##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission file number: 000-50805
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 (Exact Name of Registrant as Specified in its Charter)
 Maryland
    
    20-0138854(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2800 Post Oak BoulevardSuite 5000Houston, Texas
    
    77056-6118(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (888) 220-6121
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)Consolidated Condensed Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    2Consolidated Condensed Statements of Operations for the Three Months Ended
March 31, 2006 and 2005
    
    
    3Consolidated Condensed Statement of Shareholders Equity for the Three Months Ended
March 31, 2006 and the Year Ended December 31, 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005
    
    
    5Notes to Consolidated Condensed Financial Statements for the Three Months Ended
March 31, 2006 and 2005
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34Form of Property Management AgreementCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350
  1




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited).
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
As of March 31, 2006 and December 31, 2005
(UNAUDITED)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSInvestment property, at cost:Buildings and improvements, net
    
    $
    181,567,319
    
    
    $
    79,461,108In-place leases, net
    
    
    35,477,726
    
    
    
    25,698,679Land
    
    
    81,107,097
    
    
    
    38,416,834Total investment property
    
    
    298,152,142
    
    
    
    143,576,621Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    132,559,006
    
    
    
    118,574,523Cash and cash equivalents
    
    
    13,441,474
    
    
    
    6,156,285Restricted cash
    
    
    2,995,955
    
    
    
    Distributions receivable
    
    
    3,114,628
    
    
    
    3,598,103Straight-line rent receivable
    
    
    425,382
    
    
    
    276,726Tenant and other receivables
    
    
    1,188,254
    
    
    
    807,813Acquired above-market leases, net
    
    
    15,916,494
    
    
    
    15,099,578Deferred offering costs
    
    
    1,502,373
    
    
    
    1,221,987Deferred leasing costs, net
    
    
    1,725,494
    
    
    
    1,655,534Deferred financing costs, net
    
    
    1,340,005
    
    
    
    851,206Other assets
    
    
    11,234,659
    
    
    
    5,515,934TOTAL ASSETS
    
    $
    483,595,866
    
    
    $
    297,334,310LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses
    
    $
    5,039,065
    
    
    $
    4,280,492Unaccepted subscriptions for common shares
    
    
    1,235,835
    
    
    
    1,168,441Due to affiliates
    
    
    9,951,779
    
    
    
    10,855,669Acquired below-market leases, net
    
    
    11,664,968
    
    
    
    8,719,488Other liabilities
    
    
    2,017,009
    
    
    
    902,246Participation interest liability
    
    
    4,467,345
    
    
    
    3,021,780Dividends payable
    
    
    3,987,267
    
    
    
    3,001,754Distributions payable to minority interests
    
    
    224,617
    
    
    
    207,243Notes payable
    
    
    179,629,008
    
    
    
    74,900,000Total liabilities
    
    
    218,216,893
    
    
    
    107,057,113Minority interest
    
    
    1,846,635
    
    
    
    2,192,831Commitments and ContingenciesShareholders equity :Preferred shares, $.001 par value; 500 million preferred shares authorized, none issued or
outstanding as of March 31, 2006 and December 31, 2005
    
    
    
    
    
    
    Common shares, $.001 par value; 1,500,000,000 common shares authorized as of
March 31, 2006 and December 31, 2005; 32,191,107 and 23,046,119 common shares
issued and outstanding as of March 31, 2006 and December 31, 2005, respectively
    
    
    32,191
    
    
    
    23,046Additional paid-in capital
    
    
    279,820,673
    
    
    
    199,846,230Retained deficit
    
    
    (16,320,526
    )
    
    
    (11,784,910
    )Total shareholders equity
    
    
    263,532,338
    
    
    
    188,084,366TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    483,595,866
    
    
    $
    297,334,310
  2




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HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenues:Rental revenue
    
    $
    8,076,258
    
    
    $
    Other revenue
    
    
    317,311
    
    
    
    Total revenues
    
    
    8,393,569
    
    
    
    Expenses:Property operating expenses
    
    
    2,628,921
    
    
    
    Real property taxes
    
    
    1,012,073
    
    
    
    Property management fees
    
    
    209,398
    
    
    
    Depreciation and amortization
    
    
    3,045,829
    
    
    
    Asset management and acquisition fees
    
    
    2,891,130
    
    
    
    654,118Organizational and offering expenses
    
    
    132,673
    
    
    
    1,479,923General and administrative expenses
    
    
    609,451
    
    
    
    780,103Total expenses
    
    
    10,529,475
    
    
    
    2,914,144Loss before equity in losses, interest expense and
Loss allocated to minority interests
    
    
    (2,135,906
    )
    
    
    (2,914,144
    )Equity in losses of Hines-Sumisei
U.S. Core Office Fund, L.P.
    
