UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      DC 20549FORM
      10-Qx QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2009ORo TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ____ to ____Commission
      file number 001-32649COGDELL
      SPENCER INC.(Exact
      name of registrant as specified in its
charter)
 
 Maryland
                20-3126457(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      No.)4401
      Barclay Downs Drive, Suite 300
                28209Charlotte,
      North Carolina
                (Zip
      code)(Address
      of principal executive offices)(704)
      940-2900(Registrant’s
      telephone number, including area code)N/A(Former
      name, former address and former fiscal year, if changed since last
      report)
  Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x No  o
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES  o NO  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
 Large
      accelerated filer o
                Accelerated
      filer x
                Non-accelerated
      filer o
                Smaller
      reporting company o.(Do
      not check if a smaller reporting
company)
  Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). o Yes x No
 Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock as of the latest practicable date: 42,534,980 shares of common
      stock, par value $.01 per share, outstanding as of August 5,
      2009.
  
 
  TABLE
OF CONTENTS
 PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1
                Financial
      Statements
                1Item
      2
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                24Item
      3
                Quantitative
      and Qualitative Disclosures about Market Risk
                39Item
      4
                Controls
      and Procedures
                39PART
      II
                Other
      InformationItem
      1
                Legal
      Proceedings
                39Item
      1A
                Risk
      Factors
                39Item
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                39Item
      3
                Defaults
      Upon Senior Securities
                39Item
      4
                Submission
      of Matters to a Vote of Security Holders
                40Item
      5
                Other
      Information
                40Item
      6
                Exhibits
                40
 
  PART
I. FINANCIAL INFORMATION
  ITEM
1. FINANCIAL STATEMENTS
  COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except per share amounts)
 (unaudited)
 June
      30,
                  2009
                
                
                December
      31,
                  2008AssetsReal
      estate properties:Land
                
                $
                30,673
                
                
                $
                30,673Buildings
      and improvements
                
                
                504,618
                
                
                
                501,259Less:
      Accumulated depreciation
                
                
                (81,612
                )
                
                
                (69,285
                )Net
      operating real estate properties
                
                
                453,679
                
                
                
                462,647Construction
      in progress
                
                
                36,419
                
                
                
                15,314Net
      real estate properties
                
                
                490,098
                
                
                
                477,961Cash
      and cash equivalents
                
                
                13,408
                
                
                
                34,668Restricted
      cash
                
                
                13,082
                
                
                
                12,964Tenant
      and accounts receivable, net of allowance of $204 in 2009 and $194 in
      2008
                
                
                30,318
                
                
                
                43,523Goodwill
                
                
                108,683
                
                
                
                180,435Trade
      names and trademarks
                
                
                41,240
                
                
                
                75,969Intangible
      assets, net of accumulated amortization of $44,438 in 2009 and $38,054 in
      2008
                
                
                24,542
                
                
                
                45,363Other
      assets
                
                
                29,597
                
                
                
                29,207Total
      assets
                
                $
                750,968
                
                
                $
                900,090Liabilities
      and equityMortgage
      notes payable
                
                $
                255,622
                
                
                $
                240,736Revolving
      credit facility
                
                
                80,000
                
                
                
                124,500Term
      loan
                
                
                50,000
                
                
                
                100,000Accounts
      payable
                
                
                17,504
                
                
                
                22,090Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                21,556
                
                
                
                17,025Deferred
      income taxes
                
                
                13,706
                
                
                
                34,176Payable
      to prior Erdman shareholders
                
                
                18,002
                
                
                
                18,002Other
      liabilities
                
                
                46,068
                
                
                
                60,567Total
      liabilities
                
                
                502,458
                
                
                
                617,096Commitments
      and contingencies Equity:Cogdell
      Spencer Inc. stockholders’ equity:Preferred
      stock, $0.01 par value; 50,000 shares authorized, none issued or
      outstanding
                
                
                —
                
                
                
                —Common
      stock; $0.01 par value; 200,000 shares authorized, 42,526 and 17,699
      shares issued and outstanding in 2009 and 2008,
    respectively
                
