Costs Other start-up costs recorded in the accompanying consolidated statement of operations for the
quarter ended March 31, 2004 include primarily legal and directors fees associated with the
formation and initial activities of Hines REITs board of directors. 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. Diluted loss per common share has
not been presented as there were no dilutive potential common shares for the quarters ended March
31, 2005 or 2004. Income Taxes For the year ended December 31, 2004, Hines REIT intends to make an election to be taxed as a
REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code)
and will be taxed as such beginning with its taxable year ended December 31, 2004. In addition, the
Companys sole investment as of March 31, 2005 and December 31, 2004 was its investment in the Core
Fund, which has invested in properties through a structure that includes several entities that will
elect to be taxed as REITs. Hines REIT 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. No provision has been made for federal income taxes for the quarter ended March 31, 2005 or
the year ended December 31, 2004 in the accompanying consolidated financial statements. Stock-based Compensation Under the terms of the Employee and Director Incentive Share Plan, on December 2, 2004, the
Company granted each independent member of its board of directors 1,000 restricted shares. These
restricted shares will fully vest upon completion of each directors initial term for which he was
elected. In accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation
(as amended), the Company is recognizing the expense related to these shares over the vesting
period and therefore has recorded $14,131 of compensation expense for the quarter ended March 31,
2005. This expense is included in general and administrative expenses in the accompanying
statements of operations. 3. Investment in Hines-Sumisei U.S. Core Office Fund, L.P. Hines-Sumisei U.S. Core Office Fund, L.P. (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. As of December 31, 2004, the Companys equity method investment in the Core Fund reflected in
the accompanying consolidated balance sheet represented the $28,360,695 the Company had invested in
the Core Fund through that date as adjusted by the equity in earnings and distributions earned from
the Core Fund related to that net investment for the period from November 23, 2004 to December 31,
2004. As of December 31, 2004, the Company had distributions receivable from the Core Fund of
$247,494 related to this investment. On February 1, 2005, the Company acquired an additional $21,629,482 interest
in the Core Fund, using net offering proceeds of $2,492,000 and agreeing to pay the
remaining $19,137,482 of the purchase price as the Company received additional net proceeds 9




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from the Offering. In March 2005, the Company paid this remaining amount in full. As of March 31,
2005, the Company owned a 13.87% non-managing general partner interest in the Core Fund. The Core Fund owns interests in real estate assets through certain limited liability companies
and limited partnerships which have mortgage financing in place. None of this debt is recourse to
the Core Fund or the Company. Consolidated condensed financial information of the Core Fund is
summarized as follows: Consolidated Condensed Balance Sheet of the Core Fund
as of March 31, 2005
(unaudited) ASSETSCash
    
    $
    32,611,386Property, net
    
    
    1,304,097,478Other assets
    
    
    248,891,680Total Assets
    
    $
    1,585,600,544LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    859,255,000Other liabilities
    
    
    67,736,878Minority interest
    
    
    273,880,192Partners capital
    
    
    384,728,474Total Liabilities and Partners Capital
    
    $
    1,585,600,544
 Consolidated Condensed Statement of Operations of the Core Fund
For the Quarter Ended March 31, 2005
(unaudited) Revenues and interest income
    
    $
    42,640,235Operating expenses
    
    
    (18,450,569
    )Interest expense
    
    
    (10,560,126
    )Depreciation and amortization
    
    
    (11,980,520
    )Minority interest
    
    
    (1,895,714
    )Net Loss
    
    $
    (246,694
    )
 Of the total rental revenue of the Core Fund for the quarter ended March 31, 2005,
approximately:  
    17% was earned from two tenants in the oil and gas industry, whose leases expire on December 31, 2015; and
    40% was earned from several tenants in the legal services industry, whose leases expire at various
times during the years 2007 through 2027. On April 1, 2005, the Company entered into a Purchase and Sale Agreement (the Agreement)
pursuant to which the Company will acquire an additional $40,000,000 non-managing general
partnership interest in the Core Fund (the Partnership Interest) from Hines US Core LLC (Core
LLC), an affiliate of Hines. Core LLC transferred an approximate 1.64% partnership interest to the
Company effective on April 1, 2005 and an additional 1.64% on both April 25, 2005 and May 6, 2005.
As a result of these transactions, the Company now owns an approximate 18.80% non-managing general
partner interest in the Core Fund. The Company 10




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applied $2,252,240 to the purchase price of this interest as of April 1, 2005 and agreed to pay the remaining $37,747,760 of deferred purchase price
for the Partnership Interest as it receives additional net proceeds from the Offering and
have available cash flow. As of May 12, 2005, the Company has paid $16,800,000 of the
purchase price for this interest. Core LLC will transfer the remaining approximate 4.47%(1) interest in the Core Fund to the
Company in two installments of approximately 1.64%(1) and a final installment of approximately 1.19%(1).
Each installment will be transferred upon payment in full of $7,000,000 for the previous
installment, which may be paid at any time in the Companys discretion within six months of the
date of transfer. Upon the completion of the transfer of all of the Partnership Interest covered by
the Agreement, Hines REIT expects to own an approximate 23.26%(1) non-managing general partner
interest in the Core Fund. To the extent that the Company receives any distributions from the Core
Fund in respect of the Partnership Interest which relate to periods prior to the acquisitions, such
amounts will be transferred to Core LLC. To the extent the Company receives any distributions from
the Core Fund in respect of the Partnership Interest which relate to periods after the date of the
acquisitions, but prior to the date the Company pays the remaining purchase price for such
Partnership Interest in full, such distributions will be allocated between the Company and the
seller of the Partnership Interest as follows: (i) the applicable amount of such distribution will
be divided and deemed paid on a daily basis during such period, and (ii) each daily amount will be
allocated between the parties based the relationship of the total purchase price paid versus the
amount of the remaining purchase price unpaid on such day. 4. Dividends The Companys board of directors has declared dividends for 2005 for the periods listed below,
payable to shareholders of record at the close of business each day during the applicable period. AnnualizedRatePeriod
    
