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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q (Mark One)  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004 OR  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
                              to Commission file number: 333-108780 HINES REAL ESTATE INVESTMENT TRUST, INC. (Exact Name of Registrant as Specified in its Charter)
 Maryland(State or Other Jurisdiction of
Incorporation or Organization)
    
    20-0138854(I.R.S. Employer
Identification No.)
 2800 Post Oak Boulevard
Suite 5000
Houston, Texas(Address of principal executive offices)
    
    75056-6118(Zip code)
 Registrants telephone number, including area code (888) 220-6121
 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ As of August 13, 2004, there were 1,000 outstanding common shares of the
common stock of Hines Real Estate Investment Trust, Inc.




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TABLE OF CONTENTS  
 PART I
    
    
    
    FINANCIAL INFORMATIONItem 1
    
    
    
    Financial Statements
    
    
    2Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 (Unaudited)
    
    
    2Consolidated Statements of Operations for the Three and Six Months ended
June 30, 2004 (Unaudited)
    
    
    3Consolidated Statement of Shareholders Deficit
for the Six Months Ended June 30, 2004 (Unaudited)
    
    
    4Consolidated
Statement of Cash Flows for the Six Months
Ended June 30, 2004 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements for the
Six Months Ended June 30, 2004 (Unaudited)
    
    
    6Unaudited Pro Forma Consolidated Balance Sheet
    
    
    14Unaudited Pro
Forma Consolidated Statement of Operations for the Six Months Ended June 30, 2004
    
    
    15Unaudited Pro Forma Consolidated Statement of
Operations for the Three Months Ended June 30, 2004
    
    
    16Unaudited Note to Pro Forma Consolidated
Financial Statements
    
    
    17Item 2
    
    
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    19Item 3
    
    
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    25Item 4
    
    
    
    Controls and Procedures
    
    
    25PART 2
    
    
    
    OTHER INFORMATIONItem 2
    
    
    
    Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    26Item 4
    
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 6
    
    
    
    Exhibits and Reports on Form 8-K
    
    
    26SIGNATURESCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906




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PART I   FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 HINES REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) June 30,
    
    December 31,2004
    
    2003ASSETSCash
    
    $
    211,000
    
    
    $
    211,000Prepaid insurance
    
    
    149,063
    
    
    
    Deferred offering costs
    
    
    188,000
    
    
    
    183,000TOTAL ASSETS
    
    $
    548,063
    
    
    $
    394,000LIABILITIES AND SHAREHOLDERS DEFICITLiabilities:Accounts payable
    
    $
    125,703
    
    
    $
    897Accrued liabilities
    
    
    
    
    
    
    1,327Due to affiliate, net
    
    
    658,565
    
    
    
    202,203Total
liabilities
    
    
    784,268
    
    
    
    204,427Minority interest
    
    
    200,000
    
    
    
    200,000Commitments and ContingenciesShareholders deficit:Common stock, $.001 par value;
1,500,000,000 and 100,000
common shares authorized as of June 30,
2004 and December 31, 2003, respectively;
1,000 common shares issued and outstanding
as of June 30, 2004 and December 31, 2003
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    9,999
    
    
    
    9,999Retained deficit
    
    
    (446,205
    )
    
    
    (20,427
    )Total shareholders deficit
    
    
    (436,205
    )
    
    
    (10,427
    )TOTAL LIABILITIES AND SHAREHOLDERS
DEFICIT
    
    $
    548,063
    
    
    $
    394,000
 See notes to the consolidated financial statements. 2




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HINES REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2004Revenues
    
    $
    
    
    
    $
    Expenses:Organizational expenses
    
    
    218,725
    
    
    
    370,091General and administrative expenses
    
    
    51,188
    
    
    
    55,687Total Expenses
    
    
    269,913
    
    
    
    425,778Net Loss
    
    $
    (269,913
    )
    
    $
    (425,778
    )Loss per common share
    
    $
    (269.91
    )
    
    $
    (425.78
    )Weighted average number of common shares outstanding
    
    
    1,000
    
    
    
    1,000
 See notes to the consolidated financial statements. 3




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HINES REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT
For the Six Months Ended June 30, 2004
(UNAUDITED) Common Stock
    
    Additional
    
    
    
    
    
    TotalCommon
    
    
    
    
    
    Paid-In
    
    Retained
    
    Shareholder'sshares
    
    Amount
    
    Capital
    
    Deficit
    
    DeficitBALANCE, January 1, 2004
    
    
    1,000
    
    
    $
    1
    
    
    $
    9,999
    
    
    $
    (20,427
    )
    
    $
    (10,427
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425,778
    )
    
    
    (425,778
    )BALANCE, June 30, 2004
    
    
    1,000
    
    
    $
    1
    
    
    $
    9,999
    
    
    $
    (446,205
    )
    
    $
    (436,205
    )
 See notes to the consolidated financial statements. 4




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HINES REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2004
(UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (425,778
    )Adjustments to reconcile net loss to net cash used in operating activities:Increase in prepaid insurance
    
    
    (149,063
    )Increase in accounts payable
    
    
    124,806Decrease in accrued liabilities
    
    
    (1,327
    )Net cash used in operating activities
    
    
    (451,362
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from advances from affiliate, net
    
    
    456,362Additions to deferred offering costs
    
    
    (5,000
    )Net cash provided by financing activities
    
    
    451,362Net change in cash
    
    
    Cash, beginning of period
    
    
    211,000Cash, end of period
    
    $
    211,000
 See notes to the consolidated financial statements. 5




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HINES REAL ESTATE INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2004
(UNAUDITED) 1. Organization Hines Real Estate Investment Trust, Inc., a Maryland corporation (Hines
REIT and, together with the Operating Partnership (as defined below), the
Company), was formed on August 5, 2003 under the
General Corporation Law of the state of
Maryland for the purpose of engaging in the business of investing in and owning
commercial real estate. Subject to certain restrictions and limitations, the
business of the Company will be managed by Hines Advisors Limited Partnership
(the Advisor), an affiliate of Hines Interests Limited Partnership (Hines),
pursuant to the Advisory Agreement Hines REIT and the Operating
Partnership have entered into with the
Advisor (the Advisory Agreement) (see Note 4). On August 27, 2003, Hines REIT Investor, L.P., an affiliate of the
Advisor, purchased 1,000 common shares of common stock for $10,000 and was
admitted as the initial shareholder of Hines REIT. Hines REIT and HALP
Associates Limited Partnership (HALP), an affiliate of the Advisor, formed
Hines REIT Properties, L.P. (the Operating Partnership)
on August 20, 2003. On August 27, 2003, Hines REIT and HALP made initial capital contributions
to the Operating Partnership of $2,020 and $200,000, respectively. On May 20,
2004, Hines REIT made an additional capital contribution to the Operating
Partnership of $7,980. On May 24, 2004, HALP assigned its capital interest in
the Operating Partnership to Hines Real Estate Holdings Limited Partnership
(HREH), an affiliate of Hines. As of June 30, 2004 Hines REIT owned a 4.8%
general partnership interest in the Operating Partnership. Management expects
Hines REITs ownership percentage in the Operating Partnership to increase
significantly as Hines REIT invests net proceeds from the Offering (as defined
below) in the Operating Partnership. The Operating Partnership currently has no
substantive operations, but Hines REIT anticipates that it will conduct
substantially all of its operations through the Operating Partnership. On May 24, 2004, Hines REIT
amended its Articles of Incorporation to
authorize 1,500,000,000 common shares with a par value of $.001 (the common
shares) and 500,000,000 preferred shares with a par value of $.001. No
preferred shares had been issued by Hines REIT through June 30, 2004. On June
18, 2004, Hines REIT commenced its initial public offering pursuant to which it
is offering a minimum of 1,000,000 (the Minimum Number of Shares) and a
maximum of 220,000,000 common shares for sale to the public (the Offering).
Hines REIT has retained Hines Real Estate Securities, Inc., (HRES or the
Dealer Manager), an affiliate of the Advisor, to serve as the dealer manager
for the Offering. The Dealer Manager is responsible for marketing the common
shares being offered pursuant to the Offering (see Note 4). The Company intends
to invest the net proceeds from the Offering directly or indirectly primarily
in office properties located throughout the United States. Hines REIT had sold
no common shares pursuant to the offering as of June 30, 2004. Other than its
commitment to acquire an initial investment in the Hines-Sumisei U.S. Core
Office Fund, L.P. (the Core Fund) (see Note 3), the Company had neither
purchased nor contracted to purchase any real estate investments as of June 30,
2004. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Hines REIT
and the Operating Partnership (over which Hines REIT exercises financial and
operating control) and the related minority interest. All significant
intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in Hines
REITs annual financial statements and notes. These financial statements
are unaudited; however, amounts presented in the balance sheet as of December 31,
2003 are derived from its audited financial statements as of that date.
For further information, refer to the financial statements and footnotes for
the year ended December 31, 2003 included in Hines REITs Registration
Statement on Form S-11 (File No. 333-108780) (the Registration Statement). In the opinion of the
Companys management, the statements for the unaudited interim periods 6