    
    (100,888
    )
    
    
    (28,944
    )Interest expense
    
    
    (2,504,377
    )
    
    
    Interest income
    
    
    83,976
    
    
    
    1,564Loss allocated to minority interests
    
    
    121,579
    
    
    
    704,944Net loss
    
    $
    (4,535,616
    )
    
    $
    (2,236,580
    )Basic and diluted loss per common share:Loss per common share
    
    $
    (0.17
    )
    
    $
    (0.62
    )Weighted average number
common shares outstanding
    
    
    26,950,591
    
    
    
    3,613,838
  3




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HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
 For the Three Months Ended March 31, 2006 and the Year Ended December 31, 2005
 (UNAUDITED)
 AdditionalPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity (Deficit)BALANCE,
January 1, 2005
    
    
    
    
    
    $
    
    
    
    
    2,073,116
    
    
    $
    2,073
    
    
    $
    9,715,539
    
    
    $
    (10,028,316
    )
    
    $
    (310,704
    )Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    20,973,003
    
    
    
    20,973
    
    
    
    207,642,319
    
    
    
    
    
    
    
    207,663,292Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,637,079
    )
    
    
    
    
    
    
    (6,637,079
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,055,143
    )
    
    
    
    
    
    
    (15,055,143
    )Other offering
costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,180,594
    
    
    
    
    
    
    
    4,180,594Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,756,594
    )
    
    
    (1,756,594
    )BALANCE,
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    23,046,119
    
    
    
    23,046
    
    
    
    199,846,230
    
    
    
    (11,784,910
    )
    
    
    188,084,366Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    9,152,031
    
    
    
    9,152
    
    
    
    90,951,671
    
    
    
    
    
    
    
    90,960,823Redemption of
common shares
    
    
    
    
    
    
    
    
    
    
    (7,043
    )
    
    
    (7
    )
    
    
    (63,379
    )
    
    
    
    
    
    
    (63,386
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,987,267
    )
    
    
    
    
    
    
    (3,987,267
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,926,582
    )
    
    
    
    
    
    
    (6,926,582
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,535,616
    )
    
    
    (4,535,616
    )BALANCE,
March 31, 2006
    
    
    
    
    
    $
    
    
    
    
    32,191,107
    
    
    $
    32,191
    
    
    $
    279,820,673
    
    
    $
    (16,320,526
    )
    
    $
    263,532,338
  4




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HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For the Three Months Ended March 31, 2006 and 2005
 (UNAUDITED)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2006
    
    

March 31, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (4,535,616
    )
    
    $
    (2,236,580
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    3,337,768
    
    
    
    Non-cash compensation expense
    
    
    8,283
    
    
    
    Equity in losses of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    100,888
    
    
    
    28,944Loss allocated to minority interests
    
    
    (121,579
    )
    
    
    (704,944
    )Accrual of organizational and offering expenses
    
    
    132,673
    
    
    
    1,479,923Changes in assets and liabilities:Decrease in other assets
    
    
    57,945
    
    
    
    46,688Increase in due from affiliates
    
    
    
    
    
    
    (204,594
    )Increase in straight-line rent receivable
    
    
    (148,656
    )
    
    
    Increase in tenant and other receivables
    
    
    (380,441
    )
    
    
    Increase in deferred lease costs
    
    
    (168,475
    )
    
    
    Increase in accounts payable and accrued expenses
    
    
    1,009,106
    
    
    
    345,487Increase in participation interest liability
    
    
    1,445,565
    
    
    
    327,059Increase in other liabilities
    
    
    144,703
    
    
    
    Increase (decrease) in due to affiliates
    
    
    497,899
    
    
    
    (162,027
    )Net cash provided by (used in) operating activities
    
    
    1,380,063
    
    
    
    (1,080,044
    )CASH FLOWS FROM INVESTING ACTIVITIES:Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (17,200,000
    )
    
