UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


________________




Form 10-Q





(Mark
      One)R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended March 31, 2009or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from to





Commission
file number: 000-50805


________________




Hines
Real Estate Investment Trust, Inc.


(Exact
Name of Registrant as Specified in its Charter)





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





Registrant’s
telephone number, including area code:


(888) 220-6121







Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes x   No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes o   No  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act (Check one):


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




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




Yes o   No x




As of May
4, 2009, 202.7 million shares of the registrant’s common stock were
outstanding.









TABLE
OF CONTENTS





PART I –
      FINANCIAL INFORMATIONItem 1.
                  Condensed
      Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets
                  
                  
                  2Condensed
      Consolidated Statements of Operations
                  
                  
                  3Condensed
      Consolidated Statements of Equity
                  
                  
                  4Condensed
      Consolidated Statements of Cash Flows
                  
                  
                  5Notes
      to the Condensed Consolidated Financial Statements
                  
                  
                  6Item 2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  
                  19Item 3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  
                  29Item 4T.
                  Controls
      and Procedures
                  
                  
                  29PART II –
      OTHER INFORMATIONItem
      1A.
                  Risk
      Factors
                  
                  
                  30Item 2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  
                  32Item 6.
                  Exhibits
                  
                  
                  32`SIGNATURESCertificationCertificationCertification
      of CEO & CFO pursuant to Section 906




1





PART I





FINANCIAL
INFORMATION





Item 1.Condensed Consolidated
Financial Statements.





HINES
REAL ESTATE INVESTMENT TRUST, INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS


As
of March 31, 2009 and December 31, 2008


(UNAUDITED)





March
      31, 2009
                                
                                
                                December
      31, 2008(In
      thousands, except per share amounts)ASSETSInvestment
      property, net
                                
                                $
                                2,360,172
                                
                                
                                $
                                2,374,007Investments
      in unconsolidated entities
                                
                                
                                382,397
                                
                                
                                
                                364,374Cash
      and cash equivalents
                                
                                
                                208,105
                                
                                
                                
                                39,927Restricted
      cash and marketable securities
                                
                                
                                8,509
                                
                                
                                
                                19,732Distributions
      receivable
                                
                                
                                1,754
                                
                                
                                
                                5,275Tenant
      and other receivables
                                
                                
                                45,750
                                
                                
                                
                                43,012Intangible
      lease assets, net
                                
                                
                                349,436
                                
                                
                                
                                370,049Deferred
      leasing costs, net
                                
                                
                                48,189
                                
                                
                                
                                47,982Deferred
      financing costs, net
                                
                                
                                8,769
                                
                                
                                
                                8,993Other
      assets
                                
                                
                                2,831
                                
                                
                                
                                7,086TOTAL
      ASSETS
                                
                                $
                                3,415,912
                                
                                
                                $
                                3,280,437LIABILITIES
      AND EQUITYLiabilities:Accounts
      payable and accrued expenses
                                
                                $
                                81,390
                                
                                
                                $
                                93,364Due
      to affiliates
                                
                                
                                3,497
                                
                                
                                
                                9,515Intangible
      lease liabilities, net
                                
                                
                                106,733
                                
                                
                                
                                112,371Other
      liabilities
                                
                                
                                19,095
                                
                                
                                
                                21,643Interest
      rate swap contracts
                                
                                
                                105,178
                                
                                
                                
                                116,074Participation
      interest liability
                                
                                
                                45,391
                                
                                
                                
                                45,419Distributions
      payable
                                
                                
                                32,720
                                
                                
                                
                                32,990Notes
      payable
                                
                                
                                1,730,501
                                
                                
                                
                                1,529,842Total
      liabilities
                                
                                
                                2,124,505
                                
                                
                                
                                1,961,218Commitments
      and contingencies (Note 10)Equity:Shareholders’
      equity:Preferred
      shares, $.001 par value; 500,000 preferred shares authorized, none
      issued or outstanding as of  March 31, 2009 and December
      31, 2008
                                
                                
                                —
                                
                                
                                
                                —Common
      shares, $.001 par value; 1,500,000 common shares authorized as of
      March 31, 2009 and December 31, 2008; 202,084 and 201,743 common
      shares issued and outstanding as of March 31, 2009 and December 31, 2008,
      respectively
                                
                                
                                202
                                
                                
                                
                                202Additional
      paid-in capital
                                
                                
                                1,597,504
                                
                                
                                
                                1,629,033Retained
      deficit
                                
                                
                                (300,454
                                )
                                
                                
                                (303,323
                                )Accumulated
      other comprehensive loss
                                
                                
                                (5,845
                                )
                                
                                
                                (6,693
                                )Shareholders’
      equity
                                
                                
                                1,291,407
                                
                                
                                
                                1,319,219Noncontrolling
      interests
                                
                                
                                —
                                
                                
                                
                                —Total
      equity
                                
                                
                                1,291,407
                                
                                
                                
                                1,319,219TOTAL
      LIABILITIES AND EQUITY
                                
                                $
                                3,415,912
                                
                                
                                $
                                3,280,437





See notes
to the condensed consolidated financial statements.




2





HINES
REAL ESTATE INVESTMENT TRUST, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three Months Ended March 31, 2009 and 2008


(UNAUDITED)





2009
                                            
                                            
                                            2008Revenues:
                                            
                                            (In
      thousands, except per share amounts)Rental
      revenue
                                            
                                            $
                                            85,349
                                            
                                            
                                            $
                                            64,800Other
      revenue
                                            
                                            
                                            6,673
                                            
                                            
                                            
                                            5,334Total
      revenues
                                            
                                            
                                            92,022
                                            
                                            
                                            
                                            70,134Expenses:Property
      operating expenses
                                            
                                            
                                            22,472
                                            
                                            
                                            
                                            18,283Real
      property taxes
                                            
                                            
                                            12,428
                                            
                                            
                                            
                                            9,764Property
      management fees
                                            
                                            
                                            2,088
                                            
                                            
                                            
                                            1,585Depreciation
      and amortization
                                            
                                            
                                            31,779
                                            
                                            
                                            
                                            25,381Asset
      management and acquisition fees
                                            
                                            
                                            4,614
                                            
                                            
                                            
                                            8,410Organizational
      and offering expenses
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,918General
      and administrative expenses
                                            
                                            
                                            1,453
                                            
                                            
                                            
                                            1,280Total
      expenses
                                            
                                            
                                            74,834
                                            
                                            
                                            
                                            66,621Income
      before other income (expenses), provision for income taxes and equity in
      losses of unconsolidated entities, net
                                            
                                            
                                            17,188
                                            
                                            
                                            
                                            3,513Other
      income (expenses):Gain
      (loss) on derivative instruments, net
                                            
                                            
                                            10,896
                                            
                                            
                                            
                                            (27,445
                                            )Other
      losses
                                            
                                            
                                            (11
                                            )
                                            
                                            
                                            (2
                                            )Interest
      expense
                                            
                                            
                                            (22,587
                                            )
                                            
                                            
                                            (18,052
                                            )Interest
      income
                                            
                                            
                                            279
                                            
                                            
                                            
                                            1,249Income
      (loss) before provision for income taxes and equity in losses of
      unconsolidated entities, net
                                            
                                            
                                            5,765
                                            
                                            
                                            
                                            (40,737
                                            )Provision
      for income taxes
                                            
                                            
                                            (259
                                            )
                                            
                                            
                                            (515
                                            )Equity
      in losses of unconsolidated entities, net
                                            
                                            
                                            (1,701
                                            )
                                            
                                            
                                            (1,935
                                            )Net
      income (loss)
                                            
                                            
                                            3,805
                                            
                                            
                                            
                                            (43,187
                                            )Less:
      Net income attributable to noncontrolling interests
                                            
                                            
                                            (936
                                            )
                                            
                                            
                                            (643
                                            )Net
      income (loss) attributable to common shareholders
                                            
                                            $
                                            2,869
                                            
                                            
                                            $
                                            (43,830
                                            )Basic
      and diluted income (loss) per common share:Income
      (loss) per common share
                                            
                                            $
                                            0.01
                                            
                                            
                                            $
                                            (0.27
                                            )Weighted
      average number of common shares outstanding
                                            
                                            
                                            201,428
                                            
                                            
                                            
                                            165,144





See notes
to the condensed consolidated financial statements.





3








HINES
REAL ESTATE INVESTMENT TRUST, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY


For
the Three Months Ended March 31, 2009 and 2008


(UNAUDITED)





Hines
      Real Estate Investment Trust, Inc.Total
                                                
                                                
                                                Common
      Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Additional
      Paid-In Capital
                                                
                                                
                                                Accumulated
                                                  Deficit
                                                
                                                
                                                Accumulated
      Other Comprehensive Income (Loss)
                                                
                                                
                                                Noncontrolling
      InterestsBALANCE,
      January 1, 2009
                                                
                                                $
                                                1,319,219
                                                
                                                
                                                
                                                201,743
                                                
                                                
                                                $
                                                202
                                                
                                                
                                                $
                                                1,629,033
                                                
                                                
                                                $
                                                (303,323
                                                )
                                                
                                                $
                                                (6,693
                                                )
                                                
                                                $
                                                —Issuance
      of common shares
                                                
                                                
                                                71,357
                                                
                                                
                                                
                                                7,019
                                                
                                                
                                                
                                                7
                                                
                                                
                                                
                                                71,350
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Redemption
      of common shares
                                                
                                                
                                                (66,605
                                                )
                                                
                                                
                                                (6,678
                                                )
                                                
                                                
                                                (7
                                                )
                                                
                                                
                                                (66,598
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Distributions
      declared
                                                
                                                
                                                (32,720
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (31,784
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (936
                                                )Selling
      commissions and dealer manager fees
                                                
                                                
                                                (4,497
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (4,497
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Comprehensive
      income (loss)Net
      Income
                                                
                                                
                                                3,805
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,869
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                936Other
      comprehensive income – Foreign currency translation
    adjustment
                                                
                                                
                                                848
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                848Total
      Comprehensive Income
                                                
                                                
                                                4,653
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —BALANCE,
      March 31, 2009
                                                
                                                $
                                                1,291,407
                                                
                                                
                                                
                                                202,084
                                                
                                                
                                                $
                                                202
                                                
                                                
                                                $
                                                1,597,504
                                                
                                                
                                                $
                                                (300,454
                                                )
                                                
                                                $
                                                (5,845
                                                )
                                                
                                                $
                                                —




BALANCE,
      January 1, 2008
                                    
                                    $
                                    1,233,276
                                    
                                    
                                    
                                    159,409
                                    
                                    
                                    $
                                    159
                                    
                                    
                                    $
                                    1,358,523
                                    
                                    
                                    $
                                    (137,915
                                    )
                                    
                                    $
                                    12,509
                                    
                                    
                                    $
                                    —Issuance
      of common shares
                                    
                                    
                                    124,829
                                    
                                    
                                    
                                    11,907
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    124,817
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Redemption
      of common shares
                                    
                                    
                                    (9,398
                                    )
                                    
                                    
                                    (987
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (9,397
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Distributions
      declared
                                    
                                    
                                    (26,337
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (25,694
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (643
                                    )Selling
      commissions and dealer manager fees
                                    
                                    
                                    (9,870
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (9,870
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Other
      offering costs, net
                                    
                                    
                                    (1,556
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,556
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Comprehensive
      income (loss)Net
      Loss
                                    
                                    
                                    (43,187
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (43,830
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    643Other
      comprehensive income – Foreign currency translation
    adjustment
                                    
                                    
                                    (2,148
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (2,148
                                    )Total
      Comprehensive Loss
                                    
                                    
                                    (45,335
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —BALANCE,
      March 31, 2008
                                    
                                    $
                                    1,265,609
                                    
                                    
                                    
                                    170,329
                                    
                                    
                                    $
                                    170
                                    
                                    
                                    $
                                    1,436,823
                                    
                                    
                                    $
                                    (181,745
                                    )
                                    
                                    $
                                    10,361
                                    
                                    
                                    $
                                    —





See notes
to the condensed consolidated financial statements.




4




HINES
REAL ESTATE INVESTMENT TRUST, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 and 2008


(UNAUDITED)




2009
                                
                                
                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:
                                
                                (In
      thousands)Net
      income (loss)
                                
                                $
                                3,805
                                
                                
                                $
                                (43,187
                                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                
                                
                                30,277
                                
                                
                                
                                24,768Non-cash
      compensation expense
                                
                                
                                10
                                
                                
                                
                                9Equity
      in losses of unconsolidated entities, net
                                
                                
                                1,701
                                
                                
                                
                                1,935Distributions
      received from unconsolidated entities
                                
                                
                                445
                                
                                
                                
                                436Accrual
      of organizational and offering expenses
                                
                                
                                —
                                
                                
                                
                                1,918Other
      losses
                                
                                
                                11
                                
                                
                                
                                2(Gain)
      loss on derivative instruments
                                
                                
                                (10,896
                                )
                                
                                
                                27,445Net
      change in operating accounts
                                
                                
                                (29,938
                                )
                                
                                
                                (12,924
                                )Net
      cash provided by (used in) operating activities
                                
                                
                                (4,585
                                )
                                
                                
                                402CASH
      FLOWS FROM INVESTING ACTIVITIES:Investments
      in unconsolidated entities
                                
                                
                                (18,619
                                )
                                
                                
                                —Distributions
      received from unconsolidated entities in excess of equity in
      earnings
                                
                                
                                7,103
                                
                                
                                
                                7,217Investments
      in property
                                
                                
                                (1,752
                                )
                                
                                
                                (149,700
                                )Investments
      in master leases
                                
                                
                                —
                                
                                
                                
                                (1,918
                                )Master
      lease rent receipts
                                
                                
                                721
                                
                                
                                
                                1,546Additions
      to other assets
                                
                                
                                —
                                
                                
                                
                                (30,000
                                )Deposit
      proceeds from pending land sale
                                
                                
                                803
                                
                                
                                
                                —(Increase)
      decrease in restricted cash and marketable securities
                                
                                
                                11,268
                                
                                
                                
                                (3,307
                                )Acquired
      lease intangibles
                                
                                
                                —
                                
                                
                                
                                (58,837
                                )Net
      cash used in investing activities
                                
                                
                                (476
                                )
                                
                                
                                (234,999
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      (decrease) in other liabilities
                                
                                
                                (50
                                )
                                
                                
                                130Proceeds
      from issuance of common stock
                                
                                
                                53,194
                                
                                
                                
                                111,202Redemptions
      of common shares
                                
                                
                                (63,451
                                )
                                
                                
                                (9,397
                                )Payments
      of selling commissions and dealer manager fees
                                
                                
                                (4,478
                                )
                                
                                
                                (9,524
                                )Payments
      of organizational and offering expenses
                                
                                
                                (9
                                )
                                
                                
                                (3,879
                                )Distributions
      paid to shareholders and noncontrolling interests
                                
                                
                                (15,701
                                )
                                
                                
                                (11,305
                                )Proceeds
      from notes payable
                                
                                
                                204,000
                                
                                
                                
                                63,000Payments
      on notes payable
                                
                                
                                (259
                                )
                                
                                
                                (4,033
                                )Additions
      to deferred financing costs
                                
                                
                                (128
                                )
                                
                                
                                (1,937
                                )Increase
      in security deposit liability
                                
                                
                                298
                                
                                
                                
                                —Net
      cash provided by financing activities
                                
                                
                                173,416
                                
                                
                                
                                134,257Effect
      of exchange rate changes on cash
                                
                                
                                (177
                                )
                                
                                
                                (191
                                )Net
      change in cash and cash equivalents
                                
                                
                                168,178
                                
                                
                                
                                (100,531
                                )Cash
      and cash equivalents, beginning of period
                                
                                
                                39,927
                                
                                
                                
                                152,443Cash
      and cash equivalents, end of period
                                
                                $
                                208,105
                                
                                
                                $
                                51,912





See notes
to the condensed consolidated financial statements




5





HINES
REAL ESTATE INVESTMENT TRUST, INC.





NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


For
the Three Months Ended March 31, 2009 and 2008


(UNAUDITED)





1.  Organization





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





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





Public
Offerings





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





The
Company commenced its third public offering (the “Third Offering”) on July 1,
2008 pursuant to which it is offering up to $3.5 billion in shares of common
stock including $500.0 million in shares of common stock under its dividend
reinvestment plan.  As of March 31, 2009, Hines REIT had raised $224.2
million in proceeds through the Third Offering. In addition, from April 1
through May 4, 2009, Hines REIT received gross offering proceeds of
$43.4 million from the sale of 4.4 million common
shares.





Hines
REIT contributes all net proceeds from its public offerings to the Operating
Partnership in exchange for partnership units in the Operating Partnership. As
of March 31, 2009 and December 31, 2008, Hines REIT owned a 97.1% and
97.3%, respectively, general partner interest in the Operating
Partnership.





Noncontrolling
Interests





Hines
2005 VS I LP, an affiliate of Hines, owned a 0.5% interest in the Operating
Partnership as of March 31, 2009 and December 31, 2008, respectively. In
addition, another affiliate of Hines, HALP Associates Limited Partnership
(“HALP”) owned a 2.4% and 2.2% limited partnership interest in the Operating
Partnership as of March 31, 2009 and December 31, 2008, respectively, which is a
profits interest (the “Participation Interest”). See Note 7 for additional
information regarding the Participation Interest.




Investment
Property





As of
March 31, 2009, the Company owned direct and indirect investments in 63
properties. These properties consisted of 45 U.S. office properties, one
mixed-use office and retail complex in Toronto, Ontario, one industrial property
in Dallas, Texas, four industrial properties in Brazil and a portfolio of 12
grocery-anchored shopping centers located in five states throughout the
southeastern United States (the “Grocery-Anchored Portfolio”).


6


2.  Summary
of Significant Accounting Policies





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





Basis
of Presentation





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





Impairment
of Investment Property





Real
estate assets are reviewed for impairment each reporting period if events or
changes in circumstances indicate that the carrying amount of the individual
property may not be recoverable. In such an event, a comparison will be made of
the current and projected operating cash flows of each property on an
undiscounted basis to the carrying amount of such property. If the carrying
amount exceeds the undiscounted cash flows, it would be written down to
the estimated fair value to reflect impairment in the value of the asset.
At March 31, 2009, management believes no such impairment has occurred. The
determination of whether investment property is impaired requires a significant
amount of judgment by management and is based on the best information available
to management at the time of the evaluation. If market conditions continue to
deteriorate and result in lower valuations or reduced cash flows of our
properties, impairment charges may be recorded in future periods.





Restricted
Cash and Marketable Securities





As of
March 31, 2009 and December 31, 2008, the Company had restricted cash of $8.5
million and $17.0 million, respectively, related to escrow accounts required by
certain of the Company’s mortgage agreements. In addition, the Company had
restricted marketable securities of $2.7 million at December 31, 2008, related
to one of the Company’s lease agreements. This amount was invested in a
certificate of deposit in August 2008, which matured in February
2009.





Tenant
and Other Receivables





Receivable
balances outstanding consist primarily of base rents, tenant reimbursements and
receivables attributable to straight-line rent (see Note 2 – Revenue
Recognition).  An allowance for the uncollectible portion of tenant and
other receivables is determined based upon an analysis of the tenant’s payment
history, the financial condition of the tenant, business conditions in the
industry in which the tenant operates and economic conditions in the area in
which the property is located.  Tenant and other receivables are shown at
cost in the condensed consolidated balance sheets, net of allowance for doubtful
accounts of approximately $892,000 and $956,000, at March 31, 2009 and December
31, 2008, respectively.





Deferred
Leasing Costs





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




Tenant
inducement amortization was approximately $1.3 million and $773,000 for the
three months ended March 31, 2009 and 2008, respectively, and was recorded as an
offset to rental revenue. In addition, the Company recorded approximately
$679,000 and $302,000 as amortization expense related to other direct leasing
costs for the three months ended March 31, 2009 and 2008,
respectively.





On
December 8, 2006, Norwegian Cruise Line (NCL) signed a lease renewal for
its space in Airport Corporate Center, an office property located in
Miami, Florida. In connection with this renewal, the Company committed to
funding $10.4 million of construction costs related to NCL’s expansion and
refurbishment of its space, to be paid in future periods, beginning in the first
quarter of 2008. As of March 31, 2009, $4.2 million of this commitment remained
unfunded and was recorded in accounts payable and accrued expenses in the
accompanying balance sheet.





On March
13, 2008, the Company acquired the Raytheon/DirecTV Buildings, a two-building
office complex located in El Segundo, California. In connection with this
acquisition, the Company assumed a commitment to fund $11.5 million of
construction costs to the Raytheon Corporation. As of March 31, 2009, $8.0
million of this commitment remained unfunded and was recorded in accounts
payable and accrued expenses in the accompanying balance sheet.




Derivative
Instruments
 
 The
Company has several forward interest rate swap transactions with HSH Nordbank
AG, New York Branch (“HSH Nordbank”). These swap transactions were entered into
as economic hedges against the variability of future interest rates on the
Company’s variable interest rate borrowings with HSH Nordbank. The interest rate
swaps have been recorded at their estimated fair value in interest rate swap
contracts in the accompanying condensed balance sheets. The gain or loss on
derivative instruments recorded in the Company’s condensed consolidated
statement of operations for the three months ended March 31, 2009 and 2008 is
the result of changes in the fair value of interest rate swaps during each
period (see Note 11 for additional information).


7


The table
below provides additional information regarding each of the Company’s
outstanding interest rate swaps as of March 31, 2009 (notional amounts are
in thousands):





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





Deferred
Financing Costs





Deferred
financing costs consist of direct costs incurred in obtaining debt financing
(see Note 5) including the financing fees paid to our Advisor (see Note 7).
These costs are being amortized into interest expense on a straight-line basis,
which approximates the effective interest method, over the terms of the
obligations.  For the three months ended March 31, 2009 and 2008,
approximately $522,000 and $379,000, respectively, was amortized into interest
expense in the accompanying condensed consolidated statements of
operations.




Other
Assets





Other
assets includes the following as of March 31, 2009 and December 31, 2008 (in
thousands):





March
      31, 2009
                
                
                December
      31, 2008Property
      acquisition escrow deposit
                
                $
                —
                
                
                $
                4,885Prepaid
      insurance
                
                
                206
                
                
                
                1,221Other
                
                
                2,625
                
                
                
                980Total
                
                $
                2,831
                
                
                $
                7,086





Organizational
and Offering Costs





Second
Offering





Certain
organizational and offering costs associated with the Second Offering were paid
by the Advisor on the Company’s behalf. Pursuant to the terms of the advisory
agreement in effect for the Second Offering, the Company was obligated to
reimburse the Advisor in an amount equal to the amount of actual organizational
and offering costs incurred, so long as such costs, together with selling
commissions and dealer-manager fees, did not exceed 15% of gross proceeds from
the Second Offering. For the three months ended March 31, 2008, the Advisor
incurred $1.9 million of internal offering costs on the Company’s behalf in
connection with the Second Offering which have been expensed in the accompanying
condensed consolidated statement of operations for the three months then ended.
In addition, $1.6 million of third-party offering costs for the three months
ended March 31, 2008, were offset against net proceeds of the Second
Offering within additional paid-in capital in the accompanying condensed
consolidated statements of equity.





Third
Offering





The
Company commenced the Third Offering on July 1, 2008. During the three
months ended March 31, 2009 and 2008, the Advisor incurred approximately
$4.0 million and $849,000, respectively, of organizational and offering costs
related to the Third Offering. Pursuant to the terms of the advisory agreement
in effect for the Third Offering, the Company is not obligated to reimburse the
Advisor for organizational and offering costs related to the Third
Offering. Additionally, the Advisor is not a shareholder of the Company.
Accordingly, no such amounts have been recorded in the accompanying condensed
consolidated financial statements.




Revenue
Recognition
 
 The
Company recognizes rental revenue on a straight-line basis over the life of the
lease including rent holidays, if any. Straight-line rent receivable in the
amount of $32.0 million and $28.6 million as of March 31, 2009 and December
31, 2008, respectively, consisted of the difference between the tenants’ rents
calculated on a straight-line basis from the date of acquisition or lease
commencement over the remaining terms of the related leases and the tenants’
actual rents due under the lease agreements and is included in tenant and other
receivables in the accompanying condensed consolidated balance sheets. Revenues
associated with tenant reimbursements are recognized in the period in which the
expenses are incurred based upon the tenant lease provisions. Revenues relating
to lease termination fees are generally recognized at the time that a tenant’s
right to occupy the space is terminated and when the Company has satisfied all
obligations under the agreement.


8


Income
Taxes





In
connection with the operation of Atrium on Bay, an office property located in
Toronto, Ontario, the Company has recorded an income tax provision for Canadian
income taxes of approximately $120,000 and $506,000 for the three months ended
March 31, 2009 and 2008, respectively, in accordance with Canadian tax laws and
regulations.





The
Company also recorded an income tax provision for the Texas margin tax related
to its properties located in Texas. As a result, the Company recorded
approximately $139,000 and $9,000 for the three months ended March 31, 2009 and
2008, respectively.





As of
March 31, 2009, the Company had no significant temporary differences, tax
credits, or net operating loss carry-forwards.




Redemption
of Common Stock





The
Company has adoptedStatement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires, among other things, that financial instruments that represent a
mandatory obligation of the Company to repurchase shares be classified as
liabilities and reported at settlement value.  Management believes that
shares tendered for redemption by the holder under the Company’s share
redemption program do not represent a mandatory obligation until such
redemptions are approved.  At such time, the Company will reclassify such
obligations from equity to an accrued liability based upon their respective
settlement values. The Company has recorded a liability of $21.2 million in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet and such amount has been included in redemption of common
shares in the accompanying condensed consolidated statement of
equity as of March 31, 2009 related to 2.3 million shares tendered for
redemption and approved by the board of directors, but which were not redeemed
until April 2009. The Company has recorded a liability of $18.1 million in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet as of December 31, 2008 related to 1.9 million shares tendered for
redemption and approved by the board of directors, but which were not redeemed
until January 2009.





Per Share Data





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




Recent
Accounting Pronouncements




In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1 (“FSP 107-1”),
“Interim Disclosures about Fair Value of Financial Instruments.” FSP 107-1
amends FASB Statement No. 107, “Disclosures about Fair Value of Financial
Instruments” to require annual disclosures to also be made during interim
reporting periods. Implementation of FSP 107-1 will result in certain additional
disclosures to be included in our interim condensed consolidated financial
statements beginning with our Form 10-Q for the quarter ending June 30,
2009.
  Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly Fair Value Measurements We are
currently evaluating the effects FSP 157-4 may have on our financial
statements.





Effective
January 1, 2009, the Company adopted FASB Statement No. 141 (Revised 2007),
Business Combinations
(“SFAS No. 141R”). SFAS No. 141R significantly changed the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity is required to
recognize all the assets acquired and liabilities assumed in a transaction at
the date of acquisition fair value with limited exceptions. SFAS No. 141R
changed the accounting treatment for certain specific acquisition-related items
including: (1) expensing acquisition related costs as incurred; (2) valuing
noncontrolling interests at fair value at the acquisition date; and (3)
expensing restructuring costs associated with an acquired business. SFAS No.
141R also includes a substantial number of new disclosure requirements. The
adoption of SFAS No. 141R did not have a significant impact on the Company’s
financial statements for the three months ended March 31, 2009 since acquisition
activity was not significant during the period.




Effective
January 1, 2009, the Company adopted FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160
established requirements for ownership interests in subsidiaries held by parties
other than the Company (sometimes called “minority interests”) to be clearly
identified, presented, and disclosed in the consolidated statement of financial
position within equity, but separate from the parent’s equity. All changes in
the parent’s ownership interests are required to be accounted for consistently
as equity transactions and any noncontrolling equity investments in
deconsolidated subsidiaries must be measured initially at fair value. The
adoption of SFAS No. 160 resulted in certain changes to the Company’s financial
statement presentation but did not have a significant impact on the
Company.
  In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment to FASB Statement No. 133 (“SFAS
No. 161”). This statement contains disclosure requirements regarding an entity’s
derivative instruments and hedging activities such as: (i) how and why they are
used; (ii) how they are accounted for and (iii) how they affect an entity’s
financial statements. SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008.The
adoption of SFAS No. 161 resulted in certain additional disclosures to
our consolidated financial statements but did not have a significant impact on
the Company.


9


3.  Real
Estate Investments
 
 The
Company makes real estate investments directly through entities wholly-owned by
the Operating Partnership, or indirectly through other entities, such as through
its investment in Hines US Core Office Fund LP (the “Core Fund”).




Direct
Investments
 Property
                                    City
                                    
                                    Date
      Acquired
                                    
                                    
                                    Leasable
      Square Feet
                                    
                                    
                                    Percent
      Leased
                                    
                                    
                                    Our
      Effective
                                      Ownership(1)321
      North Clark
                                    Chicago,
      Illinois
                                    
                                    
                                    04/2006
                                    
                                    
                                    
                                    885,664
                                    
                                    
                                    
                                    99
                                    %
                                    
                                    
                                    100
                                    %Distribution
      Park Araucaria
                                    Curitiba,
      Brazil
                                    
                                    
                                    12/2008
                                    
                                    
                                    
                                    459,587
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Citymark
                                    Dallas,
      Texas
                                    
                                    
                                    08/2005
                                    
                                    
                                    
                                    220,079
                                    
                                    
                                    
                                    99
                                    %
                                    
                                    
                                    100
                                    %4055/4055
      Corporate Drive
                                    Dallas,
      Texas
                                    
                                    
                                    05/2008
                                    
                                    
                                    
                                    643,429
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %JPMorgan
      Chase Tower
                                    Dallas,
      Texas
                                    
                                    
                                    11/2007
                                    
                                    
                                    
                                    1,248,551
                                    
                                    
                                    
                                    88
                                    %
                                    
                                    
                                    100
                                    %345
      Inverness Drive
                                    Denver,
      Colorado
                                    
                                    
                                    12/2008
                                    
                                    
                                    
                                    175,287
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Arapahoe
      Business Park
                                    Denver,
      Colorado
                                    
                                    
                                    12/2008
                                    
                                    
                                    
                                    309,450
                                    
                                    
                                    
                                    91
                                    %
                                    
                                    
                                    100
                                    %Raytheon/DIRECTV
      Buildings
                                    El
      Segundo, California
                                    
                                    
                                    03/2008
                                    
                                    
                                    
                                    550,579
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Watergate
      Tower IV
                                    Emeryville,
      California
                                    
                                    
                                    12/2006
                                    
                                    
                                    
                                    344,433
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Williams
      Tower
                                    Houston,
      Texas
                                    
                                    
                                    05/2008
                                    
                                    
                                    
                                    1,480,623
                                    
                                    
                                    
                                    95
                                    %
                                    
                                    
                                    100
                                    %2555
      Grand
                                    Kansas
      City, Missouri
                                    
                                    
                                    02/2008
                                    
                                    
                                    
                                    595,607
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %One
      Wilshire
                                    Los
      Angeles, California
                                    
                                    
                                    08/2007
                                    
                                    
                                    
                                    661,553
                                    
                                    
                                    
                                    98
                                    %
                                    
                                    
                                    100
                                    %3
      Huntington Quadrangle
                                    Melville,
      New York
                                    