                
                425
                
                
                
                177Additional
      paid-in capital
                
                
                369,484
                
                
                
                275,380Accumulated
      other comprehensive loss
                
                
                (2,221
                )
                
                
                (5,106
                )Accumulated
      deficit
                
                
                (158,598
                )
                
                
                (77,438
                )Total
      Cogdell Spencer Inc. stockholders’ equity
                
                
                209,090
                
                
                
                193,013Noncontrolling
      interests:Real
      estate partnerships
                
                
                5,442
                
                
                
                4,657Operating
      partnership
                
                
                33,978
                
                
                
                85,324Total
      noncontrolling interests
                
                
                39,420
                
                
                
                89,981Total
      equity
                
                
                248,510
                
                
                
                282,994Total
      liabilities and equity
                
                $
                750,968
                
                
                $
                900,090
  See notes
to condensed consolidated financial statements.
 1
  COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except per share amounts)
 (unaudited)
 For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30,
                  2009
                
                
                June
      30,
                  2008
                
                
                June
      30,
                  2009
                
                
                June
      30,
                  2008Revenues:Rental
      revenue
                
                $
                19,662
                
                
                $
                19,300
                
                
                $
                39,328
                
                
                $
                37,991Design-Build
      contract revenue and other sales
                
                
                36,712
                
                
                
                78,021
                
                
                
                83,101
                
                
                
                101,956Property
      management and other fees
                
                
                863
                
                
                
                835
                
                
                
                1,713
                
                
                
                1,672Development
      management and other income
                
                
                227
                
                
                
                110
                
                
                
                3,027
                
                
                
                129Total
      revenues
                
                
                57,464
                
                
                
                98,266
                
                
                
                127,169
                
                
                
                141,748Expenses:Property
      operating and management
                
                
                7,884
                
                
                
                7,841
                
                
                
                15,812
                
                
                
                15,040Design-Build
      contracts and development management
                
                
                31,242
                
                
                
                66,286
                
                
                
                71,407
                
                
                
                87,330Selling,
      general, and administrative
                
                
                6,675
                
                
                
                8,488
                
                
                
                13,342
                
                
                
                12,789Depreciation
      and amortization
                
                
                8,978
                
                
                
                12,380
                
                
                
                19,089
                
                
                
                21,404Impairment
      charges
                
                
                —
                
                
                
                —
                
                
                
                120,920
                
                
                
                —Total
      expenses
                
                
                54,779
                
                
                
                94,995
                
                
                
                240,570
                
                
                
                136,563Income
      (loss) from operations before other income (expense) and income tax
      benefit (expense)
                
                
                2,685
                
                
                
                3,271
                
                
                
                (113,401
                )
                
                
                5,185Other
      income (expense):Interest
      and other income
                
                
                139
                
                
                
                218
                
                
                
                295
                
                
                
                473Interest
      expense
                
                
                (5,594
                )
                
                
                (6,857
                )
                
                
                (11,620
                )
                
                
                (11,952
                )Debt
      extinguishment and interest rate derivative expense
                
                
                (2,490
                )
                
                
                —
                
                
                
                (2,490
                )
                
                
                —Equity
      in earnings of unconsolidated real estate partnerships
                
                
                2
                
                
                
                5
                
                
                
                8
                
                
                
                7Total
      other income (expense)
                
                
                (7,943
                )
                
                
                (6,634
                )
                
                
                (13,807
                )
                
                
                (11,472
                )Loss
      from operations before income tax benefit (expense)
                
                
                (5,258
                )
                
                
                (3,363
                )
                
                
                (127,208
                )
                
                
                (6,287
                )Income
      tax benefit (expense)
                
                
                2,208
                
                
                
                (383
                )
                
                
                21,834
                
                
                
                (740
                )Net
      loss
                
                
                (3,050
                )
                
                
                (2,980
                )
                
                
                (105,374
                )
                
                
                (5,547
                )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                
                
                (48
                )
                
                
                48
                
                
                
                (141
                )
                
                
                62Operating
      partnership
                
                
                783
                
                
                
                1,089
                
                
                
                32,982
                
                
                
                1,841Net
      loss attributable to Cogdell Spencer Inc.
                