    
    (28,268,788
    )Distributions received from Hines-Sumisei U.S. Core Office Fund, L.P.
in excess of equity in losses
    
    
    3,598,103
    
    
    
    247,494Investments in property
    
    
    (63,294,193
    )
    
    
    Additions to other assets
    
    
    (10,000,000
    )
    
    
    Increase in restricted cash
    
    
    (2,995,955
    )
    
    
    Increase in acquired out-of-market leases, net
    
    
    2,209,966
    
    
    
    Net cash used in investing activities
    
    
    (87,682,079
    )
    
    
    (28,021,294
    )CASH FLOWS FROM FINANCING ACTIVITIES:Increase in escrowed investor proceeds
    
    
    
    
    
    
    333,557Increase in escrowed investor proceeds liability
    
    
    
    
    
    
    (333,557
    )Increase (decrease) in unaccepted subscriptions for common shares
    
    
    67,394
    
    
    
    (120,118
    )Proceeds from issuance of common stock
    
    
    89,187,529
    
    
    
    33,603,635Redemption of common shares
    
    
    (63,386
    )
    
    
    Payments of selling commissions and dealer manager fees
    
    
    (6,539,997
    )
    
    
    (2,669,522
    )Payments of organizational and offering expenses
    
    
    (3,000,000
    )
    
    
    Proceeds from advances from affiliate
    
    
    789,155
    
    
    
    375,821Dividends paid to shareholders
    
    
    (1,228,317
    )
    
    
    (52,311
    )Dividends paid to minority interests
    
    
    (207,243
    )
    
    
    (74,722
    )Proceeds from notes payable
    
    
    77,000,000
    
    
    
    Payments on notes payable
    
    
    (60,900,000
    )
    
    
    Additions to deferred financing costs
    
    
    (1,517,930
    )
    
    
    Net cash provided by financing activities
    
    
    93,587,205
    
    
    
    31,062,783Net change in cash and cash equivalents
    
    
    7,285,189
    
    
    
    1,961,445Cash and cash equivalents, beginning of period
    
    
    6,156,285
    
    
    
    1,536,439Cash and cash equivalents, end of period
    
    $
    13,441,474
    
    
    $
    3,497,884Supplemental Disclosure of Cash Flow InformationCash paid for interest
    
    $
    2,019,962
    
    
    $
    Supplemental Disclosure of Non-Cash ActivitiesUnpaid selling commissions and dealer manager fees
    
    $
    1,494,984
    
    
    $
    298,016Deferred offering costs offset against additional paid-in capital
    
    $
    
    
    
    $
    1,140,567Accrual of deferred offering costs
    
    $
    280,307
    
    
    $
    Dividends declared and unpaid
    
    $
    3,987,267
    
    
    $
    534,652Distributions receivable
    
    $
    3,114,628
    
    
    $
    Distributions declared and unpaid to minority interests
    
    $
    224,617
    
    
    $
    172,398Dividends reinvested
    
    $
    1,773,437
    
    
    $
    46,838Assumption of mortgage at fair value upon acquisition of property
    
    $
    88,494,864
    
    
    $
    Non-cash net assets acquired upon acquisition of property
    
    $
    1,675,315
    
    
    $
    
  5




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 For the Three Months Ended March 31, 2006 and 2005
 UNAUDITED
 1. Organization
 The accompanying interim unaudited consolidated condensed financial information has been prepared
according to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted according to such rules and regulations. For further information,
refer to the financial statements and footnotes for the year ended December 31, 2005 included in
Hines Real Estate Investment Trust, Inc.s Annual Report on Form 10-K. In the opinion of
management, all adjustments and eliminations, consisting only of normal recurring adjustments,
necessary to present fairly and in conformity with GAAP the financial position of Hines Real Estate
Investment Trust, Inc. as of March 31, 2006 and December 31, 2005, and the results of operations
and the cash flows for the three months ended March 31, 2006 and 2005 have been included. The
results of operations for such interim periods are not necessarily indicative of the results for
the full year.
  Public Offering
    Minority Interests
  Investment Property
  6




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 2. Summary of Significant Accounting Policies
 Basis of Presentation
   Investment Property
       7




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 Cash and Cash Equivalents
  Deferred Leasing Costs
  Other Assets
  March 31,
    
    
    December 31,2006
    
    
    2005Property acquisition escrow deposit
    
    $
    10,000,000
    
    
    $
    5,000,000Prepaid insurance
    
    
    46,572
    
    
    