    Declared(1)
    
    
    Date PaidJanuary 1, 2005  January 31, 2005
    
    
    6.0
    %
    
    April 2005February 1, 2005  February 28, 2005
    
    
    6.0
    %
    
    April 2005March 1, 2005  March 31, 2005
    
    
    6.0
    %
    
    April 2005April 1, 2005  April 30, 2005
    
    
    6.0
    %
    
    July 2005(2)May 1, 2005  May 31, 2005
    
    
    6.0
    %
    
    July 2005(2)
   (1)
    Dividends were declared in the amount of $0.00164384
per share per day, representing the annualized rate of
return on an investment of $10.00 per share if paid
each day over a 365-day period.(2)
    Anticipated payment date. 5. Related Party Transactions 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 $240,629 for the
quarter ended March 31, 2005, which have been recorded as an expense in the accompanying
consolidated statement of operations (see discussion of Participation Interest below). 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 $86,430 during the quarter (1) All partnership interests are based on the capital structure of the Core Fund as of May 13, 2005. 11




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ended March 31, 2005, which have been recorded as an expense in
the accompanying consolidated statement of operations (see discussion of Participation Interest
below). Expense Reimbursements In addition to reimbursement of organizational and offering costs
(see Note 2), the Company will reimburse the Advisor and its affiliates for certain other expenses
incurred in connection with the Companys administration and ongoing operations. As of March 31,
2005 and December 31, 2004 the Advisor had advanced to or paid
on behalf of the Company $1,348,552
and $976,769, respectively, to fund certain costs incurred by the Company, which has been
included in the accompanying consolidated balance sheets. Management expects that these amounts
will be repaid out of proceeds from the Offering or future operating cash flow. Reimbursement to the Company The Advisor must reimburse the Company quarterly for any
amounts by which operating expenses exceed, in any four consecutive fiscal quarters, the greater of
(i) 2.0% of the Companys average invested assets, which consists of the average book value of its
real estate properties, both equity interests in and loans secured by real estate, before reserves
for depreciation or bad debts or other similar non-cash reserves, or (ii) 25.0% of its net income,
excluding the gain on sale of any of the Companys assets, unless Hines REITs independent
directors determine that such excess was justified. Operating expenses generally include all
expenses paid or incurred by the Company as determined by generally accepted accounting principles,
except certain expenses identified in Hines REITs Amended and Restated Articles of Incorporation. Dealer Manager Agreement The Company has retained Hines Real Estate Securities, Inc (HRES or the Dealer Manager),
an affiliate of the Advisor, to serve as the dealer manager for the Offering. Pursuant to the
dealer manager agreement (DMA) the Company has entered into with HRES, the Company pays HRES
selling commissions in an amount of up to 6.0% of the gross proceeds of the common shares sold
pursuant to the Offering (up to 4.0% for common shares issued pursuant to the dividend reinvestment
plan), all of which will be reallowed to participating broker-dealers, plus a dealer manager fee in
the amount of 2.2% of the gross proceeds of the common shares sold pursuant to the Offering, a
portion of which may be reallowed to selected participating broker-dealers. No dealer manger fee
will be paid with respect to the common shares sold pursuant to Hines REITs dividend reinvestment
plan. Additionally, the Company or the Advisor may reimburse HRES for certain employee compensation
and other expenses relating to the Offering, including but not limited to reimbursement of up to
0.5% of gross proceeds for bona fide due diligence expenses incurred by HRES. Selling commissions
of $1,895,879 and dealer manager fees of $734,901 were earned by HRES for the quarter ended March
31, 2005, which have been offset against additional paid-in capital in the accompanying
consolidated statement of shareholders deficit. 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 1.19% and 1.38% as of March 31, 2005 and December 31, 2004, 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 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 $736,219 and $409,160 as of March 31, 2005 and December 31, 2004, respectively,
and is included in Participation Interest liability in the accompanying consolidated balance
sheets. The related expense of $327,059 for the quarter ended March 31, 2005 is included in asset
management and acquisition fees in the accompanying consolidated statement of operations. 12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. Explanatory Note As of March 31, 2004, we had not yet commenced real estate operations, therefore, we do not
have any meaningful active operations to discuss for the quarter ended March 31, 2004. The
following discussion and analysis of our financial condition should be read in conjunction with our
consolidated financial statements, the notes thereto, and the other financial data included
elsewhere in thisForm 10-Q. A Special Note Regarding Forward-Looking Statements Statements included in this Form 10-Q which are not historical facts (including any statements
concerning investment objectives, other plans and objectives of management for future operations or
economic performance, or assumptions or forecasts related thereto) are forward-looking 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 the forward-looking statements. Forward-looking statements are
typically identified by the use of terms such as may, will, 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 herein 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 the forward-looking statements could be inaccurate. All forward-looking statements
should be read in light of the factors identified in the Risk Factors section of the Registration
Statement on Form S-11 (File No. 333-108780) (the Registration Statement) of Hines Real Estate
Investment Trust, Inc. (Hines REIT), initially filed with the Securities and Exchange Commission
(the SEC) on September 12, 2003, as the same may be amended and supplemented from time to time. 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. Overview Hines REIT was formed primarily for the purpose of investing in office properties located
throughout the United States. In addition, we may invest in properties outside the United States,
non-office properties, mortgage loans, ground leases and other real estate investments. In order to provide capital for these investments, we filed our initial registration statement
covering a public offering of our common shares with the SEC on September 12, 2003, which was
declared effective on June 18, 2004. The offering provides the Company with the ability to raise
capital on a continual basis, and as of March 31, 2005, the Company had sold approximately
5,447,602 shares of common stock for gross proceeds of approximately $54,224,994. The Company
intends to continue raising capital through this offering, which expires in June 2006, and
potential follow-on offerings. We intend to invest the proceeds raised in our public offering in office properties generally
located in central business districts or suburban markets of major metropolitan cities. 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. Our sole investment as of March 31, 2005 was a 13.87% non-managing general partner interest in
Hines-Sumisei U.S. Core Office Fund, L.P. (the Core Fund), which as of that date held interests
in nine office properties located in New York City, Washington D.C., Houston, San Francisco and
Chicago. These properties represent approximately 5,494,000 square feet of rentable area of which
approximately 93% was leased to a diversified tenant base as of
March 31, 2005. 13