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presented include all adjustments necessary to present a fair presentation for
such periods. Such adjustments consisted of normal recurring items. Interim
results are not necessarily indicative of results for a full year.
Consolidated results of operations and cash flows for the six and three months
ended June 30, 2003 have not been presented because the Company had not been
formed and was not operating during that period. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments that are
readily convertible to cash with an original maturity of three months or less
at the time of purchase to be cash equivalents. At June 30, 2004 and December
31, 2003, the Company did not have any cash equivalents. Real Estate Purchase Price Allocation The Company will allocate the purchase price to tangible assets of an
acquired property (which include land, building and tenant improvements) based
on the estimated fair values of those tangible assets assuming the building was
vacant. The Company will record above-market and below-market in-place lease
values for acquired properties based on the present value (using a discount
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) managements estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable terms of the leases. The Company will amortize any
capitalized above-market lease values as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. The Company will
amortize any capitalized below-market lease values as an increase to rental
income over the remaining non-cancelable terms of the respective leases. The total amount of other intangible assets acquired will be further
allocated to in-place lease values and customer relationship intangible values
based on managements evaluation of the specific characteristics of each
tenants lease and the Companys overall relationship with that respective
tenant. Characteristics to be considered by management in allocating these
values include the nature and extent of the Companys existing business
relationships with the tenant, growth prospects for developing new business
with the tenant, the tenants credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors. The value of the in-place leases will be amortized to expense over the
initial term of the respective leases, which we primarily expect to range from
five to 20 years. The value of customer relationship intangibles will be amortized
to expense over the initial term and any renewal periods in the respective
leases, but in no event will the amortization period for intangible assets
exceed the remaining depreciable life of the building. Should a tenant
terminate its lease, the unamortized portion of the in-place lease value and
customer relationship intangibles would be charged to expense. Managements estimates of value are expected to be made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors to be considered by management in its analysis include an
estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar leases. The
Company will also consider information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired. In
estimating carrying costs, management will also include real estate taxes,
insurance and other operating expenses during the expected lease-up periods.
Management will also estimate costs to execute similar leases including leasing
commissions, legal and other related expenses to the extent that such costs are
not already incurred in connection with a new lease origination as part of the
transaction. Organizational and Offering Costs Hines REIT incurred Securities and Exchange Commission filing fees of
$180,000 in September, 2003, which are recorded as deferred offering costs in
the accompanying consolidated balance sheet. Organizational costs including
primarily legal and directors fees associated with the formation and initial
activities of Hines REITs board of directors are recorded as
organizational expenses in the accompanying consolidated statements of
operations. 7




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Certain other organizational and offering costs of the Company have been
paid by the Advisor on behalf of the Company. These costs consist of actual
legal, accounting, printing, marketing and certain other offering-related
expenses, and may include, but are not limited to, (i) amounts to reimburse the
Advisor for all marketing-related costs and expenses such as salaries and
direct expenses of the Advisors employees and employees of the Advisors
affiliates in connection with registering and marketing of Hines REITs common
shares; (ii) salaries and direct expenses of employees of HRES while preparing
for the offering and marketing of Hines REITs common shares and in
connection with their wholesaling activities; (iii) travel and entertainment
expenses related to the offering and marketing of Hines REITs common
shares; (iv) facilities and technology costs and other costs and expenses
associated with the Offering and marketing of Hines REITs common shares;
(v) costs and expenses of conducting Hines REITs educational conferences
and seminars; (vi) costs and expenses of attending broker-dealer sponsored
conferences; and (vii) payment or reimbursement of bona fide due diligence
expenses. Pursuant to the Advisory Agreement, the Company will be obligated to
reimburse the Advisor in an amount equal to the lesser of actual organizational
and offering costs incurred or 3.0% of the gross proceeds raised from the
Offering. In no event will the Company have any obligation to reimburse the
Advisor for organizational and offering costs totaling in excess of
3.0% of the gross proceeds from the Offering. Through June 30, 2004, Hines
REIT had sold no common shares pursuant to the Offering. In the event that the Minimum
Number of Shares is not sold to the public, Hines REIT will terminate the Offering and will have no obligation to reimburse
the Advisor for any organizational and offering costs. As of June 30, 2004 and December 31, 2003, the Advisor had incurred on
behalf of the Company organizational and offering costs of approximately $15.8
million and $6.4 million, respectively (of which approximately $7.2 million and
$2.9 million as of June 30, 2004 and December 31, 2003, respectively, relates
to the Advisor or its affiliates), which includes approximately $10.1 million
and $3.9 million as of June 30, 2004 and December 31, 2003, respectively, of
organizational and internal offering costs, which will be expensed as incurred,
and approximately $5.7 million and $2.5 million as of June 30, 2004 and
December 31, 2003, respectively, of third-party offering costs which will
reduce net proceeds of the Offering within additional paid-in capital. These
costs are not recorded in the financial statements of the Company as of June 30,
2004 or December 31, 2003 because such costs are not a liability
of the Company until (1) the Advisory Agreement is executed (which it was on May 24, 2004) and
(2) subscriptions for the Minimum Number of Shares are received and accepted by
Hines REIT. As discussed above, when recorded by the Company, organizational
and internal offering costs will be expensed as incurred, and third-party
offering costs will be deferred and charged to shareholders equity as such
amounts are reimbursed to the Advisor from the gross proceeds of the Offering. Per Share Data Loss per common share is calculated by dividing the net loss for each
period by the weighted average number of common shares outstanding during such
period. Diluted loss per common share has not been presented as there were no
dilutive potential common shares for the three or six months ended June 30,
2004. Income Taxes For the year ending December 31, 2004, Hines REIT intends to make an
election to be taxed as a REIT, under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the Code) and will be taxed as such
beginning with its taxable year ending December 31, 2004. To qualify as a REIT,
Hines REIT must meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90% of its annual
ordinary taxable income to its shareholders. As a REIT, Hines REIT generally
will not be subject to federal income tax on taxable income that it distributes
to its shareholders. If Hines REIT fails to qualify as a REIT in any taxable
year, it will then be subject to federal income taxes on its taxable income at
regular corporate rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year during
which qualification is lost unless the Internal Revenue Service granted Hines
REIT relief under certain statutory provisions. Such an event could materially
adversely affect Hines REITs net income and net cash available for
distribution to its shareholders. However, Hines REIT management
believes that the Company is organized and will operate in such a manner as to qualify for treatment as a REIT
and intends to operate in the foreseeable future in such a manner so that it
will remain qualified as a REIT for federal income tax purposes. 8




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During the three and six months ended June 30, 2004, Hines REIT generated
a deferred tax asset of approximately $41,000 and $64,000, respectively. Hines
REIT has recorded a valuation allowance of a like amount because of its
intention to qualify as a REIT in 2004, which would not allow for the
realization of the deferred tax asset. Use of Estimates The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. 3. Commitments and Contingencies The Core Fund is a partnership
organized in August 2003 by Hines
to invest in existing office properties in the United
States that Hines believes are desirable long-term holdings. The Core Fund has
no substantive operations other than holding interests in real estate
investments. On June 3, 2004 the Operating Partnership entered into an
agreement obligating it to use its first $35 million of net proceeds to acquire
an interest in the Core Fund. The proceeds the Operating Partnership intends to
use to acquire such interest will include net proceeds raised from investors in
the Offering and the net proceeds from a $10 million investment to be made in
the Operating Partnership by HREH. If the Operating Partnership had acquired
this $35 million investment in the Core Fund in a single transaction on June
30, 2004, the Operating Partnership would have owed the Advisor an acquisition
fee of approximately $400,000. Factors including the gross asset value of the
Core Funds real estate investments and the amount of the Core Funds net
invested equity as of the date the Company actually acquires an investment in
the Core Fund could have a significant impact on the amount of the acquisition
fee actually payable to the Advisor. The Companys investment in the Core Fund will be in the form of a
non-managing general partner interest. This type of interest has limited rights
with respect to the day-to-day operations of the Core Fund, but has full
general partner liability under Delaware law. The Core Fund owns interests in
real estate assets through trusts and limited liability companies which
management expects will have mortgage financing in place at the time the
Company makes its investment in the Core Fund. None of this debt is currently
recourse to the Core Fund. Management cannot predict whether the Core Fund
itself will use other debt financing in the future. The Companys interest in the Core Fund will be acquired from an affiliate
of Hines. The purchase price for this interest will be based on the selling
entitys cost of these interests when they were acquired in August 2003,
February 2004 and May 2004. The Company believes this consideration to be paid
represents the fair value of these interests based on the Companys review and
analysis of historical financial results of the properties owned by the Core
Fund, previous property valuation analyses of these properties, and the
Companys due diligence review of other materials relating to the investment.
The board of directors of Hines REIT approved this transaction after
obtaining a determination from an independent expert supporting the fair value
of this interest. 4. Related Party Transactions Advisory Agreement The Advisory
Agreement entitles the Advisor to receive specified
fees upon the provision of certain services with regard to the investment of
funds in and management of real estate investments, among other services, as
well as reimbursements for organizational and offering costs incurred by the
Advisor on behalf of the Company and certain costs incurred by the Advisor in
providing services to the Company. The Advisory Agreement expires on May 24, 2005 and may be renewed for an
unlimited number of successive one-year periods upon the mutual consent of the
parties. The Advisory Agreement may be terminated without cause by a majority
of Hines REITs independent directors or by the Advisor upon 60 days
written notice, and may be terminated immediately by the Company or the Advisor under certain 9