    110,155Mortgage loan deposit
    
    
    920,000
    
    
    
    Other
    
    
    268,087
    
    
    
    405,779Total
    
    $
    11,234,659
    
    
    $
    5,515,934
 Deferred Financing Costs
  Unaccepted Subscriptions for Common Shares
  8




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 Due to Affiliates
  March 31,
    
    
    December 31,2006
    
    
    2005Organizational and offering costs related to the Offering
    
    $
    3,900,000
    
    
    $
    6,900,000Potential follow-on offering organizational and offering costs
    
    
    1,890,791
    
    
    
    1,477,732Dealer manager fees and selling commissions
    
    
    1,494,984
    
    
    
    1,108,398Asset management, acquisition fees and property-level fees and
reimbursements
    
    
    831,803
    
    
    
    324,493General, administrative and other expenses
    
    
    1,834,201
    
    
    
    1,045,046Total
    
    $
    9,951,779
    
    
    $
    10,855,669
 Organizational and Offering Costs
      9




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 Revenue Recognition
  Stock-based Compensation
 Accounting for Stock-Based Compensation
 Income Taxes
  Per Share Data
  3. Real Estate Investments
 Direct Investments
    10




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 Acquired Above-
    
    
    AcquiredBuildings and
    
    
    In-Place
    
    
    Market
    
    
    Below-MarketImprovements
    
    
    Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    183,021,329
    
    
    $
    40,391,852
    
    
    $
    17,508,457
    
    
    $
    12,586,615Less: accumulated depreciation and
amortization
    
    
    (1,454,010
    )
    
    
    (4,914,126
    )
    
    
    (1,591,963
    )
    
    
    (921,647
    )Net
    
    $
    181,567,319
    
    
    $
    35,477,726
    
    
    $
    15,916,494
    
    
    $
    11,664,968
   In-place
    
    Out-of-MarketLeases
    
    Leases, netApril 1 through December 31, 2006
    
    $
    7,134,109
    
    
    $
    (485,564
    )2007
    
    
    8,285,990
    
    
    
    (546,250
    )2008
    
    
    6,837,672
    
    
    
    (451,258
    )2009
    
    
    5,124,133
    
    
    
    301,4682010
    
    
    3,027,671
    
    
    
    242,533
  Fixed FutureMinimum RentalsApril 1 through December 31, 2006
    
    $
    25,970,2982007
    
    
    30,760,2002008
    
    
    25,609,8262009
    
    
    16,069,3962010
    
    
    8,821,835Thereafter
    
    
    34,192,924Total
    
    $
    141,424,479
  
    
    13% was earned from a tenant in the insurance industry, whose lease expires in
May 2018; and
    
    13% was earned from one tenant in the construction industry, whose leases
representing 48% of their space expire in November 2009 and whose remaining space
expires in November 2010.
   11




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005  UNAUDITED
 Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
      Consolidated Condensed Balance Sheets of the Core Fund
as of March 31, 2006 and December 31, 2005
(unaudited)
 March 31, 2006
    
    
    December 31, 2005ASSETSCash
    
    $
    34,347,529
    
    
    $
    42,044,377Property, net
    
    
    1,451,469,306
    
    
    
    1,382,492,862Other assets
    
    
    299,200,088
    
    
    
    275,102,476Total Assets
    
    $
    1,785,016,923
    
    
    $
    1,699,639,715LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    976,480,000
    
    
    $
    915,030,000Other liabilities
    
    
    96,973,762
    
    
    
    106,125,932Minority interest
    
    
    264,811,521
    
    
    
    260,929,015Partners capital
    
    
    446,751,640
    
    
    
    417,554,768Total Liabilities and Partners Capital
    
    $
    1,785,016,923
    
    
    $
    1,699,639,715
 12




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
 Consolidated Condensed Statements of Operations of the Core Fund
For the Three Months Ended March 31, 2006 and 2005
(unaudited)
 March 31, 2006
    
    
    March 31, 2005Revenues and interest income
    
    $
    57,018,282
    
    
    $
    42,640,235Operating expenses
    
    
    (26,341,261
    )
    
    
    (18,450,569
    )Interest expense
    
    
    (13,073,420
    )
    
    
    (10,560,126
    )Depreciation and amortization
    
    
    (15,616,680
    )
    