                $
                (2,315
                )
                
                $
                (1,843
                )
                
                $
                (72,533
                )
                
                $
                (3,644
                )Net
      loss per share attributable to Cogdell Spencer Inc. - basic and
      diluted
                
                $
                (0.09
                )
                
                $
                (0.12
                )
                
                $
                (3.21
                )
                
                $
                (0.24
                )Weighted
      average common shares - basic and diluted
                
                
                27,088
                
                
                
                15,393
                
                
                
                22,569
                
                
                
                14,879
  See notes
to condensed consolidated financial statements.
 2
  COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 (In
thousands)
 (unaudited)
 Cogdell
      Spencer Inc. StockholdersTotal
                  Equity
                
                
                Comprehensive
                  Loss
                
                
                Accumulated
                  Deficit
                
                
                Accumulated
                  Other
                  Comprehensive
                  Loss
                
                
                Common
                  Stock
                
                
                Additional
                  Paid-in
                  Capital
                
                
                Noncontrolling
                  Interests
      in
                  Operating
                  Partnership
                
                
                Noncontrolling
                  Interests
      in
                  Real
      Estate
                  PartnershipsBalance
      at December 31, 2008
                
                $
                282,994
                
                
                $
                —
                
                
                $
                (77,438
                )
                
                $
                (5,106
                )
                
                $
                177
                
                
                $
                275,380
                
                
                $
                85,324
                
                
                $
                4,657Comprehensive
      loss:Net
      income (loss)
                
                
                (105,374
                )
                
                
                (105,374
                )
                
                
                (72,533
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (32,982
                )
                
                
                141Unrealized
      gain on interest rate swaps, net of tax
                
                
                4,806
                
                
                
                4,806
                
                
                
                —
                
                
                
                3,359
                
                
                
                —
                
                
                
                —
                
                
                
                531
                
                
                
                916Comprehensive
      loss
                
                
                (100,568
                )
                
                $
                (100,568
                )Issuance
      of common stock, net of costs
                
                
                76,527
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                230
                
                
                
                76,297
                
                
                
                —
                
                
                
                —Conversion
      of operating partnership units to common stock
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                (474
                )
                
                
                18
                
                
                
                17,695
                
                
                
                (17,239
                )
                
                
                —Restricted
      stock and LTIP unit grants
                
                
                818
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                80
                
                
                
                738
                
                
                
                —Amortization
      of restricted stock grants
                
                
                50
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                32
                
                
                
                18
                
                
                
                —Dividends
      and distributions
                
                
                (11,311
                )
                
                
                
                
                
                
                (8,627
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,412
                )
                
                
                (272
                )Balance
      at June 30, 2009
                
                $
                248,510
                
                
                
                
                
                
                $
                (158,598
                )
                
                $
                (2,221
                )
                
                $
                425
                
                
                $
                369,484
                
                
                $
                33,978
                
                
                $
                5,442
  See notes
to condensed consolidated financial statements.
 3
 
 COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 (In
thousands)
 (unaudited)
 Cogdell
      Spencer Inc. StockholdersTotal
                  Equity
                
                
                Comprehensive
                  Loss
                
                
                Accumulated
                  Deficit
                
                
                Accumulated
                  Other
                  Comprehensive
                  Loss
                
                
                Common
                  Stock
                
                
                Additional
                  Paid-in
                  Capital
                
                
                Noncontrolling
                  Interests
      in
                  Operating
                  Partnership
                
                
                Noncontrolling
                  Interests
      in
                  Real
      Estate
                  PartnershipsBalance
      at December 31, 2007
                
                $
                162,256
                
                
                $
                —
                
                
                $
                (50,751
                )
                
                $
                (884
                )
                
                $
                119
                
                
                $
                166,901
                
                
                $
                44,437
                
                
                $
                2,434Comprehensive
      loss:Net
      loss
                
                
                (5,547
                )
                