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The Company intends to continue to invest in the Core Fund as well as make other direct or
indirect real estate investments that will satisfy our primary investment objectives of preserving
capital, paying regular cash dividends and achieving appreciation of our assets over the long term.
Management believes capital will continue to flow into the commercial real estate market, which
results in a competitive environment for acquisition of assets. Hines Advisors Limited Partnership
(the Advisor), through an agreement with Hines Interests Limited Partnership (Hines), provides
us access to a fully integrated real estate organization with approximately 2,900 employees located
in 63 cities in the U.S. and in 13 other countries. The Advisor is an affiliate of Hines. We
believe Hines having real estate professionals living and working in the major markets in which
the Company seeks to invest allows us better access to investment opportunities due to the local
market knowledge and relationships with local owners, tenants and brokers. The ability of our
Advisor to identify and execute investment opportunities at a pace consistent with the capital
raised through our offering will directly impact the financial performance of the Company. Recent Developments and Subsequent Events On September 12, 2003, we filed a registration statement with the SEC covering the initial
public offering of our common shares. The registration statement was declared effective on June 18,
2004, and we received approval of our offering in all 50 states in October 2004. We filed the
registration statement to offer a maximum of 200,000,000 common shares to the public on a best
efforts basis at a price of $10.00 per share. We also registered up to 20,000,000 common shares
under our registration statement to be issued during our public offering pursuant to our dividend
reinvestment plan at a price of $9.50 per share. On November 23, 2004, we commenced our real estate operations and acquired the entire
$35,000,000 interest in the Core Fund we initially contracted to purchase from an affiliate of
Hines. Concurrently with this acquisition, we were admitted as the non-managing general partner of
the Core Fund. The document effecting our acquisition of this interest provided that we pay
$19,075,849 on the acquisition date and pay the remaining portion of the purchase price as we
received proceeds from our offering. As of December 31, 2004, we had paid an additional $9,284,846
of the purchase price, and we paid the remaining $6,639,305 of the purchase price in January 2005.
As of December 31, 2004 we had distributions receivable from the Core Fund of $247,494 related to
this investment. These distributions were paid in cash by the Core Fund in January 2005. On February 1, 2005, we acquired an additional $21,629,482 interest in the Core Fund, using
net offering proceeds of $2,492,000 and agreeing to pay the remaining $19,137,482 of the purchase
price as we received additional net proceeds from our offering. In March 2005, we paid this
remaining amount in full. As of March 31, 2005, we owned a 13.87% non-managing general partner
interest in the Core Fund. As of March 31, 2005 we had distributions receivable from the Core Fund
of $917,483 related to this investment. These distributions were paid in cash by the Core Fund in
April 2005. On April 1, 2005, we entered into a Purchase and Sale Agreement (the Agreement) pursuant to
which the Company will acquire an additional $40,000,000 non-managing general partnership interest
in the Core Fund (the Partnership Interest) from Hines US Core LLC, an affiliate of Hines (Core
LLC). Core LLC transferred an approximate 1.64% partnership interest to us effective as of April
1, 2005 and an additional 1.64% on both April 25, 2005 and May 6, 2005. As a result of these
transactions, the Company now owns an approximate 18.80% non-managing general partner interest in
the Core Fund. We applied $2,252,240 to the purchase price of this interest as of April 1, 2005 and
have agreed to pay the remaining $37,747,760 of deferred purchase price for the Partnership
Interest as we receive additional net proceeds from our public offering and have available cash
flow. As of May 12, 2005, we had paid $16,800,000 of the purchase price for this interest. Core LLC will transfer the remaining approximate 4.47%(1) interest in the Core Fund to us in
three installments of approximately 1.64%(1) and a final installment of approximately 1.19%(1). Each
installment will be transferred upon payment in full of $7,000,000 for the previous installment,
which may be paid at any time in our discretion within six months of the date of transfer. Upon the
completion of the transfer of all of the entire Partnership Interest covered by the Agreement, we
expect to own an approximate 23.26%(1) non-managing general partner interest in the Core Fund. To the
extent that the we receive any distributions from the Core Fund in respect of the Partnership
Interest which relate to periods prior to the acquisitions, such amounts will be transferred to
Core LLC. To the extent the we receive any distributions from the Core Fund in respect of these
units which relate to periods after the date of the acquisitions, but prior to the date the Company
pays the remaining purchase price for these units in full, such distributions will be allocated
between the Company and the seller of these units as follows: (i) the applicable amount of such
distribution will be divided and deemed paid on a daily basis during such period, and (ii) each
daily amount will be allocated between the parties based the relationship of the total purchase
price paid versus the amount of the remaining purchase price unpaid on such day. On December 31, 2004, January 31, 2005, and February 28, 2005, our board of directors declared
dividends for the months of January, February and March in an amount equal to $0.00164384 per share
per day. This amount, if paid each day over a 365-day (1) All partnership interests are based on the capital structure of the Core Fund as of May 13, 2005. 14