    
    (11,980,520
    )Minority interest
    
    
    (2,235,510
    )
    
    
    (1,895,714
    )Net Loss
    
    $
    (248,589
    )
    
    $
    (246,694
    )
  
    
    14% and 17%, respectively, was earned from two affiliated tenants in the oil and gas
industry, whose leases expire on December 31, 2015; and
    
    37% and 40%, respectively, was earned from several tenants in the legal services
industry, whose leases expire at various times during the years 2007 through 2027.
   4. Debt Financing
 Revolving Credit Facility
   Debt Secured by Investment Property
  13




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
   5. Dividends
  AnnualizedRatePeriod
    
    Declared(1)
    
    
    Date PaidApril and May 2006
    
    6.0 %
    
    
    
    July 2006(2)January, February and March 2006
    
    6.0 %
    
    
    
    April 2006October, November and December 2005
    

    6.0 %
    
    
    
    January 2006July, August and September 2005
    

    6.0 %
    
    
    
    October 2005April, May and June 2005
    

    6.0%
    
    
    
    July 2005January, February and March 2005
    

    6.0 %
    
    
    
    April 2005
 
 (1)
    
    Dividends were declared in the amount of $0.00164384 per share per day,
representing an annualized rate of 6.0% based on a price of $10.00 per share.(2)
    
    Anticipated payment date. 6. Related Party Transactions
 Advisory Agreement
  Acquisition Fees
 Asset Management Fees
 Expense Reimbursements
 14




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
  Dealer Manager Agreement
  Property Management and Leasing Agreements
  
    
    A property management fee equal to the lesser of 2.5% of the annual gross revenues
received from the properties or the amount of property management fees recoverable from
tenants of the property under the leases. The Company incurred property management fees of
approximately $209,000 for the quarter ended March 31, 2006. As of March 31, 2006 and
December 31, 2005, the Company had a liability for incurred and unpaid property management
fees of approximately $115,000 and $31,000, respectively, which has been included in due to
affiliates in the accompanying consolidated condensed balance sheets. The Company owned no
direct real estate investments during the quarter ended March 31, 2005, and accordingly,
incurred no property management fees for the quarter then ended.
    
    A leasing fee of 1.5% of gross revenues payable over the term of each executed lease
including any lease renewal, extension, expansion or similar event and certain construction
management and re-development construction management fees, in the event Hines renders such
services. The Company incurred leasing commissions of approximately $11,000 for the quarter
ended March 31, 2006 and had a liability of approximately $9,000 as of March 31, 2006
related to such costs, which has been included in due to affiliates in the accompanying consolidated condensed balance sheets. The Company incurred no leasing, construction management or
redevelopment fees during the quarter ended March 31, 2005.
    
    We reimburse Hines for certain operating costs incurred in providing property management
and leasing services pursuant to the property management and leasing agreements. The
Company incurred reimbursable expenses of approximately $458,000 for the quarter ended
March 31, 2006. This amount, net of payments, resulted in a liability of approximately
$342,000 and $100,000 as of March 31, 2006 and December 31, 2005, respectively, which has
been included in due to affiliates in the accompanying consolidated condensed balance sheets. The Company
incurred no reimbursable expenses for the quarter ended March 31, 2005.
 The Participation Interest
   15




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
  7. Commitments and Contingencies
   8. Subsequent Events
 Acquisition of 333 West Wacker
  Mortgage Agreement Secured by 1515 S Street
  Acquisition of 321 North Clark
   16




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Three Months Ended March 31, 2006 and 2005
(UNAUDITED)
  Capital Contribution to the Core Fund
  Current Public Offering
  Borrowings Under the Credit Facility
 
 17




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Explanatory Note
 The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our unaudited consolidated condensed financial statements, the notes
thereto, and the other unaudited financial data included elsewhere in this Form 10-Q . The following
discussion should also be read in conjunction with our audited consolidated financial statements,
and the notes thereto, and Managements Discussion and Analysis of Financial Condition and Results
of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005. The
following information contains forward-looking statements, which are subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize, actual results may
differ materially from those expressed or implied by the forward-looking statements.
 Cautionary Note Regarding Forward-Looking Statements
    
    
    Our ability to invest offering and dividend reinvestment plan proceeds to acquire
properties or other investments in a timely manner and at appropriate amounts that provide
acceptable returns;
    