                
                (5,547
                )
                
                
                (3,644
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1,841
                )
                
                
                (62
                )Unrealized
      gain on interest rate swaps, net of tax
                
                
                1,347
                
                
                
                1,347
                
                
                
                —
                
                
                
                753
                
                
                
                —
                
                
                
                —
                
                
                
                560
                
                
                
                34Comprehensive
      loss
                
                
                (4,200
                )
                
                $
                (4,200
                )Issuance
      of common stock and operating partnership units,  net of
      costs
                
                
                111,182
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                35
                
                
                
                53,738
                
                
                
                57,409
                
                
                
                —Investment
      in real estate costs contributed by partner in a consolidated real estate
      partnership
                
                
                206
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                206Redemptions
      of operating partnership units
                
                
                (413
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —
                
                
                
                
                
                
                
                (413
                )
                
                
                —Restricted
      stock and LTIP unit grants
                
                
                843
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                94
                
                
                
                749
                
                
                
                —Amortization
      of restricted stock grants
                
                
                50
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                32
                
                
                
                18
                
                
                
                —Dividends
      and distributions
                
                
                (17,198
                )
                
                
                
                
                
                
                (10,788
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (6,331
                )
                
                
                (79
                )Adjustment
      to record change of interest in the operating partnership due to the
      issuance of operating partnership units in excess of book
      value
                
                
                14,502
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                15,305
                
                
                
                (803
                )
                
                
                —Balance
      at June 30, 2008
                
                $
                267,228
                
                
                
                
                
                
                $
                (65,183
                )
                
                $
                (131
                )
                
                $
                154
                
                
                $
                236,070
                
                
                $
                93,785
                
                
                $
                2,533
  See notes
to condensed consolidated financial statements.
 4
  COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (unaudited)
 For
      the Six Months EndedJune
      30,
                  2009
                
                
                June
      30,
                  2008Operating
      activities:Net
      loss
                
                $
                (105,374
                )
                
                $
                (5,547
                )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
                
                
                19,089
                
                
                
                21,404Amortization
      of acquired above market leases and acquired below market leases,
      net
                
                
                (255
                )
                
                
                (369
                )Straight
      line rental revenue
                
                
                (235
                )
                
                
                (263
                )Amortization
      of deferred finance costs and debt premium
                
                
                824
                
                
                
                482Deferred
      income taxes
                
                
                (21,223
                )
                
                
                (1,103
                )Equity-based
      compensation
                
                
                868
                
                
                
                894Equity
      in earnings of unconsolidated real estate partnerships
                
                
                (8
                )
                
                
                (7
                )Change
      ini fair value of interest rate swap agreements
                
                
                (315
                )
                
                
                —Debt
      extinguishment and interest rate derivative expense
                
                
                2,490
                
                
                
                —Impairment
      of intangible assets
                
                
                120,920
                
                
                
                —Changes
      in operating assets and liabilities:Tenant
      and accounts receivable and other assets
                
                
                13,264
                
                
                
                4,171Accounts
      payable and other liabilities
                
                
                (17,640
                )
                
                
                (14,290
                )Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                
                
                4,531
                
                
                
                (4,338
                )Net
      cash provided by operating activities
                
                
                16,936
                
                
                
                1,034Investing
      activities:Business
      acquisitions, net of cash acquired
                
                
                —
                
                
                
                (130,586
                )Investment
      in real estate properties
                
                
                (20,530
                )
                
                
                (28,590
                )Purchase
      of noncontrolling interests in operating partnership
                
                
                —
                
                
                
                (281
                )Proceeds
      from sales-type capital lease
                
                
                153
                
                
                
                153Purchase
      of corporate property, plant and equipment
                
                
                (1,287
                )
                
                
                (568
                )Distributions
      received from unconsolidated real estate partnerships
                
                
                5
                
                
                
                5Increase
      in restricted cash
                
                
                (118
                )
                
                
                (11,176
                )Net
      cash used in investing activities
                
                
                (21,777
                )
                
                
                (171,043
                )Financing
      activities:Proceeds
      from mortgage notes payable
                