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period, would equal a 6.0% annualized return on an investment of $10.00 per share. These dividends
were calculated on a daily record basis, payable to shareholders of record of such shares as shown
on our books at the close of business on each applicable day during the period, and were aggregated
and paid on April 15, 2005. In addition, on March 28, 2005 and April 30, 2005, our board of
directors declared dividends for the months of April and May, respectively, in the same per-share
amount described above, to be aggregated and paid in cash in July 2005. Critical Accounting Policies Management believes our most critical accounting policies are the accounting for lease
revenues (including straight-line rent), the regular evaluation of whether the value of a real
estate asset has been impaired and real estate purchase price allocations. Each of these items
involves estimates that require management to make judgments that are subjective in nature.
Management relies on its experience, collects historical and current market data, and analyzes
these assumptions in order to arrive at what it believes to be reasonable estimates. 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 on the use of assumptions as to future uncertainties and, as a result,
actual results could materially differ from these estimates. Basis of Presentation The consolidated financial statements of the Company included in this quarterly report include
the accounts of Hines REIT and its subsidiary, Hines REIT Properties,
L.P. (the Operating Partnership) (over which Hines REIT exercises financial
and operating control) and the related amount of minority interest. All intercompany balances and
transactions have been eliminated in consolidation. Investments in real estate partnerships where the Hines REIT has the ability to exercise
significant influence, but does not exercise financial and operating control, are accounted for
using the equity method. As such, we have accounted for our investment in the Core Fund using the
equity method of accounting for investments. The interim unaudited financial information included elsewhere in this Form 10-Q 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 generally accepted accounting principles have been condensed or omitted according
to such rules and regulations. For further information, please 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. Management believes that the disclosures included are adequate
to make the information presented not misleading. In the opinion of management, all adjustments and
eliminations, consisting only of normal recurring adjustments, necessary to present fairly the
financial position of Hines Real Estate Investment Trust, Inc. as of March 31, 2005, the results of
operations for the quarters ended March 31, 2005 and 2004, and the cash flows for the quarters ended
March 31, 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. Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest Management of our operations is outsourced to the Advisor and certain other affiliates of
Hines. Fees related to each of these services are accounted for based on the nature of such 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 the 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 recorded as a liability
until such time as the participation interest 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 EITF 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 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 reduction in the percentage interest
attributable to such interest to the extent of such redemption or conversion and will have no
impact on the calculation of subsequent increases in the participation interest. We have recorded
a liability representing the total amount of organizational and offering costs incurred on our
behalf by the Advisor and its affiliates through March 31, 2005. This treatment is consistent with
Staff Accounting Bulletin (SAB) Topic 1.B1, which requires that we include all of the costs associated
with our operations and formation 15