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circumstances. In the event the Advisory Agreement is terminated, the Advisor
will be paid all earned, accrued and unpaid compensation and expense
reimbursements within 30 days. Acquisition Fees The Company will pay an acquisition fee to the Advisor for
services related to the due diligence, selection and acquisition of direct or
indirect real estate investments. The acquisition fee is payable following the
closing of each acquisition in an amount equal to 0.50% of (i) the purchase
price of real estate investments acquired directly by the Company, including
any debt attributable to such investments, or (ii) when the Company makes an
investment indirectly through another entity, such investments pro rata share
of the gross asset value of the real estate investments held by that entity.
No acquisition fees were earned by the Advisor through June 30, 2004. Asset Management Fees The Company will pay asset management fees to the
Advisor for services related to managing, operating, directing and supervising
the operations and administration of the Company and its assets. The asset
management fee is earned by the Advisor monthly in an amount equal to 0.0625%
multiplied by the net equity capital the Company has invested in real estate
investments as of the end of the applicable month. No asset management fees
were earned by the Advisor through June 30, 2004. Expense Reimbursements In addition to reimbursement of organizational and
offering costs (see Note 2), the Company will reimburse the Advisor and its
affiliates for certain other expenses incurred in connection with the Companys
administration and ongoing operations. As of June 30, 2004 and December 31,
2003 the Advisor had advanced $658,565 and $202,203, respectively, to the
Company to fund certain organizational and offering costs incurred by the
Company. Management expects that these amounts will be repaid out of proceeds
from the Offering or future operating cash flow. Reimbursement to the Company The Advisor must reimburse the Company quarterly
for any amounts by which operating expenses exceed, in any four consecutive
fiscal quarters, the greater of (i) 2.0% of the Companys average invested
assets, which consists of the average book value of its real estate properties,
both equity interests in and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves, or
(ii) 25.0% of its net income, excluding the gain on sale of any of the Companys assets,
unless Hines REITs independent directors determine that such excess was
justified. Operating expenses generally include all expenses paid or incurred
by the Company as determined by generally accepted accounting principles,
except certain expenses identified in Hines REITs Amended and
Restated Articles of Incorporation. Dealer Manager Agreement Hines REIT has entered into a dealer manager agreement (the DMA) with
HRES, for marketing the common shares being offered pursuant to the Offering.
The DMA expires at the close of business on the date that the Offering is
terminated. The DMA may be terminated by either party upon 60 days written
notice and may be terminated immediately by Hines REIT or HRES under certain
circumstances. The Company will pay HRES selling commissions in an amount of up to 6.0%
of the gross proceeds of the common shares sold pursuant to the Offering (up to
4.0% for common shares issued pursuant to the dividend reinvestment plan) plus
a dealer manager fee in the amount of 2.2% of the gross proceeds of the common
shares sold pursuant to the Offering. No dealer manger fee will be paid with
respect to the common shares sold pursuant to Hines REITs dividend reinvestment plan.
Additionally, the Company or the Advisor may reimburse HRES for certain
employee compensation and other expenses relating to the Offering, including
but not limited to reimbursement of up to 0.5% of gross proceeds for bona fide
due diligence expenses incurred by HRES. There have been no selling
commissions, dealer manager fees or expense reimbursements paid by the Company
to HRES as of June 30, 2004. The Participation Interest Pursuant to the Amended and Restated Agreement of Limited Partnership of
the Operating Partnership, HALP owns a profits interest in the Operating
Partnership (the Participation Interest). The Participation Interest was
issued in consideration for an obligation by Hines and its affiliates to
perform future services in connection with the Companys real estate
operations. The percentage interest in the Operating Partnership attributable
to the Participation Interest was 0.0% as of June 30, 2004. The Participation
Interest increases as described below and 10




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entitles HALP to receive distributions from the Operating Partnership
based upon its percentage interest in the Operating Partnership at the time of
distribution. Because the Participation Interest is a profits interest, any
value of such interest will be ultimately realized only if the Operating
Partnership has adequate gain or profit to allocate to the holder of the
Participation Interest. The Participation Interest as of the end of a particular calendar month
will equal the sum of: (i) the percentage interest attributable to the
Participation Interest as of the end of the immediately preceding month,
adjusted for any issuances or redemptions of units of partnership interest in the Operating Partnership during
the month, plus (ii) 0.0625% of the net equity received by the Operating
Partnership and invested in real estate investments as of the end of the
current month, divided by the Equity Value (as defined in the Amended and
Restated Agreement of Limited Partnership of the Operating Partnership) of the
Operating Partnership as of the end of the current month, plus (iii) 0.50% of
the gross amount invested by the Operating Partnership in any real estate
investments, including debt attributable to such investments (Gross Real Estate
Investments), made by the Operating Partnership during the current month divided by the Equity Value of the Operating Partnership as of
the end of such month; provided that in the case of amounts invested in
entities not wholly-owned by the Operating Partnership, it will be the
Companys allocable share of the Gross Real Estate Investments of such
entities, divided by the Equity Value of the Operating Partnership as of the
end of such month. The monthly adjustment to the percentage interest
attributable to the Participation Interest is intended to approximate the
economic equivalent of the cash acquisition and asset management fees earned by
the Advisor under the Advisory Agreement for the applicable month, and the
immediate and automatic reinvestment of such amount into the Operating
Partnership in exchange for equity. As the percentage interest of the Participation Interest is adjusted, the
value attributable to such adjustment will be charged against earnings and
recorded as a liability until such time as the Participation Interest is
repurchased for cash or converted into common shares. The
conversion and redemption features of the Participation Interest will be
accounted for in accordance with the guidance of EITF 95-7, Implementation
Issues Related to the Treatment of Minority Interests in Certain Real Estate
Investment Trusts. Redemptions for cash will be accounted for as a reduction
to the liability discussed above to the extent of such liability, with any
additional amounts recorded as a reduction to equity. Conversions into common
shares of Hines REIT will be recorded as an increase to the common shares and
additional paid-in capital accounts and a corresponding reduction in the
liability discussed above. Redemptions and conversions of the Participation
Interest will result in a reduction in the percentage interest attributable to
the interest to the extent of such redemption or conversion and will have no
impact on the calculation of subsequent increases in the Participation
Interest. Property Management and Leasing Agreements The Operating Partnership intends to enter into property management and
leasing agreements with Hines for most, if not all, of the properties that it
owns directly. Although no such agreements have been executed, the Company has
agreed to a form of property management and leasing agreement with Hines, which
has been approved by Hines REITs board of directors, including
all of the independent directors. The Company expects for all properties that it acquires directly to pay
Hines a property management fee equal to the lesser of (i) 2.5% of the annual
gross revenues received from the property or (ii) the amount of property
management fees recoverable from tenants of the property under their leases,
subject to a minimum of 1.0% of annual gross revenues in the case of
single-tenant properties. The Company will also pay a leasing fee of 1.5% of
gross revenues payable over the term of each executed lease including any lease
amendment, renewal, extension, expansion or similar event. Hines will also be
reimbursed for actual expenses incurred in connection with the management and
operation of the properties. Included in this reimbursement are the costs of
personnel and overhead expenses related to such personnel who are located in
Hines central and regional offices, to the extent to which such costs and
expenses relate to or support Hines performance of its duties. These
reimbursements of off-site costs will be limited to the amount that is
recovered from tenants under their leases and will not exceed in any calendar
year a per-rentable-square-foot limitation for each property. This
per-square-foot limitation is $0.205 for 2004, increasing on January 1 of each
year subsequent to 2004 based on the consumer price index. If Hines provides re-development construction management services, Hines
will be paid a fee equal to 2.5% of the total project costs relating to the
re-development, plus direct costs incurred by Hines in connection
with providing the related services. 11




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Additionally, tenant construction
management fees may also be payable to Hines by the tenant under its lease, or
if payable by the landlord, the Company will reimburse Hines for any direct
costs incurred by off-site employees in connection with providing the related
services. 5.  Subsequent
Events -- Sale of Common Shares From July 1, 2004 through
August 13, 2004, Hines REIT
received subscriptions for approximately 36,650 common shares. The proceeds of such subscriptions
are being held in escrow until such time as Hines REIT has received
subscriptions for 1,000,000 common shares.  As of August 13,
2004, approximately 199,963,350 million
common shares remained available for sale to the public pursuant to the Offering, exclusive
of common shares available under Hines REIT's dividend reinvestment plan. *********** 12