                
                25,940
                
                
                
                1,778Repayments
      of mortgage notes payable
                
                
                (11,018
                )
                
                
                (1,535
                )Proceeds
      from revolving credit facility
                
                
                2,000
                
                
                
                94,500Repayments
      to revolving credit facility
                
                
                (46,500
                )
                
                
                (59,700
                )Proceeds
      from term loan
                
                
                —
                
                
                
                100,000Repayment
      of term loan
                
                
                (50,000
                )Net
      proceeds from sale of common stock
                
                
                76,527
                
                
                
                53,773Dividends
      and distributions
                
                
                (12,143
                )
                
                
                (14,244
                )Equity
      contribution from noncontrolling interest in real estate
      partnerships
                
                
                —
                
                
                
                206Distributions
      to noncontrolling interests in real estate partnerships
                
                
                (272
                )
                
                
                (79
                )Payment
      of deferred financing costs
                
                
                (953
                )
                
                
                (3,157
                )Net
      cash provided by (used in) financing activities
                
                
                (16,419
                )
                
                
                171,542Increase
      (decrease) in cash and cash equivalents
                
                
                (21,260
                )
                
                
                1,533Balance
      at beginning of period
                
                
                34,668
                
                
                
                3,555Balance
      at end of period
                
                $
                13,408
                
                
                $
                5,088Supplemental
      disclosure of cash flow information:Cash
      paid for interest, net of capitalized interest
                
                $
                10,685
                
                
                $
                9,534Cash
      paid for income taxes
                
                $
                10
                
                
                $
                2,579Supplemental
      cash flow information - noncash investing and financing
      activities:Operating
      Partnership Units converted into common stock
                
                $
                17,714
                
                
                $
                —Investment
      in real estate properties included in accounts payable and other
      liabilities
                
                
                4,455
                
                
                
                2,045Accrued
      dividends and distributions
                
                
                5,007
                
                
                
                8,633Operating
      Partnership Units issued or to be issued in connection with the
      acquisition of a business or real estate property
                
                
                —
                
                
                