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in our financial statements. These costs 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 SAB Topic 5.A. Organizational costs are
expensed as incurred in accordance with Statement of Position 98-5. Offering-related salaries and
other general and administrative costs of the Advisor and its affiliates will be expensed as
incurred, and third-party offering expenses are taken as a reduction against the net proceeds of
the offering within additional paid-in capital (APIC) 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 the Dealer Manager. Such costs are netted against the net proceeds of the offering
within APIC as well. Expense reimbursements made to both the Advisor and Hines will be expensed as they become
payable. Income Taxes We will elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue
Code in conjunction with the filing of our 2004 federal tax return. In addition, our sole
investment as of March 31, 2005 was our investment in the Core Fund, which has invested in
properties through a structure that includes several entities that will elect to be taxed as REITs.
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 federal income taxes has been included in the Companys financial statements
included elsewhere in this Form 10-Q. 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 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. Results of Operations During the quarter ended March 31, 2004, we had been formed but had not yet commenced real
estate operations as we had not yet begun our public offering. As a result, we had no material
results of operations for that period. We commenced our public offering in June 2004, and accepted the minimum offering proceeds of
$10,000,000 on November 23, 2004. On that date, we received the initial proceeds from our minimum
offering and the $10,000,000 contributed to the Operating Partnership by Hines Real Estate Holdings
Limited Partnership (HREH), acquired an interest in the Core Fund and commenced operations. As
of March 31, 2005, we had invested a total of approximately $56,629,000 and owned a 13.87%
non-managing general partner interest in the Core Fund. As of March 31, 2005, the Core Fund owned
interests in 499 Park Avenue, 425 Lexington Avenue and 600 Lexington Avenue in New York City; 1200
19th Street in Washington, D.C.; One Shell Plaza and Two Shell Plaza in Houston; the KPMG Building
and 101 Second Street in San Francisco; and Three First National Plaza in Chicago. The property
portfolio consisted of approximately 5,494,000 square feet with an occupancy rate of
approximately 93% as of March 31, 2005. Our equity in losses of the Core Fund for the quarter ended March 31, 2005 was approximately
$29,000, representing our interest in the Core Funds net losses during the period. For the quarter
ended March 31, 2005, the Core Fund had a net loss of approximately $247,000 on revenues of
approximately $42,515,000. The Core Funds net loss for the quarter ended March 31, 2005, included
approximately $11,981,000 of non-cash depreciation and amortization expenses. We expect revenues
and expenses for the Core Fund to increase in the future as a result of having a full period of
operations for the property acquired by the Core Fund during the quarter ended March 31, 2005 and
as a result of the impact of any future acquisitions. Organization and offering costs of approximately $2,621,000 were incurred by our Advisor and
its affiliates on our behalf during the quarter ended March 31, 2005. These costs, in addition to
approximately $23,967,000 of organization and offering costs incurred by our Advisor and its
affiliates on our behalf during 2003 and 2004, are reimbursable by us to our Advisor in an amount
up to 3% of gross offering proceeds raised in our public offering. However, in accordance with our
accounting policy, we accrued the amount of such costs incurred to date on November 23, 2004, after
subscriptions for the minimum number of shares were received and accepted by us; all such costs
incurred after that date have been accrued as incurred. As a result, we expensed approximately
$1,480,000 related to organizational and internal offering costs and offset against equity
approximately $1,141,000 of third-party offering costs during the quarter ended March 31, 2005. Asset management and acquisition fees for the quarter ended March 31, 2005 totaled
approximately $173,000 and $481,000, respectively, which amounts include both the cash portion of
the fees payable to our Advisor as well as the corresponding increase in
the Participation Interest that an affiliate of Hines holds in the Operating Partnership. (See Note
5  Related Party Transactions  16




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The Participation Interest in our consolidated financial
statements included elsewhere in this Form 10-Q for a description of the Participation Interest.)
Asset management fees for the quarter ended March 31, 2005 were based on the net equity capital we
had invested in the Core Fund. Acquisition fees were computed based on the interest we acquired in
the gross asset value of the Core Funds real estate investments. General and administrative expenses for the quarter ended March 31, 2005 totaled approximately
$780,000. We expect these expenses to increase in the future as we make additional real estate
investments in future periods. The loss allocated to minority interests of approximately $705,000 for the quarter ended March
31, 2005 relates to the interests that affiliates of Hines own in the Operating Partnership. Financial Condition, Liquidity and Capital Resources We are dependent upon the net proceeds to be received from our public offering to conduct our
proposed future activities. The capital required to purchase real estate investments will be
obtained from our offering and from any indebtedness that we may incur in connection with the
acquisition and operations of any real estate investments thereafter. In addition to the proceeds
from our public offering, HREH, an affiliate of Hines, has invested an aggregate of $10,200,000 in
the Operating Partnership. Our sources of funds will primarily be the net proceeds of our offering, operating cash flows
and borrowings. We believe that these cash resources will be sufficient to satisfy our cash
requirements for the foreseeable future, and we do not anticipate a need to raise funds from other
than these sources within the next twelve months. For the quarter ended March 31, 2005, we had
distributions receivable of approximately $917,000 from the Core Fund as a result of our
investments in the Core Fund. We primarily used these distributions to pay dividends to our
shareholders in the aggregate amount of approximately $535,000 and to pay distributions to minority
interest holders in the Operating Partnership of approximately $172,000 in April 2005. We currently have no outstanding debt under any financing facilities and have not identified
any sources of debt financing. Depending on market conditions, we expect that once the net proceeds
of our current public offering are fully invested, our debt financing will be in the range of
approximately 40-60% of the aggregate value of our real estate investments. Additionally, the
amount of debt we place on an individual property, or the amount of debt incurred by an individual
entity in which we invest, 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
fact, depending on market conditions and other factors, we may choose not to place debt on our
portfolio or our assets and may choose not to borrow to finance 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. In addition to making investments in accordance with our investment objectives, we expect to
use our capital resources to make certain payments to the Advisor, the Dealer Manager, Hines and
their affiliates for services rendered during the various phases of the organization and operation
of the Company. During the organizational and offering stage, these payments will include payments
to the Dealer Manager for selling commissions and dealer manager fees and payments to the Advisor
for reimbursement of organization and offering costs. For the quarter ended March 31, 2005, we incurred
the Dealer Manager selling commissions and dealer manager fees of approximately $1,896,000 and
$735,000, respectively. As of March 31, 2005 and December 31, 2004, we have recorded a liability of
approximately $26,587,000 and $23,967,000, respectively, related to organizational and offering
costs, of which approximately $1,627,000 and $618,000, respectively, was currently payable to our
Advisor for reimbursement of such costs based on 3% of gross offering proceeds raised through such
dates. We have not yet paid the Advisor for reimbursement of any such organizational and offering
costs. During the acquisition and operational stages, certain services related to management of our
investments and operations will be provided to the Company by the Advisor and Hines pursuant to
various agreements we have entered into or anticipate entering into with these entities. Pursuant
to those agreements, we expect that we will make various payments to the Advisor and/or Hines,
including acquisition fees, asset management fees, property management fees, leasing fees, and
payments for reimbursements of certain costs incurred by the Advisor and Hines in providing related
services to the Company. We incurred cash asset management and acquisition fees (excluding amounts
related to the Participation Interest) to our Advisor of approximately $86,000 and $241,000,
respectively, for the quarter ended March 31, 2005. As of March 31, 2005 and December 31, 2004,
approximately $1,349,000 and $977,000, respectively, was payable to our Advisor for reimbursement
of certain expenses incurred in connection with our administration and ongoing operations. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 17