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HINES REAL ESTATE INVESTMENT TRUST, INC. Unaudited Pro Forma Consolidated Financial Statements
June 30, 2004 Hines Real Estate Investment Trust, Inc. (Hines REIT and, together with
Hines REIT Properties, L.P. (the Operating Partnership), the Company) has committed to acquire a $35
million interest in Hines-Sumisei U.S. Core Office Fund, L.P. (the Core
Fund), an affiliate of Hines Interests Limited Partnership (Hines),
currently held by an affiliate of Hines. If the Company does not acquire this
interest in the Core Fund by June 18, 2005, its right to acquire this interest
will expire. The Unaudited Pro Forma Consolidated Balance Sheet assumes the
Company received gross proceeds of $38.8 million, including the $10 million
contribution by Hines Real Estate Holdings Limited Partnership, an affiliate of
Hines (HREH), reduced for payment of selling commissions, dealer manager
fees, organizational and offering costs and acquisition fees and expenses, and
subsequently invested $35 million in the Core Fund on June 30, 2004. The
Unaudited Pro Forma Consolidated Statements of Operations assume the Company
invested $35 million in the Core Fund on January 1, 2004. In managements
opinion, all adjustments necessary to reflect the effects of these transactions
have been made. The Unaudited Pro Forma Consolidated Balance sheet is not
necessarily indicative of what the actual Consolidated Balance Sheet would have
been had this transaction occurred on June 30, 2004. The Unaudited Pro Forma
Consolidated Statements of Operations are not necessarily indicative of what
actual results of operations would have been had this transaction occurred on
January 1, 2004, nor do they purport to represent the results of operations for
future periods. These pro forma financial statements do not give effect to
additional proceeds, if any, from the Offering. 13




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HINES REAL ESTATE INVESTMENT TRUST, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2004 Adjustments forHistorical
    
    Acquisitions
    
    Pro FormaASSETSCash
    
    $
    211,000
    
    
    $
    --
    (a)(b)(c)
    
    $
    211,000Prepaid insurance
    
    
    149,063
    
    
    
    
    
    
    
    149,063Deferred offering costs
    
    
    188,000
    
    
    
    (188,000
    )(a)
    
    
    Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    
    
    
    
    35,200,000
    (c)
    
    
    35,200,000TOTAL ASSETS
    
    $
    548,063
    
    
    $
    35,012,000
    
    
    $
    35,560,063LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities:Accounts payable
    
    $
    125,703
    
    
    $
    
    
    
    $
    125,703Participation interest liability
    
    
    
    
    
    
    390,800
    (d)
    
    
    390,800Due to affiliate, net
    
    
    658,565
    
    
    
    14,972,400
    (b)(a)
    
    
    15,630,965Total Liabilities
    
    
    784,268
    
    
    
    15,363,200
    
    
    
    16,147,468Minority interest
    
    
    200,000
    
    
    
    10,000,000
    (b)
    
    
    10,200,000Commitments and ContingenciesShareholders equity (deficit):Common stock
    
    
    1
    
    
    
    2,882
    (b)
    
    
    2,883Additional paid in capital
    
    
    9,999
    
    
    
    20,532,918
    (b)(a)
    
    
    20,542,917Retained deficit
    
    
    (446,205
    )
    
    
    (10,887,000
    )(a)(d)
    
    
    (11,333,205
    )Total shareholders equity (deficit)
    
    
    (436,205
    )
    
    
    9,648,800
    
    
    
    9,212,595TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
    
    $
    548,063
    
    
    $
    35,012,000
    
    
    $
    35,560,063
 See notes to unaudited pro forma consolidated balance sheet and unaudited note to
pro forma consolidated financial statements. Notes to Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2004  (a)
    
    To record the pro forma effect of organization and offering costs
incurred through June 30, 2004, net of reimbursements to Hines from
pro forma gross offering proceeds raised and retirement of capitalized
deferred offering costs against additional paid-in capital. Total
costs incurred through June 30, 2004 were approximately $15.8 million,
of which $5.7 million related to offering costs, which was treated as
a reduction to offering proceeds, and $10.1 million related to
organizational and internal offering costs expensed.(b)
    
    To record the pro forma effect of the receipt of gross proceeds of
$38.8 million, including the $10 million contribution by HREH, reduced
for payment of selling commissions and dealer manager fees of
approximately $2.4 million and reimbursement of organizational and
offering costs to the Advisor of approximately $865,000.(c)
    
    To record the pro forma effect of the investment of $35 million of net
proceeds in the Core Fund and third-party acquisition costs related to
the investment.(d)
    
    To record the pro forma effect of the acquisition fee incurred,
including the amount related to the Participation Interest, related to
the Companys investment in the Core Fund. 14




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HINES REAL ESTATE INVESTMENT TRUST, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2004 Adjustments forHistorical
    
    Acquisitions
    
    Pro FormaREVENUESEquity in earnings of Hines-Sumisei
U.S. Core Office Fund, L.P.
    
    $
    
    
    
    $
    220,400
    (a)
    
    $
    220,400Total Revenues
    
    
    
    
    
    
    220,400
    
    
    
    220,400EXPENSESAsset management and acquisition fees
    
    
    
    
    
    
    1,044,000
    (b)
    
    
    1,044,000Organizational and offering expenses.
    
    
    370,091
    
    
    
    10,105,500
    (c)
    
    
    10,475,591General and administrative expenses
    
    
    55,687
    
    
    
    
    
    
    
    55,687Total Expenses
    
    
    425,778
    
    
    
    11,149,500
    
    
    
    11,575,278NET LOSS
    
    $
    (425,778
    )
    
    $
    (10,929,100
    )
    
    $
    (11,354,878
    )Loss per common share
    
    $
    (425.78
    )
    
    $
    (3.79
    )
    
    $
    (3.94
    )(d)Weighted average number of common
shares outstanding
    
    
    1,000
    
    
    
    2,882,000
    
    
    
    2,883,000
    (d)
 See notes to unaudited pro forma consolidated statement of operations
and unaudited note to pro forma consolidated financial statements. Notes to Unaudited Pro Forma Consolidated Statement of Operations for the Six
Months Ended June 30, 2004  (a)
    
    To record the pro forma effect of the Companys equity in earnings of its $35
million (representing approximately 24% of the Core Funds equity) anticipated
investment in the Core Fund assuming the Companys investment in the Core Fund
and the Core Funds acquisitions of the four properties held by NY Trust I and NY
Trust II and the two Shell Buildings (all as defined below) occurred on
January 1, 2004. Utilizing historical operating data for the six properties and
adjusting for the impact of the purchase accounting on rental revenues for
straight-line rent and amortization of intangibles, depreciation and
amortization and interest expense, unaudited pro forma net income for the Core
Fund for the six months ended June 30, 2004 is approximately $928,000.(b)
    
    To record the pro forma effect of the asset management and acquisition fees
incurred, including the amount related to the participation interest
in the Operating Partnership held by HALP Associates Limited
Partnership, related
to the Companys investment in the Core Fund.(c)
    
    To record the pro forma effect of organizational and internal offering expenses.(d)
    
    Pro forma loss per common share is calculated by dividing the pro forma net
loss for the period by the pro forma weighted average number of common shares
outstanding during the period. The pro forma weighted average number of common
shares outstanding is calculated assuming that (i) the 1,000 common shares
purchased by Hines REIT Investor, L.P. on August 27, 2003 were outstanding
during the entire period, (ii) 2,882,000 additional common shares were
authorized, issued and outstanding during the entire period (representing the
number of common shares which would need to be issued (in addition to the
$10 million contribution by HREH) to provide net proceeds of $35 million) and
(iii) there were no dilutive potential common shares for the period. 15




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HINES REAL ESTATE INVESTMENT TRUST, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2004 Adjustments forHistorical
    
    Acquisitions
    
    Pro FormaREVENUESEquity in earnings of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    $
    
    
    
    $
    89,200
    (a)
    
    $
    89,200Total Revenues
    
    
    
    
    
    
    89,200
    
    
    
    89,200EXPENSESAsset management fees
    
    
    
    
    
    
    131,300
    (b)
    
    
    131,300Organizational and offering expenses
    
    
    218,725
    
    
    
    
    
    
    
    218,725General and administrative expenses
    
    
    51,188
    
    
    
    
    
    
    
    51,188Total Expenses
    
    
    269,913
    
    
    
    131,300
    
    
    
    401,213NET LOSS
    
    $
    (269,913
    )
    
    $
    (42,100
    )
    
    $
    (312,013
    )Loss per common share
    
    $
    (269.91
    )
    
    $
    (.01
    )
    
    $
    (.11
    )(c)Weighted average number of common shares outstanding
    
    
    1,000
    
    
    
    2,882,000
    
    
    
    2,883,000
    (c)
 See notes to unaudited pro forma consolidated statement of operations
and unaudited note to pro forma consolidated financial statements. Notes to Unaudited Pro Forma Consolidated Statement of Operations for the Three
Months Ended June 30, 2004  (a)
    
    To record the pro forma effect of the Companys equity in earnings of
its $35 million (representing approximately 24% of the Core Funds
equity) anticipated investment in the Core Fund assuming the Companys
investment in the Core Fund and the Core Funds acquisitions of the
four properties held by NY Trust I and NY Trust II and the two Shell
Buildings (all defined below) occurred on January 1, 2004. Utilizing historical operating
data for the six properties and adjusting for the impact of the
purchase accounting on rental revenues for straight-line rent and
amortization of intangibles, depreciation and amortization and
interest expense, unaudited pro forma net income for the Core Fund
for the three months ended June 30, 2004 is
approximately $376,000.(b)
    
    To record the pro forma effect of the asset management fee incurred,
including the amount related to the Participation Interest, related to
the Companys investment in the Core Fund.(c)
    