                81,673
  See notes
to condensed consolidated financial statements.
 5
  COGDELL
SPENCER INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.
                Business
      Description
  Cogdell
Spencer Inc., incorporated in Maryland in 2005, together with its subsidiaries
(the “Company”) is a fully-integrated, self-administered, and self-managed real
estate investment trust (“REIT”) that invests in specialty office buildings for
the medical profession, including medical offices and ambulatory surgery and
diagnostic centers. The Company focuses on the ownership, delivery, acquisition,
and management of strategically located medical office buildings and other
healthcare related facilities in the United States of America. The Company has
been built around understanding and addressing the full range of specialized
real estate needs of the healthcare industry. The Company operates its business
through Cogdell Spencer LP, its operating partnership subsidiary (the “Operating
Partnership”), and its subsidiaries. The Company has two segments: (1) Property
Operations and (2) Design-Build and Development. Property Operations owns and
manages properties and manages properties for third parties. Design-Build and
Development provides strategic planning, design, construction, development, and
project management services for properties owned by the Company and for third
parties.
 2.
                Summary
      of Significant Accounting
Policies
  Basis of
Presentation
  The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (“GAAP”) and represent the assets and liabilities and operating results
of the Company. The condensed consolidated financial statements include the
Company’s accounts, its wholly-owned subsidiaries, as well as the Operating
Partnership and its subsidiaries. The condensed consolidated financial
statements also include any partnerships for which the Company or its
subsidiaries is the general partner or the managing member and the rights of the
limited partners do not overcome the presumption of control by the general
partner or managing member. All significant intercompany balances and
transactions have been eliminated in consolidation.
  The
Company reviews its interests in entities to determine if the entity’s assets,
liabilities, noncontrolling interests and results of activities should be
included in the condensed consolidated financial statements in accordance with
Financial Accounting Standards Board (“FASB”) Interpretation No. 46R,
“Consolidation of Variable Interest Entities,” Emerging Issues Task Force
(“EITF”) 04-5 “Determining Whether a General Partner, or the General Partners as
a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights” and Accounting Research Bulletin No. 51,
“Consolidated Financial Statements.”
  Interim
Financial Statements
  The
condensed consolidated financial statements for the three and six months ended
June 30, 2009 and 2008 is unaudited, but includes all adjustments, consisting of
normal recurring adjustments that, in the opinion of management, are necessary
for a fair presentation of the Company’s financial position, results of
operations, and cash flows for such periods. Operating results for the three and
six months ended June 30, 2009 and 2008 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal
years of 2009 or 2008 or any other future period. These condensed consolidated
financial statements do not include all disclosures required by GAAP for annual
consolidated financial statements. The Company’s audited condensed consolidated
financial statements are contained in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008 and should be read in conjunction with
these interim financial statements.
  Use of Estimates
in Financial Statements
  The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Significant estimates and assumptions are
used by management in determining the percentage of completion revenue, useful
lives of real estate properties and improvements, the initial valuations and
underlying allocations of purchase price in connection with business and real
estate property acquisitions, and projected cash flow and fair value estimates
used for impairment testing. Actual results may differ from those
estimates.
 6
  Fair
Value Measurements
  SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”) defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. The Company implemented the requirement of SFAS 157 for its
financial assets and liabilities on January 1, 2008. In accordance with FASB
Staff Position No. FAS 157-2, “Effective Date of FASB Statement No 157,” the
Company implemented SFAS 157 for all nonfinancial assets and nonfinancial
liabilities on January 1, 2009. The adoption of SFAS No. 157 for non-financial
assets and liabilities on January 1, 2009 did not have a material impact on the
Company’s consolidated financial position or results of operations.
  SFAS
157 utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. Fair values
determined by Level 1 inputs utilize observable inputs such as quoted prices in
active markets for identical assets or liabilities we have the ability to
access. Fair values determined by Level 2 inputs utilize inputs other than
quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs include quoted prices
for similar assets and liabilities in active markets and inputs other than
quoted prices observable for the asset or liability. Level 3 inputs are
unobservable inputs for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. In
instances in which the inputs used to measure fair value may fall into different
levels of the fair value hierarchy, the level in the fair value hierarchy within
which the fair value measurement in its entirety has been determined is based on
the lowest level input significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
  To
obtain fair values, observable market prices are used if available. In some
instances, observable market prices are not readily available for certain
financial instruments and fair value is determined using present value or other
techniques appropriate for a particular financial instrument. These techniques
involve some degree of judgment and as a result are not necessarily indicative
of the amounts the Company would realize in a current market exchange. The use
of different assumptions or estimation techniques may have a material effect on
the estimated fair value amounts.
  The
Company does not hold or issue financial instruments for trading purposes. The
Company considers the carrying amounts of cash and cash equivalents, restricted
cash, tenant and accounts receivable, accounts payable, and other liabilities to