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Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, we expect that the primary market risk to
which we will be exposed is interest rate risk. We may be exposed to the effects of interest rate changes primarily as a result of short-term
borrowings or long-term debt used to maintain liquidity and fund expansion of our real estate
investment portfolio and operations. Our interest rate risk management objectives will be to limit
the impact of interest rate changes on earnings and cash flows and to lower overall borrowing
costs. To achieve our objectives, we will borrow primarily at fixed rates or variable rates and, in
some cases, with the ability to convert variable rates to fixed rates. We may also enter into
derivative financial instruments such as interest rate swaps and caps in order to mitigate our
interest rate risk on a related financial instrument. We will not enter into derivative or interest
rate transactions for speculative purposes. Because we have not incurred any debt under any
financing facilities, we currently have limited exposure to financial market risks. Currently, a
10% increase or decrease in interest rates would have no material effect on our financial position
or results of operations. In addition to changes in interest rates, the value of our real estate is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of lessees. 
 Item 4. Controls and Procedures. In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended
(the Exchange Act), we, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) 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
the end of the period covered by this report, to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms. No change occurred in our internal controls concerning financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) during the three months ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting. 18




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PART II
OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. During the period covered by this Form 10-Q, we did not sell any equity securities that were
not registered under the Securities Act of 1933 and we did not repurchase any of our securities. We
filed a registration statement (File No. 333-108780) with the Securities and Exchange Commission in
connection with our public offering. The registration statement was declared effective under the
Securities Act of 1933 on June 18, 2004. Our public offering commenced on that date and is
ongoing. Hines Real Estate Securities, Inc. is the dealer manager of our offering and is an
affiliate of the Chairman of our Board of Directors, Jeffrey C. Hines. The registration statement
covers 200.0 million shares of common stock in a primary offering at an aggregate price of up to
$2.0 billion and an additional 20.0 million shares under our dividend reinvestment plan at an
aggregate price of $190 million. Through
March 31, 2005, we had sold approximately 5.4 million shares for gross offering
proceeds of approximately $54.2 million. This amount includes approximately 5,000 shares sold
pursuant to our Dividend Reinvestment Plan for gross proceeds of approximately $47,000. From the
effective date of our public offering through March 31, 2005, we have incurred the following
expenses in connection with the issuance and distribution of the registered securities: E=EstimatedType of Expense
    
    Amount
    
    
    A=ActualUnderwriting discounts and commissions
    
    $
    2,864,350
    
    
    
    AFinders fees
    
    
    
    
    
    
    AExpenses paid to or for underwriters
    
    
    
    
    
    
    AOther expenses to affiliates
    
    
    1,050,942
    
    
    
    AOther expenses paid to non-affiliates
    
    
    
    
    
    
    ATotal expenses
    
    $
    3,915,292
 19




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The net offering proceeds to us after deducting the total expenses paid as described above,
are approximately $50.3 million. The underwriting discounts and commissions were paid to our dealer manager,
which reallowed all or a portion of the commissions to soliciting dealers. With the net offering
proceeds, we acquired approximately $46.6 million in real estate
investments and related assets, paid $0.6 million in acquisition
fees and made the
other payments reflected under Cash Flows from Financing Activities in our consolidated statement
of cash flows. Cumulatively, we have used the net offering proceeds as follows: E=EstimatedUse of Proceeds
    
    Amount
    
    
    A=ActualConstruction of plant, building and facilities
    
    $
    
    
    
    
    APurchase of real estate interests
    
    
    47,258,367
    
    
    
    AAcquisition of other businesses
    
    
    