    Pro forma loss per common share is calculated by dividing the pro
forma net loss for the period by the pro forma weighted average number
of common shares outstanding during the period. The pro forma weighted
average number of common shares outstanding is calculated assuming
that (i) the 1,000 common shares purchased by Hines REIT Investor,
L.P. on August 27, 2003 were outstanding during the entire period,
(ii) 2,882,000 additional common shares were authorized, issued and
outstanding during the entire period (representing the number of
common shares which would need to be issued (in addition to the
$10 million contribution by HREH) to provide net proceeds of $35
million) and (iii) there were no dilutive potential common shares for
the period. 16




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HINES REAL ESTATE INVESTMENT TRUST, INC.
UNAUDITED NOTE TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 (1) Core Fund The Core Fund is an investment vehicle organized in August 2003 by Hines
to invest in existing office properties in the United States. In August 2003,
the Core Fund, Sumitomo Life Realty (N.Y.), Inc. (Sumitomo Life), three
independent pension plans and funds (collectively, the NY Trust Institutional
Investors) and Hines organized Hines-Sumisei NY Core Office Trust (NY Trust
I) to acquire three properties from Sumitomo Life and an entity affiliated
with Sumitomo Life. In August 2003, NY Trust I acquired these properties for an
aggregate purchase price including capitalizable transaction costs of
approximately $581,100,000. The cash portion of the purchase price, transaction
costs and working capital were funded by a combination of capital contributions
from the NY Trust Institutional Investors and Hines affiliates, bridge
financing and long-term mortgage debt from committed lenders. In January 2004, the Core Fund, Sumitomo Life and the NY Trust
Institutional Investors organized Hines-Sumisei NY Core Office Trust II (NY
Trust II) to acquire 600 Lexington Avenue, a fourth office property owned by
Sumitomo Life. In February 2004, NY Trust II acquired 600 Lexington Avenue for
a purchase price including capitalizable transaction costs of approximately
$91,600,000. The cash portion of the purchase price, transaction costs and
working capital were funded by a combination of capital contributions from
Hines affiliates and long-term mortgage debt. In May 2004, the Core Fund acquired an indirect approximate 10.18%
tenant-in-common interest in One Shell Plaza and Two Shell Plaza (collectively,
the Shell Buildings). Certain institutional investors affiliated with the NY
Trust Institutional Investors, affiliates of Hines and another third-party
investor hold the remaining approximate 89.82% indirect tenant-in-common
interests in these buildings. The Core Funds equity contribution for its
interest in the Shell Buildings was approximately $12,000,000 (the gross
purchase price of all tenant-in-common interests totaled approximately
$351,772,000). The approximately $12,000,000 used by the Core Fund to acquire
this interest was contributed to the Core Fund by Hines U.S. Core Office
Capital Associates II Limited Partnership, an affiliate of Hines. This
investment is fully consolidated in the Core Funds unaudited pro forma
consolidated financial statements which follow. The unaudited pro forma consolidated financial statements have been
prepared assuming the Companys investment in the Core Fund will be accounted
for utilizing the equity method as it is anticipated the Company will have the
ability to exercise significant influence over, but will not exercise financial
and operating control over, the Core Fund. The unaudited pro forma consolidated condensed financial statements of the
Core Fund are summarized below. These financial statements have been prepared
assuming the acquisition of the six acquired properties discussed above were
made as of January 1, 2004 for purposes of the unaudited pro forma consolidated
condensed statements of operations and as of the date of acquisition for the
unaudited pro forma consolidated condensed balance sheet. 17




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HINES REAL ESTATE INVESTMENT TRUST, INC. UNAUDITED NOTE TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
June 30, 2004 Unaudited Pro Forma Consolidated
Condensed Balance Sheet of the Core Fund
June 30, 2004 ASSETSCash
    
    $
    40,132,000Property, net
    
    
    859,800,000Other assets
    
    
    152,686,000Total Assets
    
    $
    1,052,618,000LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    572,150,000Other liabilities
    
    
    43,927,000Minority interest
    
    
    294,279,000Partners capital
    
    
    142,262,000Total Liabilities and Partners Capital
    
    $
    1,052,618,000
 Unaudited Pro Forma Consolidated
Condensed Statement of Operations of the Core Fund Six MonthsThree Months Ended
    
    EndedJune 30, 2004
    
    June 30, 2004Revenues
    
    $
    32,674,000
    
    
    $
    65,425,000Expenses:Interest
    
    
    8,013,000
    
    
    
    16,732,000Depreciation and amortization
    
    
    11,066,000
    
    
    
    21,326,000Operating, general and administrative and other
    
    
    14,524,000
    
    
    
    28,458,000Total Expenses
    
    
    33,603,000
    
    
    
    66,516,000Minority interest
    
    
    1,305,000
    
    
    
    2,019,000Net Income
    
    $
    376,000
    
    
    $
    928,000
 18




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Item 2.
    Managements Discussion and Analysis of Financial Condition and Results
of Operations Explanatory Note We have
not yet commenced operations, therefore, we do not have any
meaningful active operations to discuss. The following discussion and analysis
of our financial condition should be read in conjunction with our consolidated
financial statements, the notes thereto, and the other financial data included
elsewhere in thisForm 10-Q. A Special Note Regarding Forward-Looking Statements Statements included in this Form 10-Q which are not historical facts
(including any statements concerning investment objectives, other plans and
objectives of management for future operations or economic performance, or
assumptions or forecasts related thereto) are forward-looking statements.
These statements are only predictions. We caution that forward-looking
statements are not guarantees. Actual events or our investments and results of
operations could differ materially from those expressed or implied in the
forward-looking statements. Forward-looking statements are typically
identified by the use of terms such as may, will, should, expect,
could, intend, plan, anticipate, estimate, believe, continue,
predict, potential or the negative of such terms and other comparable
terminology. The forward-looking statements included herein are based on our current
expectations, plans, estimates, assumptions and beliefs that involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. Any
of the assumptions underlying the forward-looking statements could be
inaccurate. All forward-looking statements should be read in light of the
factors identified in the Risk Factors section of the Registration Statement
on Form S-11 (File No. 333-108780) (the Registration Statement) of Hines Real
Estate Investment Trust, Inc. (Hines REIT) filed with the Securities and
Exchange Commission (the SEC), as the same may be amended and supplemented
from time to time. You are
cautioned not to place undue reliance on any forward-looking
statements included in this Form 10-Q. All forward-looking statements are made
as of the date of this Form 10-Q and the risk that actual results will differ
materially from the expectations expressed in this Form 10-Q may increase with
the passage of time. In light of the significant uncertainties inherent in the
forward-looking statements included in this Form 10-Q, the inclusion of such
forward-looking statements should not be regarded as a representation by us or
any other person that the objectives and plans set forth in this Form
10-Q will be achieved. Overview Hines REIT
was incorporated under the General Corporation Laws of the
State of Maryland on August 5, 2003 for the purpose of investing primarily in
office properties located throughout the United States. In addition, Hines
REIT may invest in properties outside the United States, non-office properties,
mortgage loans, ground leases and other real estate investments.
Hines REIT expects to
conduct substantially all of its operations through, and substantially all of
its real estate investments will be owned directly or indirectly by, Hines REIT
Properties, L.P. (the Operating Partnership), which is a Delaware limited
partnership formed on August 20, 2003. Hines REIT is the sole general partner
of the Operating Partnership. The use of we, our, us
or similar pronouns
in this Form 10-Q refers to either Hines REIT or Hines REIT and the Operating
Partnership, collectively, as required by the context in which such pronoun is
used. We do not have employees. We have entered into an advisory agreement (the
Advisory Agreement) with Hines Advisors Limited Partnership (the Advisor)
pursuant to which the Advisor will perform our day-to-day operations. The
Advisor will also make recommendations for all our investment decisions, which
are subject to the approval of our board of directors. We will pay the Advisor
various fees, and reimburse the Advisor for certain expenses incurred on our
behalf, in connection with services performed by the Advisor pursuant to this
Advisory Agreement. As of June 30, 2004, we had no business operations. Other
than a commitment to acquire a $35 million 19