                                    
                                    07/2007
                                    
                                    
                                    
                                    407,731
                                    
                                    
                                    
                                    87
                                    %
                                    
                                    
                                    100
                                    %Airport
      Corporate Center
                                    Miami,
      Florida
                                    
                                    
                                    01/2006
                                    
                                    
                                    
                                    1,021,397
                                    
                                    
                                    
                                    92
                                    %
                                    
                                    
                                    100
                                    %Minneapolis
      Office/Flex Portfolio
                                    Minneapolis,
      Minnesota
                                    
                                    
                                    09/2007
                                    
                                    
                                    
                                    766,039
                                    
                                    
                                    
                                    83
                                    %
                                    
                                    
                                    100
                                    %3400
      Data Drive
                                    Rancho
      Cordova, California
                                    
                                    
                                    11/2006
                                    
                                    
                                    
                                    149,703
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Daytona
      Buildings
                                    Redmond,
      Washington
                                    
                                    
                                    12/2006
                                    
                                    
                                    
                                    251,313
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Laguna
      Buildings
                                    Redmond,
      Washington
                                    
                                    
                                    01/2007
                                    
                                    
                                    
                                    464,701
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %1515 S Street
                                    Sacramento,
      California
                                    
                                    
                                    11/2005
                                    
                                    
                                    
                                    348,881
                                    
                                    
                                    
                                    99
                                    %
                                    
                                    
                                    100
                                    %1900
      and 2000 Alameda
                                    San Mateo,
      California
                                    
                                    
                                    06/2005
                                    
                                    
                                    
                                    253,187
                                    
                                    
                                    
                                    95
                                    %
                                    
                                    
                                    100
                                    %Distribution
      Park Elouveira
                                    Sao
      Paulo, Brazil
                                    
                                    
                                    12/2008
                                    
                                    
                                    
                                    534,794
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Distribution
      Park Vinhedo
                                    Sao
      Paulo, Brazil
                                    
                                    
                                    12/2008
                                    
                                    
                                    
                                    609,474
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    100
                                    %Seattle
      Design Center
                                    Seattle,
      Washington
                                    
                                    
                                    06/2007
                                    
                                    
                                    
                                    390,684
                                    
                                    
                                    
                                    83
                                    %
                                    
                                    
                                    100
                                    %5th and
      Bell
                                    Seattle,
      Washington
                                    
                                    
                                    06/2007
                                    
                                    
                                    
                                    197,135
                                    
                                    
                                    
                                    98
                                    %
                                    
                                    
                                    100
                                    %Atrium
      on Bay
                                    Toronto,
      Ontario
                                    
                                    
                                    02/2007
                                    
                                    
                                    
                                    1,078,669
                                    
                                    
                                    
                                    96
                                    %
                                    
                                    
                                    100
                                    %Total
      for Directly-Owned Properties
                                    
                                    
                                    
                                    
                                    
                                    
                                    14,048,550
                                    
                                    
                                    
                                    95
                                    %Indirect
      InvestmentsCore Fund InvestmentOne
      Atlantic Center
                                    Atlanta,
      Georgia
                                    
                                    
                                    07/2006
                                    
                                    
                                    
                                    1,100,312
                                    
                                    
                                    
                                    82
                                    %
                                    
                                    
                                    23.27
                                    %The
      Carillon Building
                                    Charlotte,
      North Carolina
                                    
                                    
                                    07/2007
                                    
                                    
                                    
                                    470,995
                                    
                                    
                                    
                                    83
                                    %
                                    
                                    
                                    23.27
                                    %Charlotte
      Plaza
                                    Charlotte,
      North Carolina
                                    
                                    
                                    06/2007
                                    
                                    
                                    
                                    625,026
                                    
                                    
                                    
                                    95
                                    %
                                    
                                    
                                    23.27
                                    %One
      North Wacker
                                    Chicago,
      Illinois
                                    
                                    
                                    03/2008
                                    
                                    
                                    
                                    1,373,754
                                    
                                    
                                    
                                    97
                                    %
                                    
                                    
                                    23.27
                                    %Three
      First National Plaza
                                    Chicago,
      Illinois
                                    
                                    
                                    03/2005
                                    
                                    
                                    
                                    1,420,611
                                    
                                    
                                    
                                    91
                                    %
                                    
                                    
                                    18.62
                                    %333 West
      Wacker
                                    Chicago,
      Illinois
                                    
                                    
                                    04/2006
                                    
                                    
                                    
                                    845,328
                                    
                                    
                                    
                                    92
                                    %
                                    
                                    
                                    18.57
                                    %One
      Shell Plaza
                                    Houston,
      Texas
                                    
                                    
                                    05/2004
                                    
                                    
                                    
                                    1,230,395
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    11.64
                                    %Two
      Shell Plaza
                                    Houston,
      Texas
                                    
                                    
                                    05/2004
                                    
                                    
                                    
                                    565,467
                                    
                                    
                                    
                                    97
                                    %
                                    
                                    
                                    11.64
                                    %425
      Lexington Avenue
                                    New
      York, New York
                                    
                                    
                                    08/2003
                                    
                                    
                                    
                                    700,034
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    11.67
                                    %499
      Park Avenue
                                    New
      York, New York
                                    
                                    
                                    08/2003
                                    
                                    
                                    
                                    291,052
                                    
                                    
                                    
                                    70
                                    %
                                    
                                    
                                    11.67
                                    %600
      Lexington Avenue
                                    New
      York, New York
                                    
                                    
                                    02/2004
                                    
                                    
                                    
                                    286,722
                                    
                                    
                                    
                                    95
                                    %
                                    
                                    
                                    11.67
                                    %Renaissance
      Square
                                    Phoenix,
      Arizona
                                    
                                    
                                    12/2007
                                    
                                    
                                    
                                    965,508
                                    
                                    
                                    
                                    90
                                    %
                                    
                                    
                                    23.27
                                    %Riverfront
      Plaza
                                    Richmond,
      Virginia
                                    
                                    
                                    11/2006
                                    
                                    
                                    
                                    951,421
                                    
                                    
                                    
                                    94
                                    %
                                    
                                    
                                    23.27
                                    %Johnson
      Ranch Corporate Centre
                                    Roseville,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    179,990
                                    
                                    
                                    
                                    66
                                    %
                                    
                                    
                                    18.57
                                    %Roseville
      Corporate Center
                                    Roseville,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    111,418
                                    
                                    
                                    
                                    77
                                    %
                                    
                                    
                                    18.57
                                    %Summit
      at Douglas Ridge
                                    Roseville,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    185,128
                                    
                                    
                                    
                                    73
                                    %
                                    
                                    
                                    18.57
                                    %Olympus
      Corporate Centre
                                    Roseville,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    191,494
                                    
                                    
                                    
                                    38
                                    %
                                    
                                    
                                    18.57
                                    %Douglas
      Corporate Center
                                    Roseville,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    214,606
                                    
                                    
                                    
                                    78
                                    %
                                    
                                    
                                    18.57
                                    %Wells
      Fargo Center
                                    Sacramento,
      California
                                    
                                    
                                    05/2007
                                    
                                    
                                    
                                    502,365
                                    
                                    
                                    
                                    98
                                    %
                                    
                                    
                                    18.57
                                    %525 B Street
                                    San Diego,
      California
                                    
                                    
                                    08/2005
                                    
                                    
                                    
                                    448,275
                                    
                                    
                                    
                                    82
                                    %
                                    
                                    
                                    23.27
                                    %The
      KPMG Building
                                    San Francisco,
      California
                                    
                                    
                                    09/2004
                                    
                                    
                                    
                                    379,328
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    
                                    23.27
                                    %101
      Second Street
                                    San Francisco,
      California
                                    
                                    
                                    09/2004
                                    
                                    
                                    
                                    388,370
                                    
                                    
                                    
                                    62
                                    %
                                    
                                    
                                    23.27
                                    %720
      Olive Way
                                    Seattle,
      Washington
                                    
                                    
                                    01/2006
                                    
                                    
                                    
                                    300,710
                                    
                                    
                                    
                                    91
                                    %
                                    
                                    
                                    18.57
                                    %
 10




Property
                                                            City
                                                            
                                                            Date
      Acquired
                                                            
                                                            
                                                            Leasable
      Square Feet
                                                            
                                                            
                                                            Percent
      Leased
                                                            
                                                            
                                                            Our
      Effective
                                                              Ownership(1)1200
      19th Street
                                                            Washington,
      D.C.
                                                            
                                                            
                                                            08/2003
                                                            
                                                            
                                                            
                                                            328,154
                                                            
                                                            
                                                            
                                                            28
                                                            %
                                                            
                                                            
                                                            11.67
                                                            %Warner Center
                                                            Woodland
      Hills, California
                                                            
                                                            
                                                            10/2006
                                                            
                                                            
                                                            
                                                            808,274
                                                            
                                                            
                                                            
                                                            89
                                                            %
                                                            
                                                            
                                                            18.57
                                                            %Total
      for Core Fund Properties
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            14,864,737
                                                            
                                                            
                                                            
                                                            89
                                                            %Grocery-Anchored PortfolioCherokee
      Plaza
                                                            Atlanta,
      Georgia
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            99,749
                                                            
                                                            
                                                            
                                                            100
                                                            %
                                                            
                                                            
                                                            70
                                                            %Bellaire
      Boulevard Center
                                                            Bellaire,
      Texas
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            35,081
                                                            
                                                            
                                                            
                                                            100
                                                            %
                                                            
                                                            
                                                            70
                                                            %Thompson
      Bridge Commons
                                                            Gainesville,
      Georgia
                                                            
                                                            
                                                            03/2009
                                                            
                                                            
                                                            
                                                            92,587
                                                            
                                                            
                                                            
                                                            96
                                                            %
                                                            
                                                            
                                                            70
                                                            %Champions
      Village
                                                            Houston,
      Texas
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            384,581
                                                            
                                                            
                                                            
                                                            91
                                                            %
                                                            
                                                            
                                                            70
                                                            %King’s
      Crossing
                                                            Kingwood,
      Texas
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            126,397
                                                            
                                                            
                                                            
                                                            97
                                                            %
                                                            
                                                            
                                                            70
                                                            %Sandy
      Plains Exchange
                                                            Marietta,
      Georgia
                                                            
                                                            
                                                            02/2009
                                                            
                                                            
                                                            
                                                            72,784
                                                            
                                                            
                                                            
                                                            98
                                                            %
                                                            
                                                            
                                                            70
                                                            %Commons
      at Dexter Lakes
                                                            Memphis,
      Tennessee
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            228,496
                                                            
                                                            
                                                            
                                                            91
                                                            %
                                                            
                                                            
                                                            70
                                                            %Mendenhall
      Commons
                                                            Memphis,
      Tennessee
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            79,871
                                                            
                                                            
                                                            
                                                            99
                                                            %
                                                            
                                                            
                                                            70
                                                            %University
      Palms Shopping Center
                                                            Oviedo,
      Florida
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            99,172
                                                            
                                                            
                                                            
                                                            100
                                                            %
                                                            
                                                            
                                                            70
                                                            %Shoppes
      at Parkland
                                                            Parkland,
      Florida
                                                            
                                                            
                                                            03/2009
                                                            
                                                            
                                                            
                                                            145,652
                                                            
                                                            
                                                            
                                                            95
                                                            %
                                                            
                                                            
                                                            70
                                                            %Oak
      Park Village
                                                            San Antonio,
      Texas
                                                            
                                                            
                                                            11/2008
                                                            
                                                            
                                                            
                                                            64,287
                                                            
                                                            
                                                            
                                                            100
                                                            %
                                                            
                                                            
                                                            70
                                                            %Heritage
      Stations
                                                            Wake
      Forest, North Carolina
                                                            
                                                            
                                                            01/2009
                                                            
                                                            
                                                            
                                                            68,778
                                                            
                                                            
                                                            
                                                            96
                                                            %
                                                            
                                                            
                                                            70
                                                            %Total
      for Grocery-Anchored Portfolio
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,497,435
                                                            
                                                            
                                                            
                                                            95
                                                            %OtherDistribution
      Park Rio
                                                            Rio
      de Janeiro, Brazil
                                                            
                                                            
                                                            07/2007
                                                            
                                                            
                                                            
                                                            693,115
                                                            
                                                            
                                                            
                                                            99
                                                            %
                                                            
                                                            
                                                            50
                                                            %Total
      for All Properties
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            31,103,837
                                                            
                                                            
                                                            
                                                            92
                                                            %
                                                            (3)


__________





(1)
            This
      percentage shows the effective ownership of the Operating Partnership in
      the properties listed. On March 31, 2009, Hines REIT owned a 97.1%
      interest in the Operating Partnership as its sole general partner.
      Affiliates of Hines owned the remaining 2.9% interest in the Operating
      Partnership. In addition, the Company owned an approximate 28.7%
      non-managing general partner interest in the Core Fund as of
      March 31, 2009. The Core Fund does not own 100% of these properties;
      its ownership interest in its properties ranges from 40.6% to
      81.0%.(2)
            This
      square footage amount includes three floors which are being added to the
      building and are currently under construction. The construction is
      expected to be completed in May 2009. The total square footage, including
      the space under construction, was used to calculate the percentage
      leased.(3)
            This
      amount represents the percentage leased assuming the Company owns a 100%
      interest in each of these properties.  The percentage
      leased based on the Company’s effective ownership interest in each
      property is 94%.





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





March
      31, 2009
                
                
                December
      31, 2008Buildings
      and improvements
                
                $
                1,986,381
                
                
                $
                1,987,184Less:
      accumulated depreciation
                
                
                (88,171
                )
                
                
                (75,783)Buildings
      and improvements, net
                
                
                1,898,210
                
                
                
                1,911,401Land
                
                
                461,962
                
                
                
                462,606Investment
      property, net
                
                $
                2,360,172
                
                
                $
                2,374,007





As of
March 31, 2009, the cost basis and accumulated amortization related to lease
intangibles was as follows (in thousands):





Lease
      IntangiblesIn-Place
      Leases
                              
                              
                              Out-of-Market Lease
      Assets
                              
                              
                              Out-of-Market
      Lease LiabilitiesCost
                              $
                              421,506
                              
                              
                              $
                              61,064
                              
                              
                              $
                              137,404Less:
      accumulated amortization
                              
                              (116,698
                              )
                              
                              
                              (16,436
                              )
                              
                              
                              (30,671
                              )Net
                              $
                              304,808
                              
                              
                              $
                              44,628
                              
                              
                              $
                              106,733
 11





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





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





Amortization
expense was $18.5 million and $15.4 million for in-place leases for the
three months ended March 31, 2009 and 2008, respectively. Amortization of
out-of-market leases, net, was an increase to rental revenue of
$3.6 million and $2.0 million, respectively.





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





In-Place
      Leases
                  
                  
                  Out-of-Market
      Leases, NetApril
      1 through December 31, 2009
                  
                  $
                  49,852
                  
                  
                  $
                  (9,865
                  )2010
                  
                  
                  57,666
                  
                  
                  
                  (11,955
                  )2011
                  
                  
                  50,251
                  
                  
                  
                  (11,046
                  )2012
                  
                  
                  39,820
                  
                  
                  
                  (10,110
                  )2013
                  
                  
                  29,832
                  
                  
                  
                  (8,455
                  )





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





Fixed
      Future Minimum RentalsApril
      1 through December 31, 2009
                    
                    $
                    168,4442010
                    
                    
                    202,3432011
                    
                    
                    188,2032012
                    
                    
                    165,2262013
                    
                    
                    127,980Thereafter
                    
                    
                    496,387Total
                    
                    $
                    1,348,583





Pursuant
to the lease agreements with certain tenants in one of its buildings, the
Company receives fees for the provision of various telecommunication-related
services and the use of certain related facilities. The fixed future minimum
rentals expected to be received for such services for the period from April 1
through December 31, 2009 and for each of the years ended December 31, 2010
through 2013 and for the period thereafter are $2.1 million,
$2.6 million, $2.3 million, $1.7 million, $1.3 million and $1.1
million, respectively. The Company has outsourced the provision of these
services to a tenant in the same building, to whom it pays fees for the
provision of such services. The fixed future minimum payments for such services
for the period from April 1 through December 31, 2009 and for each of the years
ended December 31, 2010 through 2013 and for the period thereafter are
approximately $674,000, $749,000, $535,000, $372,000, $260,000 and $22,000,
respectively.