    
    
    
    ARepayment of indebtedness
    
    
    
    
    
    
    AWorking capital (currently)
    
    
    3,051,335
    
    
    
    ATemporary investments (currently)
    
    
    
    
    
    
    AOther uses
    
    
    
    
    
    
    ATotal uses
    
    $
    50,309,702
 As
of May 12, 2005, we have sold approximately 7.0 million shares at an aggregate
offering price of 70.1 million. 
 Item 4. Submission of Matters to a Vote of Security Holders. No items were submitted to a vote by the security holders of Hines REIT during the quarter
ended March 31, 2005. 
 Item 6. Exhibits. The exhibits required by this item are set forth on the Exhibit Index attached hereto. 20




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##### Table of Contents



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 13, 2005
    
    By:
    
    /s/ Charles M. BaughnCharles M. BaughnPrincipal Executive OfficerMay 13, 2005
    
    By:
    
    /s/ Sherri W. SchugartSherri W. SchugartPrincipal Financial Officer
 21




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##### Table of Contents



INDEX TO EXHIBITS 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 Form S-11 Registration Statement of Hines Real Estate
Investment Trust, Inc. (File No. 333-108780 as amended to date, the Registration Statement) 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 3.1 to
Amendment No. 5 to the Registration Statement on May 25, 2004 and incorporated herein by
reference).4.1
    
    Form of Subscription Agreement (filed as Appendix B to the Prospectus included in the Registration
Statement, filed on June 24, 2004, and incorporated herein by reference).10.1
    
    Second Amended and Restated Agreement of Limited Partnership of Hines REIT Properties, L.P. (filed
as Exhibit 10.1 to Amendment No. 5 to the Registration Statement on May 24, 2004 and incorporated
herein by reference).10.2
    
    Form of Property Management and Leasing Agreement between Hines REIT Properties, L.P. and Hines
Interests Limited Partnership (filed as Exhibit 10.2 to Amendment No. 2 to the Registration
Statement on March 2, 2004 and incorporated herein by reference).10.3
    
    Advisory Agreement among Hines REIT Properties, L.P., Hines Advisors Limited Partnership and Hines
Real Estate Investment Trust, Inc. (filed as Exhibit 10.3 to Amendment No. 5 to the Registration
Statement on May 25, 2004 and incorporated herein by reference).10.4
    
    Employee and Director Incentive Share Plan of Hines Real Estate Investment Trust, Inc. (filed as
Exhibit 10.4 to Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated
herein by reference).10.5
    
    Hines Real Estate Investment Trust, Inc. Dividend Reinvestment Plan (filed as Appendix C to the
Prospectus included in the Registration Statement, filed on June 24, 2004, and incorporated herein
by reference).10.6*
    
    Sixth Amended and Restated Agreement of Limited Partnership of Hines-Sumisei U.S. Core Office
Fund, LP.10.7
    
    Second Amended and Restated Declaration of Trust of Hines-Sumisei NY Core Office Trust. (filed as
Exhibit 10.7 to Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated
herein by reference).10.8
    
    Amended and Restated Bylaws of Hines-Sumisei NY Core Office Trust. (filed as Exhibit 10.8 to
Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated herein by
reference).10.9
    
    Amended and Restated Master Agreement dated as of March 31, 2003, among Hines Interests Limited
Partnership, Hines US Core Office Properties LP and Sumitomo Life Realty (N.Y.), Inc., as amended
(filed as Exhibit 10.9 to Amendment No. 2 to the Registration Statement on March 2, 2004 and
incorporated herein by reference).10.10
    
    Amended and Restated Shareholder Agreement dated as of December 23, 2003, by and among General
Motors Investment Management Corporation, Hines-Sumisei U.S. Core Office Fund, L.P., Hines-Sumisei
NY Core Office Trust and various shareholders to Hines-Sumisei NY Core Office Trust (filed as
Exhibit 10.10 to Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated
herein by reference).10.11
    
    Amended and Restated Investor Rights Agreement dated as of December 23, 2003, among Hines
Interests Limited Partnership, Hines-Sumisei U.S. Core Office Fund, L.P., Hines-Sumisei NY Core
Office Trust, General Motors Investment Management Corporation, and various shareholders to
Hines-Sumisei NY Core Office Trust (filed as Exhibit 10.11 to Amendment No. 2 to the Registration
Statement on March 2, 2004 and incorporated herein by reference).10.12
    
    Amended and Restated Organization Agreement for Hines-Sumisei NY Core Office Trust, dated as of
December 23, 2003, by and among General Motors Investment Management Corporation, Hines Interests
Limited Partnership, Hines-Sumisei U.S. Core Office Fund, L.P., Hines Sumisei NY Core Office Trust
and various shareholders to Hines-Sumisei NY Core Office Trust (filed as Exhibit 10.12 to
Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated herein by
reference).10.13
    
    Amended Declaration of Trust of Hines-Sumisei NY Core Office Trust II. (filed as Exhibit 10.13 to
 22




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ExhibitNo.
    