    The potential need to fund tenant improvements, lease-up costs or other capital
expenditures, as well as increases in property operating expenses and costs of compliance
with environmental matters or discovery of previously undetected environmentally hazardous
or other undetected adverse conditions at our properties;
    
    Risks associated with debt;
    
    Competition for tenants and real estate investment opportunities, including competition
with affiliates of Hines Interests Limited Partnership (Hines);
    
    Risks associated with adverse changes in general economic or local market conditions,
including terrorist attacks and other acts of violence, may affect the markets in which we
and our tenants operate;
    
    Our ability to secure adequate insurance at reasonable and appropriate rates against
catastrophic events, such as earthquakes and terrorist attacks;
 18




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 
    
    Changes in governmental, tax, real estate and zoning laws and regulations and the
related costs of compliance and increases in our administrative operating expenses,
including expenses associated with operating as a public company;
    
    Risks relating to our investment in Hines-Sumisei U.S. Core Office Fund, L.P. (the Core
Fund), such as its reliance on Hines for its operations and investments, and our potential
liability for Core Fund obligations;
    
    The lack of liquidity associated with our assets;
    
    Our reliance on our Advisor, Hines and affiliates of Hines for our day-to-day operations
and the selection of real estate investments, and our Advisors ability to attract and
retain high quality personnel who can provide acceptable service levels to us;
    
    Risks associated with conflicts of interests that result from our relationship with our
Advisor and Hines, as well as conflicts of interests certain of our officers and directors
face relating to the positions they hold with other entities; and
    
    Our ability to continue to qualify as a real estate investment trust (REIT) for
federal income tax purposes.
   Executive Summary
   19




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Leasable
    
    
    
    
    
    Ownership byProperty
    
    Market
    
    Square Feet
    
    % Leased
    
    the Company(1)Direct Investments:Citymark
    
    Dallas, Texas
    
    
    217,746
    
    
    
    100
    %
    
    
    100.00
    %1515 S Street
    
    Sacramento, California
    
    
    348,881
    
    
    
    100
    %
    
    
    100.00
    %1900 and 2000 Alameda
    
    San Mateo, California
    
    
    253,377
    
    
    
    76
    %
    
    
    100.00
    %Airport Corporate Center
    
    Miami, Florida
    
    
    1,018,477
    
    
    
    93
    %
    
    
    100.00
    %Indirect Investments:425 Lexington Avenue
    
    New York, New York
    
    
    700,134
    
    
    
    100
    %
    
    
    11.11
    %499 Park Avenue
    
    New York, New York
    
    
    285,847
    
    
    
    85
    %
    
    
    11.11
    %600 Lexington Avenue
    
    New York, New York
    
    
    279,253
    
    
    
    99
    %
    
    
    11.11
    %1200 19th Street
    
    Washington D.C.
    
    
    235,404
    
    
    
    100
    %
    
    
    11.11
    %One Shell Plaza
    
    Houston, Texas
    
    
    1,226,888
    
    
    
    95
    %
    
    
    12.69
    %Two Shell Plaza
    
    Houston, Texas
    
    
    565,155
    
    
    
    93
    %
    
    
    12.69
    %The KPMG Building
    
    San Francisco, California
    
    
    379,328
    
    
    
    95
    %
    
    
    25.37
    %101 Second Street
    
    San Francisco, California
    
    
    388,370
    
    
    
    95
    %
    
    
    25.37
    %Three First National Plaza
    
    Chicago, Illinois
    
    
    1,419,010
    
    
    
    92
    %
    
    
    20.30
    %525 B Street
    
    San Diego, California
    
    
    427,444
    
    
    
    86
    %
    
    
    25.37
    %720 Olive Way
    
    Seattle, Washington
    
    
    286,437
    
    
    
    81
    %
    
    
    20.25
    %8,031,751
    
    
    
    93
    %
 
 (1)
    
    This percentage shows the effective ownership of the Operating Partnership in
the properties listed. As of March 31, 2006, we owned a 95.36% interest in the Operating
Partnership and were its sole general partner. Affiliates of Hines owned the remaining
4.64% interest in the Operating Partnership. Real estate investments owned 100% by the
Operating Partnership are referred to as direct investments. We own interests in the
properties shown as indirect investments through our interest in the Core Fund, in
which we owned an approximate 27.37% non-managing general partner interest as of March
31, 2006. The Core Fund does not own 100% of these buildings; its ownership interests in
its buildings ranged from 40.6% to 92.7% as of March 31, 2006.  Critical Accounting Policies
  Basis of Presentation
  20