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##### Table of Contents



interest in a partnership affiliated with the Advisor (see below), we have
neither purchased nor contracted to purchase any real estate investments. We filed the Registration Statement with the SEC to offer a maximum of
200,000,000 common shares of Hines REIT, par value $0.001 per share (the
common shares) to the public on a best efforts basis at a price of $10.00 per
share (the Offering). We also registered up to 20,000,000 common shares
under this registration statement to be issued during the Offering pursuant to
our dividend reinvestment plan at a price of $9.50 per share. Proceeds raised
from this offering will be placed in escrow until such time as we receive and
accept subscriptions representing the minimum offering of $10,000,000 under the
circumstances more fully described in the Registration Statement. We will not
commence real estate operations until we receive and accept gross offering
proceeds of $10,000,000. As of June 30, 2004, we had not received any
subscriptions for common shares. From July 1, 2004 through
August 13, 2004, we
received subscriptions for approximately 36,650 common shares, representing gross
offering proceeds of approximately $366,500. The proceeds of such subscriptions are
being held in escrow until the minimum offering described above is reached. We
will use all net proceeds from such amount to acquire an interest in
Hines-Sumisei U.S. Core Office Fund, L.P., a partnership affiliated with our
Advisor. The following discussion and analysis is based primarily on our
consolidated financial statements for the periods presented and should be read
together with the notes thereto contained in this Form 10-Q. Critical Accounting Policies Our management believes that once we commence real estate operations, our
most critical accounting policies will be the accounting for lease revenues
(including straight-line rent), the regular evaluation of whether the value of
a real estate asset has been impaired, real estate purchase price allocations
and the accounting for derivatives and hedging activities, if any. Each of
these items involves estimates that require management to make judgments that
are subjective in nature. Management will rely on its experience and collect
historical data and current market data in order to make assumptions, and
analyze these assumptions in order to arrive at what it believes to be
reasonable estimates. Under different conditions or assumptions, materially
different amounts could be reported related to the accounting policies
described below. In addition, application of these accounting policies will
involve the exercise of judgment on the use of assumptions as to future
uncertainties and, as a result, actual results could materially differ from
these estimates. Revenue Recognition and Valuation of Receivables When we commence real estate operations our revenues, which will be
comprised largely of rental income, will include rents reported on a
straight-line basis over the initial term of the lease. Since our leases may
provide for rental increases at specified intervals, we will be required to
straight-line the recognition of revenue, which will result in the recording of
a receivable for rent not yet due under the lease terms. Accordingly, our
management will be required to determine, in its judgment, to what extent the
unbilled rent receivable applicable to each specific tenant is collectible. We
will review unbilled rent receivable on a quarterly basis and take into
consideration the tenants payment history, the financial condition of the
tenant, business conditions in the industry in which the tenant operates and
economic conditions in the area in which property is located. In the event
that the collectability of unbilled rent with respect to any given tenant is in
doubt, we would be required to record an increase in our allowance for doubtful
accounts or record a direct write-off of the specific rent receivable, which
would have an adverse effect on our net income for the year in which the
reserve is increased or the direct write-off is recorded and would decrease our
total assets and shareholders equity. Investments in Real Estate As we invest the proceeds of the Offering in real estate, we will record
such investments at cost (including third party acquisition expenses) and we
will capitalize improvements and replacements when they extend the useful life
or improve the efficiency of the asset. We will expense costs of repairs and
maintenance as incurred. We will compute depreciation using the straight-line
method over the estimated useful lives of our real estate assets, which we
expect will be approximately 40 years for buildings and improvements, three to
seven years for equipment and 20




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fixtures and the shorter of the useful life or the remaining lease term
for tenant improvements and leasehold interests. We will be required to make subjective assessments as to the useful lives
of the properties in which we acquire an interest for purposes of determining
the amount of depreciation to record on an annual basis with respect to our
investments in real estate. These assessments will have a direct impact on our
net income because, if we were to shorten the expected useful lives of our
investments in real estate, we would depreciate these investments over fewer
years, resulting in more depreciation expense and lower net income on an annual
basis throughout the expected useful lives of the related assets. We have adopted SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which establishes a single accounting model for the
impairment or disposal of long-lived assets including discontinued operations.
SFAS 144 requires that the operations related to properties that have been sold
or that we intend to sell be presented as discontinued operations in the
statement of operations for all periods presented, and properties we intend to
sell be designated as held for sale on our balance sheet. When circumstances such as adverse market conditions indicate a possible
impairment of the value of a property, we will review the recoverability of the
propertys carrying value. The review of recoverability will be based on our
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the propertys use and eventual disposition. Our
forecast of these cash flows will consider factors such as expected future
operating income, market and other applicable trends and residual value, as
well as the effects of leasing demand, competition and other factors. These
factors contain subjectivity and thus are not able to be precisely estimated.
If impairment exists due to the inability to recover the carrying value of a
property, an impairment loss will be recorded to the extent that the carrying
value exceeds the estimated fair value of the property. We will be required to
make subjective assessments as to whether there are impairments in the values
of our investments in real estate. Real Estate Purchase Price Allocation We will allocate the purchase price of properties into tangible assets of
an acquired property (which includes land, building and tenant improvements)
based on the estimated fair values of those tangible assets assuming the
building was vacant. Estimates of fair value for land will be based on factors
such as comparisons to other properties sold in the same geographic area
adjusted for unique characteristics. Estimates of fair values of buildings and
tenant improvements are based on present values determined based upon the
application of hypothetical leases with market rates and terms. We will record above-market and below-market in-place lease values for
acquired properties based on the present value (using an interest rate which
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease rates for the corresponding
in place leases, measured over a period equal to the remaining non-cancelable
term of the lease. We will amortize any capitalized above-market lease values
as a reduction of rental income over the remaining non-cancelable terms of the
respective leases. We will amortize any capitalized below-market lease values
as an increase to rental income over the initial term and any fixed-rate
renewal periods in the respective leases. We will measure the aggregate value of other intangible assets acquired
based on the difference between (i) the property valued with existing in-place
leases adjusted to market rental rates and (ii) the property valued as if
vacant. Our managements estimates of value are expected to be made using
methods similar to those used by independent appraisers (e.g., discounted cash
flow analysis). Factors to be considered by management in its analysis include
an estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions, and costs to execute similar leases. We
will also consider information obtained about each property as a result of our
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, our management will also include real estate taxes, insurance
and other operating expenses and estimates of lost rentals at market rates
during the expected lease-up periods. Management will also estimate costs to
execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already
incurred in connection with a new lease origination as part of the transaction. 21




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The total amount of other intangible assets acquired will be further
allocated to in-place lease values and customer relationship intangible values
based on our managements evaluation of the specific characteristics of each
tenants lease and our overall relationship with that respective tenant.
Characteristics to be considered by management in allocating these values
include the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenants credit quality and expectations of lease renewals (including those
existing under the terms of the lease agreement), among other factors. We will amortize the value of in-place leases to expense over the initial
term of the respective leases, which we primarily expect to range
from five to 20
years. The value of customer relationship intangibles will be amortized to
expense over the initial term and any renewal periods in the respective leases,
but in no event will the amortization period for intangible assets exceed the
remaining depreciable life of the building. Should a tenant terminate its
lease, the unamortized portion of the in-place lease value and customer
relationship intangibles would be charged to expense. These assessments will have a direct impact on net income and revenue. If
we assign more fair value to the in-place leases versus buildings and tenant
improvements, assigned costs would generally be depreciated over a shorter
period, resulting in more depreciation expense and a lower net income on an
annual basis. Likewise, if we estimate that more of our leases in-place at
acquisition are on terms believed to be above the current market rates for
similar properties, the calculated present value of the amount above market
would be amortized monthly as a direct reduction to rental revenues and
ultimately reduce the amount of net income. Treatment of Management Compensation, Expense Reimbursements and
Operating Partnership Participation Interest Management of our operations will be outsourced to the Advisor and certain
other affiliates of Hines Interests Limited Partnership (Hines). Fees
related to each of these services will be accounted for based on the nature of
such service and the relevant accounting literature. Fees for services
performed that represent period costs to us will be expensed as incurred. Such
fees include acquisition fees and asset management fees paid to the Advisor and
property management fees paid to Hines. In addition to the cash payments for
acquisition fees and asset management fees paid to the Advisor, an affiliate of
the Advisor owns a participation interest (the Participation
Interest) which represents a profits interest
in the Operating Partnership related to these services. The percentage
interest in the Operating Partnership attributable to this profits interest
increases on a monthly basis in a manner described in the Registration
Statement. As the percentage interest of the Participation Interest is
adjusted, the value attributable to such adjustment will be charged against
earnings and recorded as a liability until such time as the participation
interest is repurchased for cash or converted into common shares of Hines REIT.
The conversion and redemption features of the Participation Interest will be
accounted for in accordance with the guidance of EITF 95-7, Implementation
Issues Related to the Treatment of Minority Interests in Certain Real Estate
Investment Trusts. Redemptions for cash will be accounted for as a reduction
to the liability discussed above to the extent of such liability, with any
additional amounts recorded as a reduction to equity. Conversions into common
shares of Hines REIT will be recorded as an increase to the common shares and
additional paid-in capital accounts and a corresponding reduction in the
liability discussed above. Redemptions and conversions of the Participation
Interest will result in a reduction in the percentage interest attributable to
the interest to the extent of such redemption or conversion and will have no
impact on the calculation of subsequent increases in the Participation
Interest. At such time as we are obligated to reimburse the Advisor for the
organizational and offering costs incurred on our behalf, a liability will be
recorded evidencing such obligation. This treatment is consistent with Staff
Accounting Bulletin (SAB) Topic 1.B1, which requires that we include all of
the costs associated with our operations and formation in our financial
statements. These costs will then be analyzed and segregated between those
which are organizational in nature, those which are offering-related salaries
and other general and administrative expenses of the Advisor and its
affiliates, and those which qualify as offering expenses in accordance with SAB
Topic 5.1. Organizational costs will be expensed as incurred in accordance
with Statement of Position 98-5. Offering-related salaries and other general
and administrative costs of the Advisor and its affiliates will be expensed as
incurred, and third-party offering expenses will be taken as a reduction
against the net 22