During
the three months ended March 31, 2009 and 2008, the Company did not earn
more than 10% of its revenue from any individual tenant.





One of
the Company’s properties is subject to a ground lease, which expires on
March 31, 2032. Although the lease provides for increases in payments over
the term of the lease, ground rent expense accrues on a straight-line basis. The
fixed future minimum ground lease payments for the period from April 1 through
December 31, 2009 and for each of the years ended December 31, 2010 through 2013
and for the period thereafter are approximately $310,000, $420,000, $428,000,
$437,000, $445,000 and $9.9 million, respectively. Ground lease expense for the
three months ended March 31, 2009 and 2008 was approximately $126,000 and
$139,000, respectively.





In
January 2009, the Company entered into a possession and use agreement with the
City of Redmond, Washington, related to a portion of the land owned in
connection with the Laguna Buildings, which gives the city immediate use and
possession of the land until final terms of the sale are determined. Upon
execution of the agreement, the Company received a deposit of approximately
$803,000. However, because the terms of the sale have not been finalized and
title to the land has not been transferred, the Company has recorded a liability
related to the deposit in other liabilities in the accompanying condensed
consolidated balance sheet as of March 31, 2009. The Company expects to finalize
the terms of the sale and transfer the title to this land during the second
quarter of 2009.


12


4.  
Investments in Unconsolidated Entities





The
Company owns indirect interests in real estate through its investments in the
Core Fund, the Grocery-Anchored Portfolio and Distribution Park Rio. The table
below presents the activity of the Company’s unconsolidated entities for the
three months ended March 31, 2009 (in thousands):





Core
      Fund
                                              
                                              Grocery-Anchored
      Portfolio
                                              
                                              Distribution
                                                Park
      Rio
                                              
                                              
                                              TotalBalance
      as of January 1, 2009
                                              $
                                              290,062
                                              
                                              $
                                              51,473
                                              
                                              $
                                              22,839
                                              
                                              
                                              $
                                              364,374Contributions
                                              
                                              —
                                              
                                              
                                              23,535
                                              
                                              
                                              —
                                              
                                              
                                              
                                              23,535Distributions
      declared
                                              
                                              (640
                                              )
                                              
                                              (2,865
                                              )
                                              
                                              (523
                                              )
                                              
                                              
                                              (4,028
                                              )Equity
      in earnings (losses)
                                              
                                              (2,141
                                              )
                                              
                                              (5
                                              )
                                              
                                              445
                                              
                                              
                                              
                                              (1,701
                                              )Effect
      of exchange rate
                                              
                                              —
                                              
                                              
                                              —
                                              
                                              
                                              217
                                              
                                              
                                              
                                              217Balance
      as of March 31, 2009
                                              $
                                              287,281
                                              
                                              $
                                              72,138
                                              
                                              $
                                              22,978
                                              
                                              
                                              $
                                              382,397





The table
below presents the activity of the Company’s unconsolidated entities for the
three months ended March 31, 2008 (in thousands):





Core
      Fund
                    
                    
                    Distribution
                      Park
      Rio
                    
                    
                    TotalBalance
      as of January 1, 2008
                    
                    $
                    330,441
                    
                    
                    $
                    30,716
                    
                    
                    $
                    361,157Contributions
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Distributions
                    
                    
                    (5,874
                    )
                    
                    
                    (763
                    )
                    
                    
                    (6,637
                    )Equity
      in earnings (losses)
                    
                    
                    (2,371
                    )
                    
                    
                    436
                    
                    
                    
                    (1,935
                    )Effect
      of exchange rate
                    
                    
                    —
                    
                    
                    
                    394
                    
                    
                    
                    394Balance
      as of March 31, 2008
                    
                    $
                    322,196
                    
                    
                    $
                    30,783
                    
                    
                    $
                    352,979





Investment
in the Grocery-Anchored Portfolio





On
November 13, 2008, the Company acquired a 70% interest in a joint venture
with a subsidiary of Weingarten Realty Investors
(“Weingarten”).  Concurrently, the joint venture entered into an
agreement to acquire a portfolio of grocery-anchored retail centers owned by
Weingarten for $271.4 million.  This portfolio includes 12 retail
properties anchored by grocery stores located in Texas, Georgia, Tennessee,
Florida and North Carolina and consists of approximately 1.5 million square
feet of rentable area that is 95% leased. The initial closing included eight
properties for approximately $205.1 million. During the three months ended
March 31, 2009, the joint venture closed on the remaining four properties
and assumed four additional loans totaling $34.6 million. Weingarten
will continue to manage this portfolio for the joint venture, though the
Company’s approval is required for any significant actions of the joint
venture.




Impairment
of Unconsolidated Entities
  The
Company’s investments in unconsolidated entities are reviewed for impairment,
periodically, if events or circumstances change indicating that the carrying
amount of its investments may not be recoverable.  The ultimate
realization of its investments in unconsolidated entities is dependent on a
number of factors, including the performance of each investment and market
conditions.  In accordance with Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock, the Company will record an impairment charge if it
determines that a decline in the value of an investment is other than
temporary.  Based on the analysis of the facts and circumstances at
March 31, 2009, no impairment was recorded. If market conditions continue
to deteriorate and result in lower valuations or reduced cash flows of our
properties, impairment charges may be recorded in future
periods.




5.  Debt
Financing





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




Description
                                                                        Origination
      or
                                                                          Assumption
      Date
                                                                        Maturity
      Date
                                                                        
                                                                        Interest
      Rate
                                                                        
                                                                        
                                                                        Principal
      Outstanding at March 31, 2009
                                                                        
                                                                        
                                                                        Principal
      Outstanding at December 31, 2008SECURED
      MORTGAGE DEBTWells
      Fargo Bank, N.A. — Airport Corporate Center
                                                                        1/31/2006
                                                                        3/11/2009
                                                                        
                                                                        
                                                                        4.775
                                                                        %
                                                                        
                                                                        $
                                                                        91,000
                                                                        (4)
                                                                        
                                                                        $
                                                                        90,852Metropolitan
      Life Insurance Company — 1515 S. Street
                                                                        4/18/2006
                                                                        5/1/2011
                                                                        
                                                                        
                                                                        5.680
                                                                        %
                                                                        
                                                                        
                                                                        45,000
                                                                        (6)
                                                                        
                                                                        
                                                                        45,000Capmark
      Finance, Inc. — Atrium on Bay
                                                                        2/26/2007
                                                                        2/26/2017
                                                                        
                                                                        
                                                                        5.330
                                                                        %
                                                                        
                                                                        
                                                                        152,133
                                                                        (3)
                                                                        
                                                                        
                                                                        155,477The
      Prudential Insurance Company of America — One
Wilshire
                                                                        10/25/2007
                                                                        11/1/2012
                                                                        
                                                                        
                                                                        5.980
                                                                        %
                                                                        
                                                                        
                                                                        159,500
                                                                        
                                                                        
                                                                        
                                                                        159,500IXIS
      Real Estate Capital Inc. – Raytheon/ DIRECTV Buildings
                                                                        3/13/2008
                                                                        12/5/2016
                                                                        
                                                                        
                                                                        5.675
                                                                        %
                                                                        
                                                                        
                                                                        52,355
                                                                        (7)
                                                                        
                                                                        
                                                                        52,515New
      York State Teachers’ Retirement System – 2555 Grand
                                                                        4/24/2008
                                                                        5/1/2013
                                                                        
                                                                        
                                                                        5.375
                                                                        %
                                                                        
                                                                        
                                                                        86,000
                                                                        (8)
                                                                        
                                                                        
                                                                        86,000


13
 
 Description
                                                                                                                                Origination
      or
                                                                                                                                  Assumption
      Date
                                                                                                                                Maturity
      Date
                                                                                                                                
                                                                                                                                Interest
      Rate
                                                                                                                                
                                                                                                                                
                                                                                                                                Principal
      Outstanding at March 31, 2009
                                                                                                                                
                                                                                                                                
                                                                                                                                Principal
      Outstanding at December 31, 2008SECURED
      MORTGAGE DEBTNew
      York State Teachers’ Retirement System – Williams Tower
                                                                                                                                5/29/2008
                                                                                                                                6/1/2013
                                                                                                                                
                                                                                                                                
                                                                                                                                5.500
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                165,000
                                                                                                                                (9)
                                                                                                                                
                                                                                                                                
                                                                                                                                165,000Artesia
      Mortgage Capital Corporation –
                                                                                                                                  345
      Inverness Drive
                                                                                                                                12/30/2008
                                                                                                                                12/11/2016
                                                                                                                                
                                                                                                                                
                                                                                                                                5.850
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                13,843
                                                                                                                                (10)
                                                                                                                                
                                                                                                                                
                                                                                                                                13,790Artesia
      Mortgage Capital Corporation – Arapahoe Business Park I
                                                                                                                                12/30/2008
                                                                                                                                6/11/2015
                                                                                                                                
                                                                                                                                
                                                                                                                                5.330
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                8,718
                                                                                                                                (11)
                                                                                                                                
                                                                                                                                
                                                                                                                                8,676Artesia
      Mortgage Capital Corporation – Arapahoe Business Park II
                                                                                                                                12/30/2008
                                                                                                                                11/11/2015
                                                                                                                                
                                                                                                                                
                                                                                                                                5.530
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                9,416
                                                                                                                                (12)
                                                                                                                                
                                                                                                                                
                                                                                                                                9,411HSH
      POOLED MORTGAGE FACILITYHSH
      Nordbank — Citymark, 321 North Clark, 1900 and 2000
      Alameda
                                                                                                                                8/1/2006
                                                                                                                                8/1/2016
                                                                                                                                
                                                                                                                                
                                                                                                                                5.8575
                                                                                                                                %
                                                                                                                                (2)
                                                                                                                                
                                                                                                                                185,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                185,000HSH
      Nordbank — 3400 Data Drive, Watergate Tower IV
                                                                                                                                1/23/2007
                                                                                                                                1/12/2017
                                                                                                                                
                                                                                                                                
                                                                                                                                5.2505
                                                                                                                                %
                                                                                                                                (2)
                                                                                                                                
                                                                                                                                98,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                98,000HSH
      Nordbank — Daytona and Laguna Buildings
                                                                                                                                5/2/2007
                                                                                                                                5/2/2017
                                                                                                                                
                                                                                                                                
                                                                                                                                5.3550
                                                                                                                                %
                                                                                                                                (2)
                                                                                                                                
                                                                                                                                119,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                119,000HSH
      Nordbank — 3 Huntington Quadrangle
                                                                                                                                7/19/2007
                                                                                                                                7/19/2017
                                                                                                                                
                                                                                                                                
                                                                                                                                5.9800
                                                                                                                                %
                                                                                                                                (2)
                                                                                                                                
                                                                                                                                48,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                48,000HSH
      Nordbank — Seattle Design Center/5th and Bell
                                                                                                                                8/14/2007
                                                                                                                                8/14/2017
                                                                                                                                
                                                                                                                                
                                                                                                                                6.0300
                                                                                                                                %
                                                                                                                                (2)
                                                                                                                                
                                                                                                                                70,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                70,000MET
      LIFE SECURED MORTGAGE FACILITYMet
      Life — JPMorgan Chase Tower/
                                                                                                                                  Minneapolis
      Office/Flex Portfolio
                                                                                                                                12/20/2007
                                                                                                                                12/20/2012
                                                                                                                                
                                                                                                                                
                                                                                                                                5.70
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                205,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                205,000OTHER
      NOTES PAYABLEKeyBank
      Revolving Credit Facility
                                                                                                                                9/9/2005
                                                                                                                                10/31/2009
                                                                                                                                
                                                                                                                                
                                                                                                                                Variable
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                220,000
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                16,000Atrium
      Note Payable
                                                                                                                                9/1/2004
                                                                                                                                10/1/2011
                                                                                                                                
                                                                                                                                
                                                                                                                                7.390
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                2,536
                                                                                                                                (5)
                                                                                                                                
                                                                                                                                
                                                                                                                                2,621$
                                                                                                                                1,730,501
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                1,529,842


__________





(1)
                The
      weighted average interest rate on outstanding borrowings under this
      facility was 2.9% as of March 31, 2009.(2)
                The
      Company entered into an interest rate swap agreement which effectively
      fixed the interest rate of this borrowing at the specified rate. See Note
      2 – Derivative Instrumentsfor additional
      information regarding the Company’s derivatives.(3)
                The
      Company entered into mortgage financing in connection with its acquisition
      of Atrium on Bay. The mortgage agreement provided for an interest only
      loan with a principal amount of 190.0 million Canadian dollars. This
      amount was translated from Canadian dollars to U.S. dollars at a rate of
      $0.8007 as of March 31,
2009.




(4)
                          This
      interest-only loan in the principal amount of $91.0 million was
      assumed by the Company in connection with its acquisition of Airport
      Corporate Center. This mortgage matured on March 11, 2009 and the
      non-payment of this loan at maturity created a non-monetary default under
      the KeyBank revolving credit facility. The Company was granted an
      extension which was set to expire on April 23, 2009 to cure this default
      while it was negotiating a modification to the loan documents to provide
      for an extension of the maturity of such loan.  On April 20,
      2009, the Company executed a modification to the $91.0 million mortgage
      and pursuant to the terms of the modification, the maturity of the
      mortgage was extended to March 11, 2010 with the option for an additional
      6-month extension subject to certain conditions.  Concurrently,
      the Company made a principal payment of $13.1 million to reduce the
      outstanding principal balance to $77.9 million.  In addition,
      the execution of the modification cured the related non-monetary default
      under the KeyBank revolving credit agreement. All other significant terms
      and covenants of the loan remained the same, including the fixed interest
      rate of
4.775%.


(5)
                              Note
      with Citicorp Vendor Finance Ltd. related to installation of certain
      equipment at Atrium on Bay. This amount was translated to U.S. dollars at
      a rate of $0.8007 as of March 31, 2009.(6)
                              The
      Company entered into mortgage financing in connection with its acquisition
      of 1515 S. Street. The mortgage agreement provided for an
      interest only loan with a principal amount of
      $45.0 million.(7)
                              The
      Company assumed a mortgage note in the principal amount of $54.2 million
      in connection with its acquisition of the Raytheon/DirecTV Buildings. At
      the time of acquisition, the fair value of this mortgage was estimated to
      be $52.9 million, resulting in a discount of $1.3 million. The discount is
      being amortized over the term of the mortgage.(8)
                              The
      Company entered into an interest-only loan with the New York State
      Teachers’ Retirement System (“NYSTRS”) in the principal amount of $86.0
      million secured by its interest in 2555 Grand.(9)
                              The
      Company entered into an interest-only loan with NYSTRS in the principal
      amount of $165.0 million secured by its interest in
      Williams Tower.


14
 
  (10)
                                                    The
      Company assumed a $15.5 million note in connection with its
      acquisition of 345 Inverness Drive. The note is interest-only until June
      11, 2010, at which time the principal will begin amortizing until its
      maturity. At the time of acquisition, the fair value of this note was
      estimated to be $13.8 million, resulting in a discount of $1.7
      million. The discount is being amortized over the term of the
      note.