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Investment Property
       Deferred Leasing Costs
  Organizational and Offering Costs
  21




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Miscellaneous
Accounting  Expenses of Offering Reporting on the Costs of Start-up Activities.
   Revenue Recognition and Valuation of Receivables
  Treatment of Management Compensation, Expense Reimbursements and Operating Partnership
Participation Interest
 Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate
Investment Trusts.
 22




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Accounting for Costs and Initial Rental Operations of Real Estate Projects.
 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases.
  Financial Condition, Liquidity and Capital Resources
  
    
    proceeds from the Offering and potential follow-on offerings, as well as our dividend reinvestment plan;
    
    proceeds from debt financings, including secured or unsecured facilities;
    
    cash flow generated by our real estate investments and operations; and
    
    advances from affiliates.
 Sources of Funds
 Our public offering
    Debt financings
   23




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
      Cash flow from real estate investments and operations
  
    
    We earned distributions of approximately $3.1 million and $918,000, respectively,
related to our investment in the Core Fund; and
    
    We earned distributions of approximately $2.8 million and zero, respectively, related
to properties we own directly.
  Advances from affiliates
  24




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
   Uses of Funds
 Real estate investments
     Payment of offering and other costs and expenses
   25




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
    Property Management and Leasing Agreements
  
    
    A property management fee equal to the lesser of 2.5% of the annual gross revenues
received from the properties or the amount of property management fees recoverable from
tenants of the property under the leases. We incurred property management fees of
approximately $209,000 for the quarter ended March 31, 2006. As of March 31, 2006 and
December 31, 2005, we had a liability for incurred and unpaid property management fees of
approximately $115,000 and $31,000, respectively, which has been included in due to
affiliates in the accompanying consolidated condensed balance sheets. We owned no direct
real estate investments during the quarter ended March 31, 2005, and accordingly, incurred
no property management fees for the quarter then ended.
    
    A leasing fee of 1.5% of gross revenues payable over the term of each executed lease
including any lease renewal, extension, expansion or similar event and certain construction
management and re-development construction management fees, in the event Hines renders such
services. We incurred leasing commissions of approximately $11,000 for the quarter ended
March 31, 2006 and had a liability of approximately $9,000 as of March 31, 2006 related to
such costs, which has been included in due to affiliates in the accompanying consolidated condensed balance sheets. We incurred no leasing, construction management or redevelopment fees during
the quarter ended March 31, 2005.
    
    We reimburse Hines for certain operating costs incurred in providing property management
and leasing services pursuant to the property management and leasing agreements. We
incurred reimbursable expenses of approximately $458,000 for the quarter ended March 31,
2006. This amount, net of repayments, resulted in a liability of approximately $342,000
and $100,000 as of March 31, 2006 and December 31, 2005, respectively, which has been
included in due to affiliates in the accompanying consolidated condensed balance sheets. We incurred no
reimbursable expenses for the quarter ended March 31, 2005.
 Dividends
   26




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
  Dividends for the Quarter Ended
    
    Date Paid
    
    Total DividendsMarch 31, 2006
    
    April 13, 2006
    
    $
    3,987,267December 31, 2005
    
    January 13, 2006
    
    $
    3,001,754September 30, 2005
    
    October 14, 2005
    
    $
    2,008,861June 30, 2005
    
    July 15, 2005
    
    $
    1,091,813March 31, 2005
    
    April 7, 2005
    
    $
    534,652December 31, 2004(1)
    
    January 14, 2005
    
    $
    99,149
 
 (1) We commenced operations on November 23, 2004. Dividends for the quarter
ended December 31, 2004 were declared for the period from November 23, 2004 through
December 31, 2004.   Results of Operations
   Direct Investments
  27




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Our Interest in the Core Fund
   Asset Management and Acquisition Fees
  General, Administrative and Other Expenses
   Loss Allocated to Minority Interests
  Off-Balance Sheet Arrangements
  28




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Subsequent Events
 Acquisition of 333 West Wacker
  Mortgage Agreement Secured by 1515 S Street
  Acquisition of 321 North Clark
   Capital Contribution to the Core Fund
  Current Public Offering
  29