    DescriptionAmendment No. 2 to the Registration Statement on March 2, 2004 and incorporated herein by
reference).10.14
    
    Amended Bylaws of Hines-Sumisei NY Core Office Trust II. (filed as Exhibit 10.14 to Amendment No.
2 to the Registration Statement on March 2, 2004 and incorporated herein by reference).10.15
    
    Shareholder Agreement for Hines-Sumisei NY Core Office Trust II, dated as of February 2, 2004, by
and among General Motors Investment Management Corporation, Hines-Sumisei U.S. Core Office Fund,
L.P., Hines-Sumisei NY Core Office Trust II and certain shareholders of Hines-Sumisei NY Core
Office Trust II (filed as Exhibit 10.15 to Amendment No. 2 to the Registration Statement on March
2, 2004 and incorporated herein by reference).10.16
    
    Subscription Agreement for Hines-Sumisei NY Core Office Trust and Hines-Sumisei NY Core Office
Trust II, dated as of February 2, 2004, by and among General Motors Investment Management
Corporation, Hines Interests Limited Partnership, Hines-Sumisei U.S. Core Office Fund, L.P.,
Hines-Sumisei NY Core Office Trust, Hines-Sumisei NY Core Office Trust II and various shareholders
of Hines-Sumisei NY Core Office Trust and Hines-Sumisei NY Core Office Trust II (filed as Exhibit
10.16 to Amendment No. 2 to the Registration Statement on March 2, 2004 and incorporated herein by
reference).10.17
    
    Subscription Agreement dated as of September 11, 2003 between Hines REIT Properties, L.P. and
Hines Real Estate Holdings Limited Partnership (filed as Exhibit 10.17 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated herein by reference).10.18
    
    Agreement, dated as of June 10, 2004, between Hines REIT Properties, L.P., Hines U.S. Core Office
Capital Associates II Limited Partnership and Hines-Sumisei U.S. Core Office Fund, L.P. (filed as
Exhibit 10.18 to Amendment No. 6 to the Registration Statement on June 10, 2004 and incorporated
herein by reference).10.19
    
    Amended and Restated Escrow Agreement between Hines Real Estate Investment Trust, Inc. and Wells
Fargo Bank, National Association (filed as Exhibit 10.19 to Amendment No. 2 to the Registration
Statement on March 2, 2004 and incorporated herein by reference).10.20
    
    Articles of Amendment dated May 4, 2004 to the Declaration of Trust of Hines-Sumisei N.Y. Core
Office Trust (filed as Exhibit 10.20 to Amendment No. 5 to the Registration Statement on May 25,
2004 and incorporated herein by reference).10.21
    
    Articles of Amendment dated May 4, 2004 to the Declaration of Trust of Hines-Sumisei N.Y. Core
Office Trust II (filed as Exhibit 10.21 to Amendment No. 5 to the Registration Statement on May
25, 2004 and incorporated herein by reference).10.22
    
    Articles of Amendment dated December 27, 2004 to the Declaration of Trust of Hines-Sumisei N.Y.
Core Office Trust (filed as Exhibit 10.22 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.23
    
    Articles of Amendment dated December 27, 2004 to the Declaration of Trust of Hines-Sumisei N.Y.
Core Office Trust II (filed as Exhibit 10.23 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.24
    
    Purchase and Sale Agreement dated November 23, 2004, by and among Hines U.S. Core Office Capital
Associates II Limited Partnership, Hines REIT Properties, L.P. and Hines U.S. Core Office Capital
LLC (filed as Exhibit 10.24 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.25
    
    Purchase and Sale Agreement dated February 1, 2005, by and among Hines US Core LLC, Hines REIT
Properties, L.P. and Hines U.S. Core Office Capital LLC (filed as Exhibit 10.25 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.26
    
    Second Amended and Restated Agreement of Limited Partnership of Hines-Sumisei US Core Office
Properties LP (filed as Exhibit 10.26 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.27
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Jeffrey C. Hines
(filed as Exhibit 10.27 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.28
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and C. Hastings Johnson
(filed as Exhibit 10.28 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.29
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and George A. Davis
(filed as Exhibit 10.29 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.30
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Thomas A. Hassard
(filed as Exhibit 10.30 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.31
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Stanley D. Levy
 23




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ExhibitNo.
    
    Description(filed as Exhibit 10.31 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.32
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Charles M. Baughn
(filed as Exhibit 10.32 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.33
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Charles N. Hazen
(filed as Exhibit 10.33 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.34
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Sherri W. Schugart
(filed as Exhibit 10.34 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.35
    
    Indemnification Agreement between Hines Real Estate Investment Trust, Inc. and Frank R. Apollo
(filed as Exhibit 10.35 to the registrants Annual Report on Form 10-K for the year ended December
31, 2004 and incorporated herein by reference).10.36
    
    Purchase and Sale Agreement, dated as of April 1, 2005, by and among Hines US Core LLC, Hines REIT
Properties L.P. and Hines U.S. Core Office Capital LLC, the managing general partner of
Hines-Sumisei U.S. Core Office Fund, L.P. (filed as Exhibit 99.1 to the registrants Current
Report on Form 8-K dated April 1, 2005 and incorporated herein by reference).10.37*
    
    Agreement of Sale by and between Madison Two Associates and Hines 70 West Madison LP.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 2002.32.2*
    
    Certification of Chief Executive 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.32.2*
    
    Certification of 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 24