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proceeds of the offering within additional paid-in capital (APIC) in accordance with SAB
Topic 5.1. As of June 30, 2004, and December 31, 2003, respectively, the
Advisor had incurred organizational and offering costs on our behalf of
approximately $15.8 million and $6.4 million, including approximately $10.1
million and $3.9 million of organizational costs and offering-related salaries
and other general and administrative expenses of the Advisor and its
affiliates, and approximately $5.7 million and $2.5 million of third-party
offering expenses. In addition to the offering costs to be paid to the
Advisor, selling commissions and a dealer manager fee will be paid to the Hines
Real Estate Securities, Inc. (the Dealer Manager) in connection with the
Offering. Such costs will be netted against the net proceeds of the offering
within APIC as well. Hines may perform construction management services for both re-development
activities and tenant construction. These fees are considered incremental to
the construction effort and will be capitalized as incurred in accordance with
FAS 67, Accounting for Costs and Initial Rental Operations of Real Estate
Projects. These costs will be capitalized to the associated real estate
project as incurred. Costs related to tenant construction will be depreciated
over the shorter of their useful life or the term of the related lease. Costs
related to redevelopment activities will be depreciated over the estimated
useful life of the associated project. The leasing activity will be performed by Hines on our behalf. This
leasing fee will be capitalized and amortized over the life of the related
lease in accordance with the provisions of FAS 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases. Expense reimbursements made to both the Advisor and Hines will be expensed
as they become payable. Accounting for Derivative Financial Investments and Hedging Activities We will account for our derivative and hedging activities, if any, in
accordance with SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS 137, Accounting for Derivative Instruments and
Hedging Activities  Deferral of the Effective Date of FASB Statement No.
133, and SFAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which requires all derivative instruments to be carried at
fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate
exposure to variability in expected future cash flows, or other types of
forecasted transactions, will be considered cash flow hedges. We will formally
document all relationships between hedging instruments and hedged items, as
well as our risk-management objective and strategy for undertaking each hedge
transaction. We will periodically review the effectiveness of each hedging
transaction, which involves estimating future cash flows. Cash flow hedges
will be accounted for by recording the fair value of the derivative instrument
on the balance sheet as either an asset or liability, with a corresponding
amount recorded in other comprehensive income within shareholders equity.
Calculation of a fair value of derivative instruments will also require
management to use estimates. Amounts will be reclassified from other
comprehensive income to the income statement in the period or periods the
hedged forecasted transaction affects earnings. Derivative instruments
designated in a hedge relationship to mitigate exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular
risk, such as rate risk, will be considered fair value hedges under SFAS 133.
We are not currently a party to any derivatives contracts. Income Taxes For the year ending December 31, 2004, we expect to make an election to be
taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code
and, if such election is made, we will be taxed as such beginning with our
taxable year ending December 31, 2004. To qualify as a REIT, Hines REIT must
meet certain organizational and operational requirements, including a
requirement to distribute at least 90% of the REITs annual ordinary taxable
income to shareholders. As a REIT, we generally will not be subject to federal
income tax on taxable income that we distribute to our shareholders. If we
fail to qualify as a REIT in any taxable year, we will then be subject to
federal income taxes on our taxable income at regular corporate rates and will
not be permitted to qualify for treatment as a REIT for federal income tax
purposes for four years following the year during which qualification is lost
unless the Internal Revenue Service grants us relief under certain statutory
provisions. Such an event could materially adversely affect our net income and
net cash available for distribution to shareholders. However, we believe that
we will be organized and operate in such a manner as to qualify for treatment
as a REIT 23




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and we intend to operate in the foreseeable future in such a manner so
that we will qualify as a REIT for federal income tax purposes. Financial Condition, Liquidity and Capital Resources We are dependent upon the net proceeds to be received from our Offering to
conduct our proposed real estate activities. The capital required to purchase
real estate investments will be obtained from our Offering and from any
indebtedness that we may incur in connection with the acquisition of any real
estate investments thereafter. We have been initially capitalized with $10,000
from the sale of 1,000 common shares to
Hines REIT Investor, L.P., an affiliate
of Hines. Hines Real Estate Holdings Limited Partnership, an affiliate of Hines, has invested $200,000 into the
Operating Partnership and will invest an additional $10,000,000 into the
Operating Partnership upon the closing of the minimum offering. Our sources of funds will primarily be the net proceeds of our offering,
operating cash flows and borrowings. We believe that these cash resources will
be sufficient to satisfy our cash requirements for the foreseeable future, and
we do not anticipate a need to raise funds from other than these sources within
the next twelve months. Our management is not aware of any material trends or
demands, commitments, events or uncertainties that will or that are reasonably
likely to result in our liquidity increasing or decreasing in a material way,
other than national economic conditions affecting real estate generally. Other than amounts payable to affiliates of Hines, we currently have no
outstanding debt and have not identified any sources of debt financing.
Depending on market conditions, we expect that once the net proceeds of our
Offering are fully invested, our debt financing will be in the range of
approximately 40-60% of the aggregate value of our real estate investments.
Additionally, the amount of debt we place on an individual property, or the
amount of debt incurred by an individual entity in which we invest, may be less
than 40% or more than 60% of the value of such property or the value of the
assets owed by such entity, depending on market conditions and other factors.
In fact, depending on market conditions and other factors, we may choose not to
place debt on our portfolio or our assets and may choose not to borrow to
finance our operations or to acquire properties. Our Amended and
Restated Articles of Incorporation
limit our borrowing to 300% of our net assets (equivalent to 75% of the cost of
our assets) unless any excess borrowing is approved by a majority of our
independent directors and is disclosed to our shareholders in our next
quarterly report. Any indebtedness we do incur will likely be subject to
continuing covenants, and we will likely be required to make continuing
representations and warranties about our company in connection with such debt.
Moreover, some or all of our debt may be secured by some or all of our assets.
If we default in the payment of interest or principal on any such debt, breach
any representation or warranty in connection with any borrowing or violate any
covenant in any loan document, our lender may accelerate the maturity of such
debt requiring us to immediately repay all outstanding principal. If we are
unable to make such payment, our lender could foreclose on our assets that are
pledged as collateral to such lender. The lender could also sue us or force us
into bankruptcy. Any such event would have a material adverse effect on the
value of an investment in our common shares. In addition to making investments in accordance with our investment
objectives, we expect to use our capital resources to make certain payments to
the Advisor, the Dealer Manager, Hines and other affiliates during the various
phases of our organization and operation. During our organizational and
offering stage, these payments will include payments to the Dealer Manager for
selling commissions and the dealer manager fee and payments to the Advisor for
reimbursement of organization and offering costs. During our acquisition and
operational stages, certain services related to management of our investments
and operations will be provided to us by the Advisor and Hines pursuant to
various agreements we have entered into or anticipate entering into with these
entities. Pursuant to those agreements, we expect that we will make various
payments to the Advisor and/or Hines, including acquisition fees, asset
management fees, property management fees, leasing fees, and payments for
reimbursements of certain costs incurred by the Advisor and Hines in providing
related services to us. In order to qualify as a REIT and to avoid corporate-level tax on the
income we distribute to our shareholders, we are required to distribute at least
90% of our annual ordinary taxable income. Therefore, once the net proceeds we
receive from our Offering are substantially fully invested, we will need to
raise additional capital in order to grow our business and acquire additional
real estate investments. We anticipate borrowing funds to obtain additional
capital, but there can be no assurance that we will be able to do so on terms
acceptable to us, if at all. 24




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Inflation The real estate market has not been affected significantly by inflation in
the past several years due to the relatively low inflation rate. However, once
we commence our real estate operations, we intend to include provisions in a
substantial number of our tenant leases that would mitigate the adverse impact
of inflation upon us. These provisions include reimbursement billings for
common area maintenance charges, real estate tax and insurance reimbursements
on a per square foot basis, or in some cases, annual reimbursement of operating
expenses above a certain per square foot allowance. Results of Operations As previously noted, as of the date of this Form 10-Q, we have not
commenced real estate operations because we are in our development stage. No
operations will commence until we have sold at least 1,000,000 common shares in the Offering. Our management is not aware of any material
trends or uncertainties, other than national economic conditions affecting real
estate generally that may reasonably be expected to have a material impact,
favorable or unfavorable, on revenues or income from the acquisition and
operations of real properties and mortgage loans. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices and other
market changes that affect market sensitive instruments. In pursuing our
business plan, we expect that the primary market risk to which we will be
exposed is interest rate risk. We may be exposed to the effects of interest rate changes primarily as a
result of long-term debt used to maintain liquidity and fund expansion of our
real estate investment portfolio and operations. Our interest rate risk
management objectives will be to limit the impact of interest rate changes on
earnings and cash flows and to lower overall borrowing costs. To achieve our
objectives, we will borrow primarily at fixed rates or variable rates and, in
some cases, with the ability to convert variable rates to fixed rates. We may
also enter into derivative financial instruments such as interest rate swaps
and caps in order to mitigate our interest rate risk on a related financial
instrument. We will not enter into derivative or interest rate transactions
for speculative purposes. Because we have not commenced operations, we
currently have limited exposure to financial market risks. Currently our cash
balance represents the majority of our assets and a 10% increase or decrease in
interest rates would have no material effect on our financial position or
results of operations. In addition to changes in interest rates, the value of our real estate is
subject to fluctuations based on changes in local and regional economic
conditions and changes in the creditworthiness of lessees, which may affect our
ability to refinance our debt if necessary. 
 Item 4. Controls and Procedures In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934, as amended (the Exchange Act), we, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(d) of the Exchange Act) as of the end of
the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report, to provide reasonable assurance that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. No change occurred in our internal controls concerning financial
reporting (as defined in Rule 13a-15(e) of the Exchange Act) during the three
months ended June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting. 25