(11)
                                              The
      Company assumed a $9.8 million note in connection with its acquisition of
      Arapahoe Business Park I. The note is interest-only until June 11, 2010,
      at which time the principal will begin amortizing until its maturity. At
      the time of acquisition, the fair value of this note was estimated to be
      $8.7 million, resulting in a discount of $1.1 million.
      The discount is being amortized over the term of the
      note.(12)
                                              The
      Company assumed a $10.5 million note in connection with its acquisition of
      Arapahoe Business Park II. At the time of acquisition, the fair value of
      this note was estimated to be $9.4 million, resulting in a discount
      of $1.1 million. The discount is being amortized over the term of the
      note.


The
Company is contractually obligated to make principal payments on its
outstanding notes payable for the period from April 1, 2009 through December 31,
2009, for each of the years ended December 31, 2010 through December 31, 2013
and for the period thereafter of $311.7 million, $1.3 million, $48.5 million,
$365.7 million, $252.3 million and $755.8 million.




Other
than the technical default described in note 4 to the table above, the Company
is not aware of any instances of noncompliance with financial covenants as of
March 31, 2009.




6.  Distributions





With the
authorization of its board of directors, the Company has declared distributions
monthly and aggregated and paid such distributions quarterly. The Company
intends to continue this distribution policy for so long as its board of
directors decides this policy is in the best interests of its shareholders. The
Company has made the following quarterly distributions to its shareholders
and noncontrolling interests for the quarter ended March 31, 2009 and for
each of the quarters in the year ended December 31, 2008.




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


7.  Related
Party Transactions





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





Incurred
                                  Unpaid
      as ofType
      and Recipient
                                  
                                  Three
      Months Ended
                                    March
      31, 2009
                                  
                                  
                                  Three
      Months Ended
                                    March
      31, 2008
                                  
                                  March
      31, 2009
                                  
                                  December
      31, 2008Selling
      Commissions – the Dealer Manager
                                  
                                  $
                                  3,385
                                  
                                  
                                  $
                                  7,423
                                  
                                  $
                                  88
                                  
                                  $
                                  135Dealer
      Manager Fee – the Dealer Manager
                                  
                                  
                                  1,112
                                  
                                  
                                  
                                  2,447
                                  
                                  
                                  (27
                                  )
                                  
                                  (93
                                  )Organizational
      and Offering Expenses -  the Advisor
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,474
                                  
                                  
                                  —
                                  
                                  
                                  9Acquisition
      Fee – the Advisor
                                  
                                  
                                  1,160
                                  
                                  
                                  
                                  1,447
                                  
                                  
                                  753
                                  
                                  
                                  4,534Asset
      Management Fee – the Advisor
                                  
                                  
                                  3,482
                                  
                                  
                                  
                                  2,758
                                  
                                  
                                  1,159
                                  
                                  
                                  1,141Participation
      Interest in the Operating Partnership – HALP Associates Limited
      Partnership
                                  
                                  
                                  (28
                                  )
                                  
                                  
                                  4,205
                                  
                                  
                                  45,391
                                  
                                  
                                  45,419Debt
      Financing Fee – the Advisor
                                  
                                  
                                  242
                                  
                                  
                                  
                                  —
                                  
                                  
                                  155
                                  
                                  
                                  1,058Property
      Management Fee – Hines
                                  
                                  
                                  1,965
                                  
                                  
                                  
                                  1,522
                                  
                                  
                                  163
                                  
                                  
                                  (11
                                  )Leasing
      Fee – Hines
                                  
                                  
                                  259
                                  
                                  
                                  
                                  1,515
                                  
                                  
                                  695
                                  
                                  
                                  645Tenant
      Construction Management Fees – Hines
                                  
                                  
                                  2
                                  
                                  
                                  
                                  134
                                  
                                  
                                  65
                                  
                                  
                                  184Re-development
      Construction Management Fees – Hines
                                  
                                  
                                  15
                                  
                                  
                                  
                                  —
                                  
                                  
                                  (5
                                  )
                                  
                                  —Expense
      Reimbursements – Hines (with respect to management and operation of the
      Company’s properties)
                                  
                                  
                                  4,215
                                  
                                  
                                  
                                  3,066
                                  
                                  
                                  451
                                  
                                  
                                  1,098





15


Due
to Affiliates





Due to
affiliates includes the following (in thousands):





March
      31, 2009
                
                
                December
      31, 2008Organizational
      and offering costs related to the Second Offering
                
                $
                —
                
                
                $
                9Dealer
      manager fees and selling commissions
                
                
                61
                
                
                
                42Asset
      management, acquisition fees and property-level fees and
      reimbursements
                
                
                3,436
                
                
                
                8,649Other
                
                
                —
                
                
                
                815Total
                
                $
                3,497
                
                
                $
                9,515





The
Participation Interest





Pursuant
to the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, HALP owns a profits interest in the Operating Partnership.
The limited partnership interest in the Operating Partnership
attributable to the Participation Interest was 2.4% and 2.2% as of March 31,
2009 and December 31, 2008, respectively. The Participation Interest
entitles HALP to receive distributions from the Operating Partnership based upon
its percentage interest in the Operating Partnership at the time of
distribution. The Company recorded a liability related to the Participation
Interest based on the estimated settlement value of this ownership interest in
the accompanying condensed consolidated balance sheets which is remeasured at
fair value at each balance sheet date. See Note 11 for additional
information.





8.  Changes
in Assets and Liabilities





The
effect of changes in asset and liability accounts on cash flows from operating
activities for the three months ended March 31, 2009 and 2008 is as follows
(in thousands):





2009
                
                
                2008Changes
      in assets and liabilities:(Increase)
      decrease in other assets
                
                $
                (634
                )
                
                $
                364Increase
      in tenant and other receivables
                
                
                (2,291
                )
                
                
                (6,412
                )Additions
      to deferred leasing costs
                
                
                (4,640
                )
                
                
                (4,921
                )Decrease
      in accounts payable and accrued expenses
                
                
                (12,117
                )
                
                
                (8,285
                )(Decrease)
      increase in participation interest liability
                
                
                (28
                )
                
                
                4,205(Decrease)
      increase in other liabilities
                
                
                (3,585
                )
                
                
                2,444Decrease
      in due to affiliates
                
                
                (6,643
                )
                
                
                (319
                )Changes
      in assets and liabilities
                
                $
                (29,938
                )
                
                $
                (12,924
                )


9.  Supplemental
Cash Flow Disclosures





Supplemental
cash flow disclosures for the three months ended March 31, 2009 and 2008 are as
follows (in thousands):





2009
                        
                        
                        2008Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
                        
                        $
                        21,262
                        
                        
                        $
                        17,845Cash
      paid for income taxes
                        
                        $
                        1,049
                        
                        
                        $
                        196Supplemental
      Schedule of Non-Cash ActivitiesUnpaid
      selling commissions and dealer manager fees
                        
                        $
                        61
                        
                        
                        $
                        952Deferred
      offering costs offset against additional
    paid-in-capital
                        
                        $
                        —
                        
                        
                        $
                        1,556Distributions
      declared and unpaid
                        
                        $
                        32,720
                        
                        
                        $
                        26,337Distributions
      receivable
                        
                        $
                        1,754
                        
                        
                        $
                        5,874Distributions
      reinvested
                        
                        $
                        17,290
                        
                        
                        $
                        13,618Increase
      in shares tendered for redemption
                        
                        $
                        3,153
                        
                        
                        $
                        —Stock
      subscription
                        
                        $
                        864
                        
                        
                        $
                        —Non-cash
      net liabilities acquired upon acquisition of
property
                        
                        $
                        —
                        
                        
                        $
                        15,929Accrual
      of deferred financing costs
                        
                        $
                        22
                        
                        
                        $
                        8Assumption
      of mortgage upon acquisition of property
                        
                        $
                        —
                        
                        
                        $
                        52,938Accrued
      additions to deferred leasing costs
                        
                        $
                        1,883
                        
                        
                        $
                        3,182Accrued
      additions to investment property
                        
                        $
                        372
                        
                        
                        $
                        803




10.  Commitments
and Contingencies





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


16


11.
Fair Value Disclosures





As of March 31, 2009, the Company recorded a liability of $105.2
million related to the fair value of its interest rate swap contracts in
accordance with Statement No. 157, Fair Value Measurements("SFAS No. 157"). The fair value of these
derivative instruments was determined using pricing models, which take into
account the contract terms as well as other inputs where applicable, such as
interest rate yield curves. Although the Company has determined the majority of
the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives
utilize Level 3 inputs, such as estimates of current credit spreads to evaluate
the likelihood of default by the Company and its counterparty, HSH Nordbank. In
adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds and
guarantees. However, as of March 31, 2009, the Company has assessed the
significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its
derivatives. As a result, the Company has determined its derivative valuations
are classified in Level 2 of the fair value hierarchy.




To obtain
fair values, observable market prices are used if available. In some instances,
observable market prices are not readily available for certain financial
instruments and fair value is determined using present value or other techniques
appropriate for a particular financial instrument. These techniques involve some
degree of judgment and as a result are not necessarily indicative of the amounts
the Company would realize in a current market exchange. The use of different
assumptions or estimation techniques may have a material effect on the estimated
fair value amounts. The Company did not have any assets or liabilities measured
at fair value on a nonrecurring basis at March 31, 2009.


In addition, in accordance with Statement of Financial Accounting Standards No.
123, Accounting for
Stock-Based Compensation (as amended), the Company recorded a
liability related to the Participation Interest based on the estimated
settlement value of this ownership interest in the accompanying condensed
consolidated balance sheets which is remeasured at fair value at each balance
sheet date. The fair value of the shares underlying the Participation
Interest liability is determined based on the related offering price in place as
of each balance sheet date. Adjustments required to record this liability at
fair value are included in asset management and acquisition fees in the
accompanying consolidated statements of operations.




12.  Reportable
Segments





Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards for reporting
financial and descriptive information about an enterprise’s reportable segments.
The Company’s investments in real estate are geographically diversified and
management evaluates the operating performance of each at an individual property
level. The Company has determined it has four reportable segments: 1) office
properties, 2) domestic industrial properties,  3) domestic retail
properties and 4) international industrial properties. The office properties
segment consists of 21 office properties that the Company owns directly as well
as 25 office properties that are owned indirectly through the Company’s
investment in the Core Fund. The domestic industrial properties segment consists
of one directly-owned industrial property located in Dallas, Texas. The domestic
retail segment consists of 12 grocery-anchored shopping centers that are owned
indirectly through the Company’s investment in a joint venture with Weingarten.
The international industrial properties segment consists of three directly-owned
industrial properties located in Curitiba and Sao Paolo, Brazil and one
industrial property located in Rio de Janeiro, Brazil that is owned indirectly
through the Company’s investment in a joint venture with a Hines
affiliate.





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




The
tables below provide additional information related to each of the Company’s
segments (in thousands) and a reconciliation to the Company’s net loss.
"Corporate-Level Accounts" includes amounts incurred by the corporate-level
entities which are not allocated to any of the reportable segments.
 
 Three
      Months Ended
                                          March
      31,2009
                                        
                                        
                                        2008Total
      revenueOffice
      properties
                                        
                                        $
                                        87,819
                                        
                                        
                                        $
                                        70,134Domestic
      industrial properties
                                        
                                        
                                        1,115
                                        
                                        
                                        
                                        —International
      industrial properties
                                        
                                        
                                        3,088
                                        
                                        
                                        
                                        —Corporate-level
      accounts
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Total
      revenue
                                        
                                        $
                                        92,022
                                        
                                        
                                        $
                                        70,134Net
      operating income (loss)Office
      properties(1)
                                        
                                        $
                                        51,712
                                        
                                        
                                        $
                                        40,502Domestic
      industrial properties(1)
                                        
                                        
                                        869
                                        
                                        
                                        
                                        —International
      industrial properties(1)
                                        
                                        
                                        2,453
                                        
                                        
                                        
                                        —Corporate-level
      accounts(2)
                                        
                                        
                                        (6,067
                                        )
                                        
                                        
                                        (11,608
                                        )Total
      segment net operating income (loss)
                                        
                                        $
                                        48,967
                                        
                                        
                                        $
                                        28,894


17




The
tables below provide additional information related to each of the Company’s
segments (in thousands) and a reconciliation to the Company’s net loss.
"Corporate-Level Accounts" includes amounts incurred by the corporate-level
entities which are not allocated to any of the reportable segments.





Three
      Months Ended
                                                                  March
      31,2009
                                                                
                                                                
                                                                2008
 Equity
      in earnings (losses) of unconsolidated entitiesEquity
      in losses of office properties
                                          
                                          $
                                          (2,141
                                          )
                                          
                                          $
                                          (2,371
                                          )Equity
      in losses of domestic retail properties
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          —Equity
      in earnings of international industrial properties
                                          
                                          
                                          445
                                          
                                          
                                          
                                          436Total
      equity in earnings (losses) of unconsolidated entities
                                          
                                          $
                                          (1,701
                                          )
                                          
                                          $
                                          (1,935
                                          )Total
      assets
                                          
                                          March
      31, 2009
                                          
                                          
                                          December
      31, 2008Office
      properties
                                          
                                          $
                                          2,692,284
                                          
                                          
                                          $
                                          2,732,894Domestic
      industrial properties
                                          
                                          
                                          43,765
                                          
                                          
                                          
                                          44,146International
      industrial properties
                                          
                                          
                                          119,006
                                          
                                          
                                          
                                          119,368Investment
      in unconsolidated entities –Office
      properties
                                          
                                          
                                          287,281
                                          
                                          
                                          
                                          290,062Domestic
      retail properties
                                          
                                          
                                          72,138
                                          
                                          
                                          
                                          51,473International
      industrial properties
                                          
                                          
                                          22,978
                                          
                                          
                                          
                                          22,839Corporate-level
      accounts
                                          
                                          
                                          178,460
                                          
                                          
                                          
                                          19,656Total
      assets
                                          
                                          $
                                          3,415,912
                                          
                                          
                                          $
                                          3,280,437


Three
      Months Ended March 31,2009
                                      
                                      2008Reconciliation
      to net income (loss)Total
      segment net operating income
                                      
                                      $
                                      48,967
                                      
                                      $
                                      28,894Depreciation
      and amortization
                                      
                                      
                                      (31,779
                                      )
                                      
                                      (25,381
                                      )Equity
      in losses of unconsolidated entities, net
                                      
                                      
                                      (1,701
                                      )
                                      
                                      (1,935
                                      )Gain
      (loss) on derivative instruments, net
                                      
                                      
                                      10,896
                                      
                                      
                                      (27,445
                                      )Other
      losses
                                      
                                      
                                      (11
                                      )
                                      
                                      (2
                                      )Interest
      expense
                                      
                                      
                                      (22,587
                                      )
                                      
                                      (18,052
                                      )Interest
      income
                                      
                                      
                                      279
                                      
                                      
                                      1,249Provision
      for income taxes
                                      
                                      
                                      (259
                                      )
                                      
                                      (515
                                      )Net
      income (loss)
                                      
                                      $
                                      3,805
                                      
                                      $
                                      (43,187
                                      )






(1)
            Revenues
      less property operating expenses, real property taxes and property
      management fees.(2)
            Revenues
      less asset management and acquisition fees, organizational and offering
      expenses and general and administrative
  expenses.




13. Subsequent
Events





KeyBank
Activity





From
April 1, 2009 through May 4, 2009, the Company repaid $124.0 million under its
revolving credit facility with KeyBank resulting in an outstanding principal
balance of $96.0 million.





Shareholder
Redemptions





For the
months of March and April 2009, in accordance with its share
redemption plan, Hines REIT redeemed 4.6 million common shares and made
corresponding payments (on April 1 and May 1, 2009, respectively) totaling
$41.9 million to shareholders who had requested these redemptions. The
shares redeemed were cancelled and will have the status of authorized, but
unissued shares. The Company recorded a $21.2 million liability as of March 31,
2009  for the shares redeemed in April 2009. See Note 2 – Redemption of Common Stock
for additional information.