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, continued
 Borrowings Under the Credit Facility
  Form of Property Management Agreement
  30




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##### Table of Contents



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




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##### Table of Contents



PART
II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Maximum Number (orTotal Number of
    
    Approximate DollarTotal
    
    
    
    
    
    Shares Purchased as
    
    Value) of Shares thatNumber of
    
    Average Price
    
    Part of Publicly
    
    May Yet be PurchasedShares
    
    Paid per Share
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    Programs
    
    ProgramsJanuary 1, 2006 to January 31, 2006
    
    
    7,043
    
    
    
    9.00
    
    
    
    7,043
    
    
    
    215,799February 1, 2006 to February 28, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215,799March 1 to March 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215,799Total
    
    
    7,043
    
    
    
    9.00
    
    
    
    7,043
   Type of Expense
    
    AmountUnderwriting discounts and commissions
    
    $
    16,011,273Finders fees
    
    
    Expenses paid to or for underwriters
    
    
    Other expenses paid to affiliates
    
    
    15,057,994Other expenses paid to non-affiliates
    
    
    Total expenses
    
    $
    31,069,267
  32




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##### Table of Contents



Type of Expense
    
    AmountConstruction of plant, building and facilities
    
    $
    Purchase of real estate interests
    
    
    126,643,035Acquisition of other businesses
    
    
    Repayment of indebtedness
    
    
    152,300,000
    (1)Working capital (as of March 31, 2006)
    
    
    9,076,217Temporary investments
    
    
    Other uses
    
    
    Total uses
    
    $
    288,019,252
 
 (1)
    
    These were principal payments made on our Credit Facility which was put in place to provide
financing for the purpose of acquiring our real estate investments.  
 Item 6. Exhibits.
  33




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##### Table of Contents



SIGNATURES
  HINES REAL ESTATE INVESTMENT
TRUST, INC.May 15, 2006
    By:
    /s/ Charles M. BaughnCharles M. BaughnChief Executive OfficerMay 15, 2006
    By:
    /s/ Sherri W. SchugartSherri W. SchugartChief Financial Officer 34




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation of Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 3.1 to Amendment
No. 5 to the registrants Registration Statement on Form S-11,
File No. 333-108780, on May 25, 2004 and incorporated herein by
reference).3.2
    
    
    Amended and Restated Bylaws of Hines Real Estate Investment
Trust, Inc. (filed as Exhibit 3.2 to Amendment No. 4 to the
registrants Registration Statement on Form S-11, File No.
333-108780, on May 4, 2004 and incorporated herein by
reference).3.3*
    
    
    Form of Property Management and Leasing Agreement between Hines REIT Properties, L.P. and Hines
Interests Limited Partnership.10.1
    
    
    Sixth Amendment, dated January 20, 2006, to Agreement of Sale,
dated October 12, 2005, by and between Miami RPFIV Airport
Corporate Center Associates Limited Liability Company and Hines
REIT Properties, L.P. (filed as Exhibit 10.55 to Post Effective
Amendment No. 7 to the Registration Statement, filed February
14, 2006, and incorporated herein by reference).10.2
    
    
    Purchase and Sale Agreement between Kan Am Grund
Kapitalanlagegesellschaft MBH and Hines-Sumisei U.S. Core Office
Properties, LP, dated as of March 10, 2006 (Filed as Exhibit
10.56 to the registrants Annual Report on Form 10-K for the
year ended December 31, 2005, filed March 29, 2006, and
incorporated herein by reference).10.3
    
    
    Purchase and Sale Agreement between 321 North Clark Realty
L.L.C. and Hines REIT Properties, LP, dated as of March 23, 2006
(Filed as Exhibit 10.57 to the registrants Annual Report on
Form 10-K for the year ended December 31, 2005, filed on March
29, 2006, and incorporated herein by reference).10.4
    
    
    Agreement of Purchase and Sale by and between WXIII/SCV Real
Estate Limited Partnership and Hines 720 Olive Way LP, dated as
of December 29, 2005, as amended by First Amendment, dated as of
January 6, 2006, and Second Amendment, dated January 11, 2006.
(Filed as Exhibit 10.58 to Post-Effective Amendment No. 8 to the
Registration Statement, filed on April 14, 2006, 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*
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C., Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to
SEC Release 34-47551 this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 
 *
    
    Filed herewith 35