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PART II- OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds. and Issuer Purchases of Equity Securities We filed the Registration Statement with the SEC in connection with the
Offering. The Registration Statement was declared effective under the
Securities Act of 1933 on June 18, 2004. Our Articles of Incorporation were
amended and restated on May 24, 2004 and are summarized in, and filed as an
exhibit to, our Registration Statement. Proceeds raised from the Offering will be placed in escrow until such time
as we receive and accept subscriptions representing $10,000,000 as more fully
described in the Registration Statement. As of June 30, 2004, we had not
reached this minimum offering and we had not received any proceeds from the
Offering. During the period covered by this Form 10-Q, we did not sell any equity
securities that were not registered under the Securities Act of 1933 and we did
not repurchase any of our securities. 
 Item 4. Submission of Matters to a Vote of Security Holders On May 24, 2004, the sole shareholder of Hines Real Estate Investment
Trust, Inc., pursuant to a unanimous written consent in lieu of a special meeting,
approved the form, terms and provisions of Hines REITs Amended and Restated
Articles of Incorporation and Employee and Director Incentive Share Plan. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The exhibits required by this item are set forth on the Exhibit Index
attached hereto. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the period covered by
this Form 10-Q:  (i)
    
    During the period covered by this Form 10-Q, Hines REIT
furnished a report on Form 8-K dated June 22, 2004 under Item 9,
Regulation FD Disclosure with respect to the launch of its
offering. 26




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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. Date: August 16, 2004
    HINES REAL ESTATE INVESTMENT TRUST, INC.By:
    /s/ CHARLES M. BAUGHNCharles M. BaughnPrincipal Executive Officer Date:  August 16, 2004
    By:
    /s/ SHERRI W. SCHUGARTSherri W. SchugartChief Financial Officer 27




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EXHIBIT INDEX Exhibit No.
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 3.1 to
Amendment No. 5 to the Registration Statement on May 25, 2004
and incorporated herein by reference).3.2
    
    Amended and Restated Bylaws of Hines Real Estate Investment
Trust, Inc. (filed as Exhibit 3.1 to Amendment No. 5 to the
Registration Statement on May 25, 2004 and incorporated herein
by reference).4.1
    
    Form of Subscription Agreement (filed as Appendix B to the
Prospectus included in the Registration Statement, filed on
June 24, 2004, and incorporated herein by reference).10.1
    
    Amended and Restated Agreement of Limited Partnership of Hines
REIT Properties, L.P. (filed as Exhibit 10.1 to Amendment No.
5 to the Registration Statement on May 25, 2004 and
incorporated herein by reference).10.2
    
    Form of Property Management and Leasing Agreement between
Hines REIT Properties, L.P. and Hines Interests Limited
Partnership (filed as Exhibit 10.2 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated
herein by reference).10.3
    
    Advisory Agreement among Hines REIT Properties, L.P., Hines
Advisors Limited Partnership and Hines Real Estate Investment
Trust, Inc. (filed as Exhibit 10.3 to Amendment No. 5 to the
Registration Statement on May 25, 2004 and incorporated herein
by reference).10.4
    
    Employee and Director Incentive Share Plan of Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 10.4 to
Amendment No. 2 to the Registration Statement on March 2, 2004
and incorporated herein by reference).10.5
    
    Hines Real Estate Investment Trust, Inc. Dividend Reinvestment
Plan (filed as Appendix C to the Prospectus included in the
Registration Statement, filed on June 24, 2004, and
incorporated herein by reference).10.6
    
    Third Amended and Restated Agreement of Limited Partnership of
Hines-Sumisei U.S. Core Office Fund, LP (filed as Exhibit 10.6
to Amendment No. 5 to the Registration Statement on May 25,
2004 and incorporated herein by reference).10.7
    
    Second Amended and Restated Declaration of Trust of
Hines-Sumisei NY Core Office Trust (filed as Exhibit 10.7 to
Amendment No. 2 to the Registration Statement on March 2, 2004
and incorporated herein by reference).10.8
    
    Amended and Restated Bylaws of Hines-Sumisei NY Core Office
Trust (filed as Exhibit 10.8 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated
herein by reference).10.9
    
    Amended and Restated Master Agreement dated as of March 31,
2003, among Hines Interests Limited Partnership, Hines US Core
Office Properties LP and Sumitomo Life Realty (N.Y.), Inc., as
amended (filed as Exhibit 10.9 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated
herein by reference).10.10
    
    Amended and Restated Shareholder Agreement dated as of
December 23, 2003, by and among General Motors Investment
Management Corporation, Hines-Sumisei U.S. Core Office Fund,
L.P., Hines-Sumisei NY Core Office Trust and various
shareholders to




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Exhibit No.
    
    DescriptionHines-Sumisei NY Core Office Trust (filed as
Exhibit 10.10 to Amendment No. 2 to the Registration Statement
on March 2, 2004 and incorporated herein by reference).10.11
    
    Amended and Restated Investor Rights Agreement dated as of
December 23, 2003, among Hines Interests Limited Partnership,
Hines-Sumisei U.S. Core Office Fund, L.P., Hines-Sumisei NY
Core Office Trust, General Motors Investment Management
Corporation, and various shareholders to Hines-Sumisei NY Core
Office Trust (filed as Exhibit 10.11 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated
herein by reference).10.12
    
    Amended and Restated Organization Agreement for Hines-Sumisei
NY Core Office Trust, dated as of December 23, 2003, by and
among General Motors Investment Management Corporation, Hines
Interests Limited Partnership, Hines-Sumisei U.S. Core Office
Fund, L.P., Hines Sumisei NY Core Office Trust and various
shareholders to Hines-Sumisei NY Core Office Trust (filed as
Exhibit 10.12 to Amendment No. 2 to the Registration Statement
on March 2, 2004 and incorporated herein by reference).10.13
    
    Declaration of Trust of Hines-Sumisei NY Core Office Trust II
(filed as Exhibit 10.13 to Amendment No. 2 to the Registration
Statement on March 2, 2004 and incorporated herein by
reference).10.14
    
    Bylaws of Hines-Sumisei NY Core Office Trust II (filed as
Exhibit 10.14 to Amendment No. 2 to the Registration Statement
on March 2, 2004 and incorporated herein by reference).10.15
    
    Shareholder Agreement for Hines-Sumisei NY Core Office Trust
II, dated as of February 2, 2004, by and among General Motors
Investment Management Corporation, Hines-Sumisei U.S. Core
Office Fund, L.P., Hines-Sumisei NY Core Office Trust II and
certain shareholders of Hines-Sumisei NY Core Office Trust II
(filed as Exhibit 10.15 to Amendment No. 2 to the Registration
Statement on March 2, 2004 and incorporated herein by
reference).10.16
    
    Subscription Agreement for Hines-Sumisei NY Core Office Trust
and Hines-Sumisei NY Core Office Trust II, dated as of
February 2, 2004, by and among General Motors Investment
Management Corporation, Hines Interests Limited Partnership,
Hines-Sumisei U.S. Core Office Fund, L.P., Hines-Sumisei NY
Core Office Trust, Hines-Sumisei NY Core Office Trust II and
various shareholders of Hines-Sumisei NY Core Office Trust and
Hines-Sumisei NY Core Office Trust II (filed as Exhibit 10.16
to Amendment No. 2 to the Registration Statement on March 2,
2004 and incorporated herein by reference).10.17
    
    Subscription Agreement dated as of September 11, 2003 between
Hines REIT Properties, L.P. and Hines Real Estate Holdings
Limited Partnership (filed as Exhibit 10.17 to Amendment No. 2
to the Registration Statement on March 2, 2004 and
incorporated herein by reference).10.18
    
    Agreement, dated as of June 10, 2004, between Hines REIT
Properties, L.P., Hines U.S. Core Office Capital Associates II
Limited Partnership and Hines-Sumisei U.S. Core Office Fund,
L.P. (filed as Exhibit 10.18 to Amendment No. 6 to the
Registration Statement on June 10, 2004 and incorporated
herein by reference).10.19
    
    Amended and Restated Escrow Agreement between Hines Real
Estate Investment Trust, Inc. and Wells Fargo Bank, National
Association (filed as Exhibit 10.19 to Amendment No. 2 to the
Registration Statement on March 2, 2004 and incorporated
herein by reference).




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Exhibit No.
    
    Description10.20
    
    Articles of Amendment of the Declaration of Trust of
Hines-Sumisei N.Y. Core Office Trust (filed as Exhibit 10.20
to Amendment No. 5 to the Registration Statement on May 25,
2004 and incorporated herein by reference).10.21
    
    Articles of Amendment of the Declaration of Trust of
Hines-Sumisei N.Y. Core Office Trust II (filed as Exhibit
10.21 to Amendment No. 5 to the Registration Statement on May
25, 2004 and incorporated herein by reference).31.1*
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Statement 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