18


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





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





Cautionary
Note Regarding Forward-Looking Statements





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





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





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





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





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





•
            Risks
      associated with debt;





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




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





•
            Catastrophic
      events, such as hurricanes, earthquakes and terrorist attacks; and our
      ability to secure adequate insurance at reasonable and appropriate
      rates;





•
            Risks
      associated with the currency exchange rate related to our international
      investments;




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





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





•
            Risks
      relating to our investment in Hines US Core Office Fund LP (the “Core
      Fund”), such as its reliance on Hines for its operations and investments,
      and our potential liability for Core Fund
  obligations;




19


•
            The
      lack of liquidity associated with our
assets;





•
            Our
      reliance on our Advisor, Hines and affiliates of Hines for our day-to-day
      operations and the selection of real estate investments, and our Advisor’s
      ability to attract and retain high-quality personnel who can provide
      service at a level acceptable to
us;





•
            Risks
      associated with conflicts of interests that result from our relationship
      with our Advisor and Hines, as well as conflicts of interests certain of
      our officers and directors face relating to the positions they hold with
      other entities; and





•
            Our
      ability to continue to qualify as a real estate investment trust (“REIT”)
      for federal income tax purposes.




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





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





Executive
Summary





Hines
Real Estate Investment Trust, Inc. (“Hines REIT” and, together with its
consolidated subsidiaries, “we”, “us” or the “Company”) and its subsidiary,
Hines REIT Properties, L.P. (the “Operating Partnership”) were formed in August
2003 for the purpose of investing in and owning interests in real estate. We
invest in real estate to satisfy our primary investment objectives including
preserving invested capital, paying regular cash distributions and achieving
modest capital appreciation of our assets over the long term. We make
investments directly through entities wholly owned by the Operating Partnership
or indirectly through other entities such as through our investment in the Core
Fund. As of March 31, 2009, we had direct and indirect interests in 63
properties. These properties consist of 45 office properties located throughout
the United States, one mixed-use office and retail property in Toronto, Ontario,
one industrial property in Dallas, Texas, four industrial properties in Rio de
Janeiro, Brazil and a portfolio of 12 grocery-anchored shopping centers located
across five states (the “Grocery-Anchored Portfolio”).





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





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





Economic
Update





During
the first quarter of 2009, the financial markets continued to experience adverse
impacts from the credit crisis and global recession.  Although there have
recently been a few positive signs such as increased government stimuli,
increased corporate debt and equity activities, declining job losses, etc., it
still remains uncertain as to how severe the current recession will be or how
long it will be before a recovery begins.  Accordingly, we believe the
current economic recession will continue to have an adverse effect on real
estate market fundamentals, including tenant demand, overall occupancies,
leasing velocity, rental rates, subletting and tenant defaults.  We
expect that these conditions will negatively impact our operations and may limit
our ability to maintain our current level of distributions to
shareholders.  We are proactively managing our portfolio in an effort
to minimize the negative impacts during this time.  As with most
commercial real estate, our portfolio of assets is not immune to a recessionary
economy. However, due to the quality and diversification of our portfolio, we
believe that our portfolio is relatively well positioned to limit the negative
impact from this down cycle.




To date,
our portfolio has not experienced significant direct effects resulting from the
events in the financial markets. As of March 31, 2009, our portfolio was 94%
leased to a diverse tenant base over a variety of industries, with approximately
16% leased to several companies in the financial and insurance industries and
approximately 14% leased to several companies in the legal
industry.   In most markets where we operate we are seeing slower
leasing activities, lower rental rates and increased leasing
incentives.  We continue to be concerned about the ultimate impact of
events in the financial markets on our tenants in the finance, insurance and
legal industries and we are monitoring them in an effort to
mitigate potential adverse impacts to our portfolio.


20




The
capital markets affecting commercial real estate continue to be virtually
frozen.  Given the economic environment and the significant decline of
the stock markets, there is significantly less capital being invested in most
sectors including commercial real estate.  In addition, investors remain
focused on liquidity and safety and, therefore, there is a significant increase
in requests to redeem securities and a decrease in sales of securities to
investors.  During the first quarter of 2009, we experienced similar
circumstances whereby proceeds received from our current offering were lower
than our historical capital raising activities and share redemptions under our
redemption plan were significantly higher.  In April and early May, we
have experienced a slight increase in the amount of proceeds received from the
Third Offering and have also experienced a decrease in redemptions from the
number of shares redeemed with respect to the first quarter.  We
believe this may be the beginning of a trend that investors are beginning to
regain more confidence in the investment markets due to some signs of stability
in the economy.





The real
estate debt markets remain distressed as financial institutions and other
lenders continue to be capital constrained.  As a result, debt capital
continues to be difficult to obtain and more expensive. We have managed our
portfolio to date in an effort to minimize our exposure to volatility in the
debt capital markets.  We have done this by using moderate levels of
long-term fixed-rate debt and minimizing our exposure to short-term variable
rate debt which is more likely to be impacted by market
volatility.  Our portfolio was 60% leveraged as of March 31, 2009,
with 85% of our debt in the form of long-term, fixed-rate mortgage loans (some
of which are effectively fixed through the use of interest rate
swaps). In April
2009, we modified a $91.0 million mortgage that matured in March 2009. Pursuant
to the terms of the modification, we paid down $13.1 million of the outstanding
principal and agreed to a one-year extension of the mortgage with an option for
an additional six-month extension. All other significant terms and
covenants of the loan remained the same, including the fixed interest rate of
4.775%.




Values of
commercial real estate assets and debt instruments continue to be impacted by
the events described above.  Values of assets have continued to
decline from the values achieved over the last 24 months.  It is
uncertain how much of the declines are attributable to the current illiquidity
and volatility in the markets or a longer-term re-pricing of real estate
assets.  While real estate values have continued to decline in recent
months, values of existing, low-rate debt continues to be valuable as debt
is now less available and more expensive. In conjunction with our recent
share re-pricing which occurred in January 2009, we reflected the current
valuations of our real estate investments and notes payable as of December 31,
2008.  This resulted in our per share price declining from $10.66 to
$10.08.   Depending on how the broader economy and markets perform in
the future, there is no assurance that values of commercial real estate will not
decline further.




Given the
current environment, we are focused on continuing to raise capital and
strengthening our liquidity position to meet our operating needs and redemption
requests, as well as to position ourselves to take advantage of attractive
investment opportunities in the next 6-18 months.    We believe
that the current market environment will result in investment opportunities at
significantly higher cap rates and decreased pricing of high quality real estate
assets.  This should result in investments which generate higher
returns than assets acquired 12 – 24 months ago.  To the extent we
have capital available, we plan to actively pursue investment opportunities as
we believe that during this time of severe constraints in debt and equity
capital, the distress in the market may allow us access to attractively priced
real estate investment opportunities.




We
continue to manage our strong lending relationships with banks, insurance
companies, pension funds and others that generally provide debt capital for
commercial real estate transactions.  Although new debt capital is
more scarce and more expensive than it was during the last several years, we
expect that it will continue to be available to us due to our reputation,
financial strength and the quality of the assets we acquire.  As we
pursue new investment opportunities, we will continue to factor into such
opportunities the current availability and price of debt capital.
Notwithstanding the above, depending on market conditions and other factors, we
may choose not to borrow to finance future new acquisitions or to place new debt
on our existing portfolio or assets.




Although
we cannot predict when the financial markets and broader economy will recover,
we are actively managing our well-diversified portfolio of quality real estate
assets to maximize its long-term income and value.  Our Sponsor,
Advisor and property manager have significant experience through several real
estate and economic cycles, and thus we believe we are relatively
well-positioned to manage through these difficult and uncertain
times.


Critical
Accounting Policies





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





21


Financial
Condition, Liquidity and Capital Resources





General




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





•
            proceeds
      from our public offerings, including our dividend reinvestment
      plan;





•
            debt
      financings, including secured or unsecured
      facilities; and





•
            cash
      flow generated by our real estate investments and
    operations.





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





We intend
to continue making real estate investments using proceeds from the Third
Offering and funds available to us under our credit facilities and other
permanent debt. We intend to refinance mortgage debt expiring in the near term
with new mortgage financing or our revolving credit facility. We also intend to
continue to pay distributions to our shareholders on a quarterly basis. However,
as discussed above, in light of the current economic conditions, we may not be
able to maintain the current level of distributions to our shareholders in
future periods.




On March
11, 2009, we had a $91.0 million mortgage which matured and the non-payment of
this loan at maturity created a non-monetary default under the KeyBank revolving
credit facility. We were granted an extension which was set to expire on April
23, 2009 to cure this default while we were negotiating a modification to the
loan documents to provide for an extension of the maturity of such
loan.  On April 20, 2009, we executed a modification to the $91.0
million mortgage and pursuant to the terms of the modification, the maturity of
the mortgage was extended to March 11, 2010 with the option for an additional
6-month extension subject to certain conditions.  Concurrently, we
made a principal payment of $13.1 million to reduce the outstanding principal
balance to $77.9 million.  In addition, because the modification was
executed prior to the expiration of the extension that was previously granted,
it cured the related non-monetary default under the KeyBank revolving credit
agreement. All other significant terms and covenants of the loan remained the
same, including the interest rate of 4.775%.




Additionally,
HSH Nordbank has the right to have the properties serving as collateral under
the HSH Nordbank credit facility appraised every two years. Should the
aggregate outstanding principal amounts under this facility exceed 55% of the
lender’s appraised values, we must rebalance through making partial payment or
providing additional collateral to eliminate such excess. Considering the
declining real estate values in recent months, we expect that we may be
required to repay certain amounts outstanding in the upcoming quarters to
maintain compliance with this covenant. Should we need to do so, we expect
to fund such amounts with proceeds from the Third Offering or with
borrowings from our KeyBank revolving credit facility.





Cash
Flows from Operating Activities





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





Net cash
used in operating activities was $4.6 million for the three months ended March
31, 2009 compared to net cash provided by operations of approximately $402,000
for the three months ended March 31, 2008. The decrease is primarily due to
property taxes paid during the first quarter related to our acquisitions during
the past year. Additionally, more than 50% of our 2009 property taxes for our
existing assets were paid during the first quarter.





Cash
Flows from Investing Activities





During
the three months ended March 31, 2008, we had cash outflows of $208.5 million
related to the acquisition of properties and their related lease intangibles. We
did not acquire any direct interests in properties during the three months ended
March 31, 2009.




In
January 2009, we entered into possession and use agreements with the City of
Redmond, Washington, related to a portion of the land owned in connection with
the Laguna Buildings, which gives the city immediate use and possession of the
land until final terms of the sale are determined. Upon execution of the
agreements, we received a deposit of approximately $803,000. However, because
the terms of the sale have not been finalized and title to the land has not been
transferred, we have recorded a liability related to the deposit and the
proceeds are included in deposit proceeds from pending land sale on the
accompanying condensed statement of cash flows as of March 31,
2009.


22


As of
March 31, 2009, we had invested $395.5 million in the Core Fund
representing an approximate 28.7% non-managing general partner interest. During
the three months ended March 31, 2009 and 2008, we received distributions
from the Core Fund totaling $4.7 million and $6.9 million, respectively,
which was included in cash flows from investing activities as it exceeded our
equity in earnings of the joint venture. The Core Fund decreased the amount of
its distribution in the first quarter of 2009 in order to pay down debt and
improve its liquidity position and expects distributions, if any, will be
minimal for the next several quarters.





As of
March 31, 2009, we had invested $28.9 million in Distribution Park Rio
representing a 50% interest. During the three months ended March 31, 2009
and 2008, we received distributions from Distribution Park Rio totaling
approximately $523,000 and $763,000, respectively. Approximately $78,000 and
$327,000 of this amount was included in cash flows from investing activities as
it exceeded our equity in earnings of the joint venture and the remaining amount
was included in operating cash flows for the three months ended March 31, 2009
and 2008, respectively.





On
November 13, 2008, we acquired a 70.0% non-managing interest the
Grocery-Anchored Portfolio through a joint venture. Concurrently with our
initial investment, the joint venture acquired interests in eight of these
properties. During the three months ended March 31, 2009, the joint venture
acquired interests in the remaining four properties resulting in our additional
investment of $23.5 million. During the three months ended March 31, 2009,
we received operating distributions from the Grocery-Anchored Portfolio totaling
approximately $532,000. Additionally, we received a return of the capital
contributed to the joint venture in the fourth quarter of 2008 of $1.8 million,
which was used to fund a deposit on the joint venture’s mortgage financing.
These amounts are included in cash flows from investing activities as they
exceeded our equity in earnings of the joint venture.





During
the three months ended March 31, 2009 and 2008, respectively, we had net
cash inflows of approximately $721,000 and net cash outflows of $372,000, for
master leases entered into in connection with our acquisitions.





During
the three months ended March 31, 2009, we had decreases in restricted cash
and marketable securities of $11.3 million. This decrease is primarily related
to prepaid rent at one of our properties of $8.5 million required by its
mortgage agreement to be restricted as of year-end, which has subsequently been
released. Additionally, we had restricted marketable securities of $2.7 million
as of December 31, 2008 at one of our properties held in a certificate of
deposit which matured in February 2009. During the three months ended
March 31, 2008, we had an increase in restricted cash of $3.3 million
related to certain escrows required by our mortgage agreements of properties
acquired during that period.





During
the three months ended March 31, 2008 we had outflows related to other assets of
$30.0 million, primarily as a result of deposits paid on investment
properties that we acquired subsequent to March 31, 2008.





Cash
Flows from Financing Activities





Public
Offerings





We offer
shares of our common stock for sale through continuous public offerings, which
provides us with the ability to raise capital on an ongoing basis. We
raised $527.5 million in proceeds through our Initial Offering prior to its
expiration on June 18, 2006. We raised $1.5 billion in proceeds through our
Second Offering prior to its expiration on June 30,
2008.





We
commenced our Third Offering on July 1, 2008, pursuant to which we are
offering up to $3.5 billion in shares of common stock, including $500.0
million in shares of common stock under our dividend reinvestment
plan.  As of March 31, 2009, we had raised $224.2 million in proceeds
through the Third Offering. During the three months
ended March 31, 2009 and 2008 we raised proceeds of $53.2 million and $111.2
million, respectively. The decrease in proceeds is a result of the current
capital markets and economic environment. See
“Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Economic Update” for additional information
regarding the current state of the economy.




Payment
of Offering and Other Costs and Expenses





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





For the
three months ended March 31, 2009 and 2008, we paid the Dealer Manager selling
commissions of $3.4 million and $7.0 million, respectively, and dealer manager
fees of $1.0 million and $2.5 million, respectively. All such selling
commissions and a portion of such dealer manager fees were reallowed by the
Dealer Manager to participating broker dealers for their services in selling our
shares. Commissions and dealer manager fees paid during the three months ended
March 31, 2009 decreased, as compared to the three months ended March 31, 2008,
primarily as a result of a decrease in capital raised.




Our
Second Offering terminated on June 30, 2008. No organizational and offering
costs related to the Second Offering were incurred after December 31, 2008.
During the three months ended March 31, 2008, the Advisor incurred internal
organizational and offering costs related to the Second Offering totaling
approximately $1.9 million, respectively, and third-party offering costs of $1.6
million, respectively. During the three months ended March 31, 2008 we made
payments totaling $3.9 million for Second Offering organizational and offering
costs, of which $3.8 million were reimbursements made to our
Advisor.


23




Distributions





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





From
July 1, 2006 through April 30, 2008, we declared distributions (as
authorized by our board of directors) equal to $0.00170959 per share, per
day. We increased the dividend rate to $0.00175233 per share, per day for the
months of May through December 2008. Additionally, we have declared
distributions equal to $0.00175233 per share, per day for the period from
January 1, 2009 through May 30, 2009.The distributions declared were authorized
and set by our board of directors at a level the board believed to be
appropriate based upon the board’s evaluation of our assets, historical and
projected levels of cash flow and results of operations, additional capital and
debt anticipated to be raised or incurred and invested in the future, the
historical and projected timing between receiving offering proceeds and
investing such proceeds in real estate investments, and general market
conditions and trends. However, as discussed above, in light of the current
economic environment, we may not be able to maintain the current level of
distributions to our shareholders in future periods.





The
table below outlines our total distributions declared to shareholders
and noncontrolling interests for each of the three months ended March 31,
2009 and 2008, including the breakout between the distributions paid in cash and
those reinvested pursuant to our dividend reinvestment plan (all amounts are in
thousands):





Shareholders
                                  
                                  Noncontrolling InterestsThree
      Months Ended
                                  
                                  Cash
      Distributions
                                  
                                  
                                  Dividends
      Reinvested
                                  
                                  Total
      Declared
                                  
                                  Total
      DeclaredEnded
      March 31, 2009
                                  
                                  $
                                  14,982
                                  
                                  
                                  $
                                  16,802
                                  
                                  $
                                  31,784
                                  $
                                  936Ended
      March 31, 2008
                                  
                                  $
                                  11,411
                                  
                                  
                                  $
                                  14,283
                                  
                                  $
                                  25,694
                                  $
                                  643





For each
of the three months ended March 31, 2009 and 2008, we funded our cash
distributions with cash flows from operating activities, distributions received
from our unconsolidated investments and cash generated during prior periods,
which had cash flows from operating activities and distributions received from
our unconsolidated investments in excess of distributions.





Debt
Financings





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





For the
three months ended March 31, 2009, we received proceeds of $204.0 million
related to borrowings under our revolving credit facility in anticipation of the
Airport Corporate Center debt maturity (see “Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of Operation -
Economic Update”for additional
information), to make capital contributions related to acquisitions in the
Grocery-Anchored Portfolio and to fund general working capital
needs.  On April 20, 2009, upon execution of the Airport Corporate
Center debt maturity extension, we made a principal payment of $13.1 million to
reduce the outstanding principal balance to $77.9 million. Additionally, we
repaid $124.0 million on our revolving credit facility resulting in an
outstanding principal balance of $96.0 million as of May 4, 2009.





As of
March 31, 2009, our debt financing was approximately 60% of the aggregate value
of our real estate investments (including our pro rata share of real estate
assets and related debt owned through our investments in other entities such as
the Core Fund) compared with 55% at December 31, 2008. The increase in the
leverage percentage between the periods is primarily due to short-term
borrowings under our revolving credit facility as described above.





During
the three months ended March 31, 2008, we assumed a $54.2 million mortgage
related to our acquisition of the Raytheon/DirecTV Buildings. In addition,
we received proceeds of $63.0 million and made debt payments of $4.0 million,
primarily related to borrowings under our revolver.





Other
than the technical default discussed in “Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of Operation -
Economic Update”, we are not aware of any instances of noncompliance with
financial covenants as of March 31, 2009.


24


Results of
Operations





Three
months ended March 31, 2009 compared to the three months ended
March 31, 2008




RESULTS
      FOR OUR DIRECTLY-OWNED PROPERTIES




We owned
25 properties directly that were 95% leased as of March 31, 2009 compared to 18
properties that were 95% leased as of March 31, 2008. The following table
presents the property-level revenues and expenses for the three months ended
March 31, 2009, as compared to the same period in 2008. Same-store
properties for the three months ended March 31, 2009 include all properties
owned as of January 1, 2008. Revenues and expenses for properties acquired after
January 1, 2008 are included in “Recent Acquisitions.” All amounts are in
thousands, except for percentages:





Three
      Months Ended March 31,
                          
                          Change2009
                          
                          2008
                          
                          $
                          
                          
                          
                          %Property
      revenuesSame-store
      properties
                          
                          $
                          67,292
                          
                          
                          $
                          68,059
                          
                          
                          $
                          (767
                          )
                          
                          
                          (1.1
                          )%Recent
      acquisitions
                          
                          
                          24,730
                          
                          
                          
                          2,075
                          
                          
                          
                          22,655
                          
                          
                          
                          1,091.8
                          %Total
      property revenues
                          
                          $
                          92,022
                          
                          
                          $
                          70,134
                          
                          
                          $
                          21,888
                          
                          
                          
                          31.2
                          %Property
      expenses (1)Same-store
      properties
                          
                          $
                          51,354
                          
                          
                          $
                          53,909
                          
                          
                          $
                          (2,555
                          )
                          
                          
                          (4.7
                          )%Recent
      acquisitions
                          
                          
                          17,672
                          
                          
                          
                          1,619
                          
                          
                          
                          16,053
                          
                          
                          
                          991.5
                          %Total property
      expenses
                          
                          $
                          69,026
                          
                          
                          $
                          55,528
                          
                          
                          $
                          13,498
                          
                          
                          
                          24.3
                          %Property
      revenues in excess of expensesSame-store
      properties
                          
                          $
                          15,938
                          
                          
                          $
                          14,150
                          
                          
                          $
                          1,788
                          
                          
                          
                          12.6
                          %Recent
      acquisitions
                          
                          
                          7,058
                          
                          
                          
                          456
                          
                          
                          
                          6,602
                          
                          
                          
                          1,447.8
                          %Total
      property revenues in excess of expenses
                          
                          $
                          22,996
                          
                          
                          $
                          14,606
                          
                          
                          $
                          8,390
                          
                          
                          
                          57.4
                          %Interest
      Income/ExpenseInterest
      Expense
                          
                          $
                          22,587
                          
                          
                          $
                          18,052
                          
                          
                          $
                          4,535
                          
                          
                          
                          25.1
                          %Interest
      Income
                          
                          $
                          279
                          
                          
                          
                          1,249
                          
                          
                          $
                          (970
                          )
                          
                          
                          (77.7
                          )%


____




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




As
indicated above, the increases in property revenues and expenses between the
three months ended March 31, 2009 and 2008 were primarily due to acquisitions
made in those years. Revenues and expenses from our same-store properties were
comparable between both periods. However, the margin of property revenues in
excess of property expenses for same-store properties increased to 23.7% during
the three months ended March 31, 2009 from 20.8% during the same period in 2008.
The increase in the margins is primarily due to decreased depreciation and
amortization resulting from fully depreciated lease intangibles.





The
increase in interest expense is primarily due to increased borrowings related to
our acquisitions of directly-owned properties. Average debt outstanding during
the three months ended March 31, 2009 and 2008 was $1.6 billion and $1.3
billion, respectively. The decrease in interest income is primarily due to lower
interest rates on cash we held in short-term investments during delays between
raising capital and acquiring real estate investments.





As a
result of future potential acquisitions and our recent acquisitions having less
than a full period of operations, our results of operations for the three
months ended March 31, 2009 are not indicative of what we expect our results of
operations to be in future periods.





RESULTS
      FOR OUR INDIRECTLY-OWNED
PROPERTIES





Our
Interest in the Core Fund





As of
March 31, 2009, we owned a 28.7% non-managing general partner interest in
the Core Fund, which held interests in 25 properties that were 89% leased. As of
March 31, 2008, we owned a 28.7% interest in the Core Fund as of
March 31, 2008, we owned a 28.7% non-managing general partner interest
in the Core Fund, which held interests in 25 properties that were 92%
leased. Our
equity in losses related to our investment in the Core Fund for the three months
ended March 31, 2009 and 2008 was $2.1 million and $2.4 million,
respectively.





Our
Interest in Distribution Park Rio





We own a
50% non-managing interest in Distribution Park Rio, an industrial property
located in Rio de Janeiro, Brazil. Our equity in earnings related to our
investment in Distribution Park Rio for the three months ended March 31,
2009 and 2008 was approximately $445,000 and $436,000,
respectively.


25





CORPORATE-LEVEL
ACTIVITIES





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





Derivative
Instruments





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





The gain
resulting from the increase in the fair value of the interest rate swaps for the
three months ended March 31, 2009 of $10.9 million has been recorded
in gain (loss) on derivative instruments, net in the consolidated statements of
operations. The loss resulting from the decrease in the fair value of the
interest rate swaps for the three months ended March 31, 2008 of
$27.4 million has been recorded in gain (loss) on derivative instruments,
net in the consolidated statements of operations.





Other
Corporate-level Activities




The table
below provides detail relating to our asset management and acquisition fees and
general and administrative expense for the three months ended March 31, 2009 and
2008.  All amounts in thousands, except percentages:





Three
      Months Ended March 31,
                        
                        
                        Change2009
                        
                        
                        2008
                        
                        
                        $
                        
                        
                        %Asset
      Management and Acquisition Fees
                        
                        $
                        4,614
                        
                        
                        $
                        8,410
                        
                        
                        $
                        (3,796
                        )
                        
                        
                        (45.1
                        )%General
      and Administrative Expenses
                        
                        $
                        1,453
                        
                        
                        $
                        1,280
                        
                        
                        $
                        173
                        
                        
                        
                        13.5
                        %





We pay
monthly asset management fees to our Advisor based on the amount of net equity
capital invested in real estate investments and pay acquisition fees to our
Advisor based on the purchase prices of our real estate investments. The
decrease in asset management and acquisition fees is primarily the result of
fewer acquisitions made during the three months ended March 31, 2009 and the
change in fair value of the Participation Interest.





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





Net
Income Attributable to Noncontrolling Interests





As of
March 31, 2009 and 2008, affiliates of Hines owned 2.9% and 2.4%
interests, respectively. We allocated income of approximately $936,000 and
$643,000, respectively, to the holders of these noncontrolling interests
for the three months ended March 31, 2009 and 2008.





Operating Funds Generated by the
Company




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


26




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





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





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





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





The
table below summarizes OFG for the three months ended March 31, 2009 and
2008 and a reconciliation of such non-GAAP financial performance
measure to our net income (loss) for the three months then ended (in
thousands):




Three
      Months Ended
                      March
      31, 2009
                    
                    
                    Three
      Months Ended
                      March
      31, 2008Net
      income (loss)
                    
                    $
                    3,805
                    
                    
                    $
                    (43,187
                    )Adjustments:Depreciation
      and amortization (1)
                    
                    
                    31,779
                    
                    
                    
                    25,381(Gain)
      loss on derivative instruments (2)
                    
                    
                    (10,896
                    )
                    
                    
                    27,445Participation
      interest expense (3)
                    
                    
                    (28
                    )
                    
                    
                    4,205Other
      components of revenues and expenses (4)
                    
                    
                    (4,896
                    )
                    
                    
                    (4,561
                    )Master
      lease rents (5)
                    
                    
                    721
                    
                    
                    
                    3,464Organizational
      and offering expenses (6)
                    
                    
                    —
                    
                    
                    
                    1,918Acquisition
      fees (6)
                    
                    
                    1,160
                    
                    
                    
                    1,447Adjustments
      to equity in losses from unconsolidated entities, net
    (7)
                    
                    
                    11,313
                    
                    
                    
                    9,779Adjustments
      for noncontrolling interests (8)
                    
                    
                    (929
                    )
                    
                    
                    (632
                    )Operating
      Funds Generated by the Company
                    
                    $
                    32,029
                    
                    
                    
                    25,259Operating
      Funds Generated by the Company Per Common Share
                    
                    $
                    0.16
                    
                    
                    $
                    0.15Weighted
      Average Shares Outstanding
                    
                    
                    201,428
                    
                    
                    
                    165,144


__________




1)
            
            Represents
      the depreciation and amortization of various real estate
      assets.  Historical cost accounting for real estate assets in
      accordance with GAAP implicitly assumes that the value of real estate
      assets diminishes predictably over time. Since real estate values have
      historically risen or fallen with market conditions, we believe that such
      depreciation and amortization may be of limited relevance in evaluating
      current operating performance and, as such, these items are excluded from
      our determination of OFG.2)
            
            Represents
      components of net income (loss) related to the estimated changes in the
      values of our interest rate swap derivatives.  We have excluded
      these changes in value from our evaluation of the operating performance of
      the Company and OFG because we expect to hold the underlying instruments
      to their maturity and accordingly the interim gains or losses will remain
      unrealized.3)
            
            Represents
      the portion of the acquisition and asset management fees that are paid in
      equity, which we expect will be settled in the future using proceeds from
      the sale of properties or other non-operating sources, and which we
      therefore do not consider in evaluating the operating performance of the
      Company and determining OFG.4)
            
            Includes
      the following components of revenues and expenses that we do not consider
      in evaluating the operating performance of the Company and determining OFG
      for three months ended March 31, 2009 and 2008 (in
    thousands):





Three
      Months Ended
                        March
      31, 2009
                      
                      
                      Three Months
      Ended
                        March
      31, 2008Straight-line
      rent adjustment (a)
                      
                      $
                      (3,440
                      )
                      
                      $
                      (3,925
                      )Amortization
      of lease incentives (b)
                      
                      
                      1,270
                      
                      
                      
                      773Amortization
      of out-of-market leases (b)
                      
                      
                      (3,625
                      )
                      
                      
                      (2,055
                      )Amortization
      of deferred financing costs (b)
                      
                      
                      522
                      
                      
                      
                      379Other
                      
                      
                      377
                      
                      
                      
                      267$
                      (4,896
                      )
                      
                      $
                      (4,561
                      )
  27





a
                  )
                  Represents
      the adjustments to rental revenue as required by GAAP to recognize minimum
      lease payments on a straight-line basis over the respective lease
      terms.  We have excluded these adjustments from our evaluation
      of the operating performance of the Company and in determining OFG because
      we believe that the rent that is billable during the current period is a
      more relevant measure of the Company’s operating performance for such
      period.b
                  )
                  Represents
      the amortization of lease incentives, out-of-market leases and deferred
      financing costs.  As stated in Note 1 above, historical cost
      accounting for real estate assets in accordance with GAAP implicitly
      assumes that the value of real estate assets diminishes predictably over
      time. Since real estate values have historically risen or fallen with
      market conditions, we believe that such amortization may be of limited
      relevance in evaluating current operating performance and, as such, these
      items are excluded from our determination of OFG.5
                  )
                  
                  Includes
      master lease rents related to master leases entered into in conjunction
      with certain asset acquisitions. In accordance with GAAP, these rents are
      not included in rental revenue; however, we consider this rent in
      evaluating the operating performance of the Company and determining
      OFG.6
                  )
                  
                  Represents
      organizational and offering expenses and acquisition fees paid to our
      Advisor that are expensed in our condensed consolidated statements of
      operations. We fund such costs with proceeds from our offering and
      acquisition-related indebtedness, and therefore do not consider these
      expenses in evaluating the operating performance of the
      Company and determining OFG.7
                  )
                  
                  Includes
      adjustments to equity in losses of unconsolidated entities, net, similar
      to those described in Notes 1, 4 and 5 above for our unconsolidated
      entities, which are necessary to convert the Company's share of income
      (loss) from unconsolidated entities to OFG.8
                  )
                  
                  Includes
      income attributable to noncontrolling interests and all adjustments to
      eliminate the noncontrolling interests’ share of the adjustments to
      convert the Company’s net income (loss) to
OFG.





Set forth
below is additional information related to certain items excluded from the
analysis above which may be helpful in assessing our operating
results:





·
            Pursuant
      to the terms of the Grocery Anchored Portfolio joint venture agreement, we
      earned distributions of approximately $340,000 in excess of our pro-rata
      share of the joint venture’s OFG.




Related-Party
Transactions and Agreements





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





Off-Balance
Sheet Arrangements




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





Subsequent
Events





KeyBank
Activity





From
April 1, 2009 through May 4, 2009, we repaid $124.0 million under our revolving
credit facility with KeyBank resulting in an outstanding principal balance of
$96.0 million as of May 4, 2009.





Shareholder
Redemptions





For the
months of March and April 2009, in accordance with our share redemption
plan, we redeemed 4.6 million common shares and made corresponding payments
(on April 1 and May 1, 2009, respectively) totaling $41.9 million to
shareholders who had requested these redemptions. The shares redeemed were
cancelled and will have the status of authorized, but unissued shares. We
recorded a $21.2 million liability as of March 31, 2009 for the shares redeemed
in April 2009.


28




Item 3.
Quantitative and
Qualitative Disclosures About Market Risk.





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





We are
exposed to the effects of interest rate changes primarily as a result of our
revolving credit facility, which bears interest at a variable
rate.  We typically use this facility on a short-term basis to
maintain liquidity and fund expansion of our real estate investment portfolio
and operations. As of March 31, 2009, we had $220.0 million outstanding under
this facility, and the weighted average interest rate on outstanding borrowings
was 2.9%.  Annual interest expense would increase $2.2 million for
every 1% increase in interest rates on this balance.





As of
March 31, 2009, we also had $520.0 million of debt outstanding under
our HSH Credit Facility, which is a variable-rate pooled mortgage facility.
However, as a result of the interest rate swap agreements entered into with HSH
Nordbank, these borrowings effectively bear interest at fixed rates ranging from
5.25% to 6.03%.  We are exposed to credit risk of the counterparty to
these interest rate swap agreements in the event of non-performance under the
terms of the derivative contracts.  In the event of non-performance by
the counterparty, we would be subject to the variability of interest rates on
the debt outstanding under the HSH Credit Facility to which our outstanding
interest rate swaps relate. Please see “Debt Financings” above for more
information concerning our outstanding debt.





We
currently have investments in Canada and Brazil and as a result are subject to
risk from the effects of exchange rate movements of foreign currencies, which
may affect future costs and cash flows. For all currencies we are currently a
net receiver of the foreign currency (we receive more cash than we pay out), and
therefore our foreign operations benefit from a weaker U.S. dollar and are
adversely affected by a stronger U.S. dollar relative to the foreign currency.
During the three months ended March 31, 2009 and 2008, we had no currency
transactions which resulted in significant gains or losses being recorded in our
condensed consolidated statements of operations. Generally, we have not entered
into any foreign currency forward exchange contracts to hedge the effects of
adverse fluctuations in foreign currency exchange rates. We have obtained
non-recourse mortgage financing at a fixed rate of interest in the local
currency related to our property in Toronto, Canada. To the extent that currency
fluctuations increase or decrease net operating income as translated to U.S.
dollars, the change in debt service, as translated to U.S. dollars, will
partially offset the effect of fluctuations in net operating income, and, to
some extent, mitigate the risk from changes in foreign currency
rates.  Based on our current operational strategies, management does
not believe that variations in the foreign currency exchange rates pose a
significant risk to our consolidated results of operations or financial
position.


Item 4T.
Controls and
Procedures.





In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of March 31, 2009, to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and (ii) accumulated and communicated to our management,
as appropriate to allow timely decisions regarding required
disclosure.





Other
than those described below, no change occurred in our internal controls over
financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
during the quarter ended March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





During
the three months ended March 31, 2009, we continued the implementation of an
upgrade to our financial and accounting systems and a new enterprise-wide
accounting and lease management system for Hines. We anticipate this
implementation will be completed by June 30, 2009. This new software has
affected many aspects of our accounting and financial systems and procedures and
has resulted in significant changes to our internal controls. The implementation
of these systems upgrades had a material impact on our internal control over
financial reporting, but these upgrades were not implemented in response to an
identified significant control deficiency or material weakness. We believe that
these changes have improved and strengthened our overall system of internal
control.


29


PART II – OTHER
INFORMATION




Item 1A. Risk
Factors.




We are
subject to a number of risks and uncertainties, which are discussed in Part I,
Item 1A of our 2008 Annual Report on Form 10-K.  The risk factors set
forth below reflect changes to the risk factors included in our 2008 Annual
Report on Form 10-K.
  Investment
Risks
 
 Our
shareholders’ ability to have their shares redeemed is limited under our share
redemption program, and if shareholders are able to have their shares redeemed,
it may be at a price that is less than the price paid for and the then-current
market value of the shares. We may utilize all sources of cash flow, including
offering proceeds, to fund redemptions which may reduce our liquidity available
to fund acquisitions of real estate investments and other cash
needs.
 
 Even
though our share redemption program may provide shareholders with a limited
opportunity to redeem their shares after they have held them for a period of one
year, shareholders should understand that our share redemption program contains
significant restrictions and limitations. In addition, irrespective of the
amount of time a shareholder has held their securities, only the following
shares are eligible for redemption: (i) shares purchased directly from us, (ii)
shares received through a non-cash transaction, not in the secondary market and
(iii) shares purchased from another shareholder prior to January 11, 2009. We
expect to redeem shares to the extent our board of directors determines we have
sufficient available cash to do so subject to the annual and monthly limitations
on the number of shares we can redeem set forth in our share redemption program.
During 2009, we have experienced an increase in share redemption requests. From
January 1, 2009 to April 1, 2009, we have redeemed approximately $84.7 million
in shares as compared to $58.7 million, $10.6 million and $2.3 million during
the years ended December 31, 2008, 2007 and 2006, respectively. Moreover, the
number of share redemption requests we received during the months of February
and March exceeded the monthly limit of shares we may redeem pursuant to the
share redemption plan. While our board of directors elected to waive this
monthly limitation, we cannot assure our shareholders that our board will elect
to or will otherwise be able to waive this limitation in the future. If at any
time some but not all tendered shares are redeemed, shares will be redeemed on a
pro rata basis. The Company may, but is not required to, utilize all sources of
cash flow not otherwise dedicated to a particular use to meet shareholders’
redemption needs, including proceeds from our dividend reinvestment plan or
securities offerings, operating cash flow not intended for distributions,
borrowings and capital transactions such as asset sales or financings. For
example, in 2009 we have used proceeds from the Third Offering to
fund redemption requests. Cash used to fund redemptions reduces our liquidity
available to fund acquisitions of real estate investments and other cash needs.
Our board of directors reserves the right to amend, suspend or terminate the
share redemption program at any time in its discretion upon 30 days’
written notice. Shares are currently redeemed at a price of $9.15 per share.
However, our board of directors may change the redemption price from time to
time upon 30 days’ written notice based on our then-current estimated net
asset value at the time of the adjustment and such other factors as it deems
appropriate, including the then-current offering price of our shares (if any),
our then- current dividend reinvestment plan price and general market
conditions. The methodology used in determining the redemption price is subject
to a number of limitations and to a number of assumptions and estimates which
may not be accurate or complete. The redemption price, like our offering price,
may not be indicative of the price our shareholders would receive if our shares
were actively traded, if we were liquidated or if they otherwise sold their
shares. Therefore, shareholders should not assume that they will be able to sell
all or any portion of their shares back to us pursuant to our share redemption
program or at a price that reflects the then-current market value of their
shares.
  Business
and Real Estate Risks
 
 Any
indirect investment we make will be consistent with the investment objectives
and policies described in this report and will, therefore, be subject to similar
business and real estate risks. The Core Fund, which has investment objectives
and policies similar to ours, is subject to many of the same business and real
estate risks as we are.
 
 For
example, the Core Fund:
 
 •
                  may
      not have sufficient available funds to make distributions and expects
      distributions, if any, for the next several quarters to be
      minimal;
 
 •
                  expects
      to acquire additional properties in the future which, if unsuccessful,
      could affect our ability to pay distributions to our
      shareholders;
 
 •
                  is
      subject to risks as a result of joint ownership of real estate with Hines
      and other Hines programs or third
parties;
 
 •
                  intends
      to use borrowings to partially fund acquisitions, which may result in
      foreclosures and unexpected debt-service requirements and indirectly
      negatively affect our ability to pay dividends to our
      shareholders;
 
 •
                  is
      also dependent upon Hines and its key employees for its
      success;
 
 •
                  also
      operates in a competitive business with competitors who have significant
      financial resources and operational
flexibility;
 
 •
                  may
      not have funding or capital resources for future tenant
      improvements;
  30
 
 •
                  depends
      on its tenants for its revenue and relies on certain significant
      tenants;
 
 •
                  is
      subject to risks associated with terrorism, uninsured losses and high
      insurance costs;
 
 •
                  will
      be affected by general economic and regulatory factors it cannot control
      or predict;
 
 •
                  will
      make illiquid investments and be subject to general economic and
      regulatory factors, including environmental laws, which it cannot control
      or predict; and
 
 •
                  will
      be subject to property taxes and operating expenses that may
      increase.
 
 To the
extent the operations and ability of the Core Fund, or any other entity through
which we indirectly invest in real estate, to make distributions is adversely
affected by any of these risks, our operations and ability to pay distributions
to our shareholders will be adversely affected.
  Our
use of borrowings to partially fund acquisitions and improvements on properties
could result in foreclosures and unexpected debt service expenses upon
refinancing, both of which could have an adverse impact on our operations and
cash flow.
 
 We intend
to rely in part on borrowings under our credit facilities and other external
sources of financing to fund the costs of new investments, capital expenditures
and other items. Accordingly, we are subject to the risk that our cash flow will
not be sufficient to cover required debt service payments and that we will be
unable to meet other covenants or requirements in the credit
agreements.
 
 If we
cannot meet our required debt obligations, the property or properties subject to
indebtedness could be foreclosed upon by, or otherwise transferred to, our
lender, with a consequent loss of income and asset value to the Company. For tax
purposes, a foreclosure of any of our properties would be treated as a sale of
the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the
mortgage exceeds our tax basis in the property, we would recognize taxable
income on foreclosure, but we may not receive any cash proceeds. Additionally,
we may be required to refinance our debt subject to “lump sum” or “balloon”
payment maturities on terms less favorable than the original loan or at a time
we would otherwise prefer to not refinance such debt. A refinancing on such
terms or at such times could increase our debt service payments, which would
decrease the amount of cash we would have available for operations, new
investments and distribution payments.
  Volatility
in debt markets could impact future acquisitions and values of real estate
assets potentially reducing cash available for distribution to our
shareholders.
 
 The
commercial real estate debt markets have recently been adversely affected by
certain factors including the tightening of underwriting standards by lenders
and credit rating agencies and the significant inventory of unsold
Collateralized Mortgage Backed Securities in the market. Additionally, the
deteriorating economic environment continues to have an adverse impact on real
estate fundamentals which has led to declining property values. These factors,
among others, have resulted in lenders decreasing the availability of debt
financing as well as increasing the cost of debt financing. Should the overall
availability of debt decrease and/or the cost of borrowings increase, either by
increases in the index rates or by increases in lender spreads, such factors
will impact our ability to complete future acquisitions at prices, including
financing terms, that are acceptable to us or at all. This may result in future
acquisitions generating lower overall economic returns and potentially reducing
future cash flow available for distribution to our shareholders.
 
 In
addition, the state of the debt markets have had an impact on the overall amount
of capital investing in real estate which has resulted in price or value
decreases of real estate assets. Although this may benefit us for future
acquisitions, it has negatively impacted the current value of our existing
assets and could make it more difficult for us to sell any of our investments if
we were to determine to do so.
  Tax
Risks
 
 Recently
enacted tax legislation may make REIT investments comparatively less attractive
than investments in other corporate entities.
 
 Under
current law, qualifying corporate distributions received by individuals prior to
2011 are subject to tax at a maximum rate of 15%. This special tax rate is
generally not applicable to distributions paid by a REIT, unless such
distributions represent earnings on which the REIT itself has been taxed. As a
result, distributions (other than capital gain distributions) paid by us to
individual investors will generally be subject to the tax rates that are
otherwise applicable to ordinary income which currently are as high as 35%. This
law change may make an investment in our common shares comparatively less
attractive relative to an investment in the shares of other corporate entities
which pay distributions that are not formed as REITs.
 31




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





During
the three months ended March 31, 2009, we did not sell or issue any equity
securities that were not registered under the Securities Act.





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





Period
                        
                        Total
                          Number
      of
                          Shares
                          Purchased
                        
                        
                        Average
      Price
                          Paid
      per Share
                        
                        
                        Total
      Number of
                          Shares
      Purchased as
                          Part
      of Publicly
                          Announced Plans
      or Programs
                        
                        
                        Maximum
      Number of
      Shares that
      May Yet be Purchased Under
      the Plans
      or Programs(1)January
      1, 2009 to January 31, 2009
                        
                        
                        1,867,120
                        
                        
                        $
                        9.68
                        
                        
                        
                        1,867,120
                        
                        
                        
                        14,489,078February
      1, 2009 to February 28, 2009
                        
                        
                        2,555,508
                        
                        
                        
                        9.68
                        
                        
                        
                        2,555,508
                        
                        
                        
                        12,275,424March
      1, 2009 to March 31, 2009
                        
                        
                        2,255,787
                        
                        
                        
                        9.15
                        
                        
                        
                        2,255,787
                        
                        
                        
                        10,354,455
                        (2)Total
                        
                        
                        6,678,415
                        
                        
                        $
                        9.15
                        
                        
                        
                        6,678,415


__________





(1)
            We
      may redeem shares under the program so long as the total number of shares
      redeemed during the calendar year does not exceed, as of the date of the
      redemption, 10% of our shares outstanding on the same date during the
      prior year. For the three months ended March 31, 2009, all shareholder
      requests for redemptions were fully funded. Beginning with shares redeemed
      in March 2009, monthly share redemptions pursuant to our share redemption
      program will be limited to 1/12th
      of 10% of our shares outstanding as of the prior calendar year-end.
      Our share redemption plan has been in effect since June 2004 and has no
      definitive expiration date. However, the plan may be suspended or
      terminated at the discretion of the board of directors.(2)
            Our
      board of directors elected to waive the 1/12th
      limitation on redemptions made during the months of March and April 2009
      as redemption requests were in excess of this limitation. To date, we
      have not exceeded our 10% share limitation described
      above.





Item 6.
Exhibits.





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


32




SIGNATURES





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





HINES
REAL ESTATE INVESTMENT TRUST, INC.





May 15,
2009                                                                                 By:  /s/ CHARLES N.
HAZEN


Charles
N. Hazen


President
and Chief Executive Officer








May 15,
2009                                                                                 By:  /s/ SHERRI W.
SCHUGART


Sherri
W. Schugart


Chief
Financial Officer




33


EXHIBT
INDEX




Exhibit
      No.
              
              
              Description3.1
              
              —
              Second
      Amended and Restated Articles of Incorporation of Hines Real Estate
      Investment Trust, Inc. (filed as Exhibit 3.1 to the registrant’s
      Current Report on Form 8-K on July 13, 2007 and incorporated by reference
      herein).3.2
              
              —
              Second
      Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc.
      (filed as Exhibit 3.1 to the registrant’s Current Report on
      Form 8-K on August 3, 2006 and incorporated by reference
      herein).10.1
              
              —
              Advisory
      Agreement between Hines REIT Properties, L.P., Hines Advisors Limited
      Partnership and Hines Real Estate Investment Trust, Inc. dated July 1,
      2008 (filed as Exhibit 1.2 to the Registrant’s Current Report on Form 8-K
      on July 7, 2008, and incorporated by reference herein).31.1
              *
              —
              Certification.31.2
              *
              —
              Certification.32.1
              *
              —
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to
      18 U.S.C., Section 1350, as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this
      Exhibit is furnished to the SEC and shall not be deemed to be
      “filed.”


__________





*
            Filed
      herewith







34