approximate fair value due to the short maturity of these instruments. The
Company has estimated the fair value of debt utilizing present value techniques.
At June 30, 2009, the carrying amount and estimated fair value of debt was
$385.6 million and $380.0 million, respectively. At December 31, 2008, the
carrying amount and estimated fair value of debt was $465.2 million and $453.8
million, respectively.
  See
Note 6 regarding the write-down of the Company’s goodwill and certain intangible
assets to implied fair market value. See Note 8 regarding the fair value of the
Company’s interest rate swap agreements.
  Concentrations
and Credit Risk
  The
Company maintains its cash in commercial banks. Balances on deposit are insured
by the Federal Deposit Insurance Corporation (“FDIC”) up to specific limits.
Balances on deposit in excess of FDIC limits are uninsured. At June 30, 2009,
the Company had bank cash balances of $14.8 million in excess of FDIC insured
limits.
  One
customer accounted for more than 10% of tenant and accounts receivable at June
30, 2009 and 2008. Two customers and one customer accounted for more than 10% of
revenue for the three and six months ended June 30, 2009, respectively. Zero
customers accounted for more than 10% of revenue for the three and six months
ended June 30, 2008.
  Subsequent
Events
  The
Company evaluates significant unusual or infrequent events occurring after the
financial statement date through the date the financial statements are issued,
or available to be issued, to determine if additional disclosures are needed. As
of August 10, 2009, the date the financial statements were available to be
issued, no significant events have been identified.
 7
  Recent
Accounting Pronouncements
  In
December 2007, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 141(Revised), “Business Combinations — a replacement of FASB
Statement No. 141” (“SFAS 141R), which significantly changes the principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This statement is effective prospectively, except for
certain retrospective adjustments to deferred tax balances, for fiscal years
beginning after December 15, 2008. The Company implemented SFAS 141R effective
January 1, 2009. The adoption of SFAS 141R had no impact on the Company’s
balance sheet, statement of operations, or changes in equity on January 1,
2009.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS 160”). SFAS
160 changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years, except for the presentation and
disclosure requirements, which will apply retrospectively. The Company
implemented SFAS 160 effective January 1, 2009 and has applied the presentation
and disclosure requirements retrospectively. The adoption of SFAS 160 has
resulted in an increase to equity as of December 31, 2008 of $94.0 million for
the reclassification of minority interest to equity for noncontrolling interests
in consolidated entities. The adoption of SFAS 160 has resulted in a $4.1
million reclassification of Accumulated Other Comprehensive Loss from Cogdell
Spencer Inc. stockholders’ equity to noncontrolling interests as of December 31,
2008. Also, net loss for the three and six months ended June 30, 2008 has
increased by $1.1 and $1.9 million for the reclassification of loss allocated to
noncontrolling interests; however, net loss per common share attributable to
Cogdell Spencer Inc. – basic and diluted was not affected by this
reclassification.
  In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 is intended to provide users of financial statements with
an enhanced understanding of derivative instruments and hedging activities by
having the Company disclose: (1) how and why the Company uses derivative
instruments; (2) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations; and (3) how
derivative instruments and related hedged items affect the Company’s financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages, but
does not require, comparative disclosures for earlier periods at initial
adoption. The adoption of SFAS 161 had no impact on the Company’s balance sheet,
statement of operations, or changes in equity on January 1, 2009. See Note 8 for
additional disclosures.
  In
June 2008, the FASB issued FSP EITF 03-06-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities” (“FSP
EITF 03-06-1”). FSP EITF 03-06-1 clarifies that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per common unit pursuant to the two-class method.
FSP EITF 03-06-1 requires the retrospective adjustment of all prior-period
earnings per common unit data presented (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of the FSP. As a result, the Company’s unvested LTIP Units and
restricted stock are considered participating securities and are included in the
computation of basic and diluted earnings per common share of the Company if the
effect of applying the if-converted method is dilutive. The adoption of FSP
03-6-1 did not have a material impact on the Company’s computation of earnings
per common share.
  In
November 2008, the EITF reached a consensus on EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations.” EITF 08-6 states that (1) the
determination of the initial carrying value of an equity method investment
should be made by applying the cost accumulation model described in SFAS No.
141(R); (2) the other-than-temporary impairment model of APB Opinion No. 18
should be used when testing equity method investments for impairments; (3) share
issuances by the investee should be accounted for as if the equity method
investor had sold a proportionate share of its investment; and 4) when the
investment is no longer within the scope of equity method accounting, the
investor should prospectively apply the provisions of SFAS No. 115 and use the
carrying amount of the investment as its initial cost. EITF 08-6 is effective
for transactions occurring in fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The adoption of EITF 08-6
had no impact on the Company’s balance sheet, statement of operations, or
changes in equity.
 8
  In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures
About Fair Value of Financial Instruments” (“FSP No. FAS 107-1”). FSP No. FAS
107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair-value of financial instruments
for interim reporting periods of publicly-traded companies as well as in annual
financial statements. FSP No. FAS 107-1 also amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. FSP No. FAS 107-1 is effective for
interim reporting periods ending after June 15, 2009. The adoption of FSP No.
FAS 107-1 resulted in additional disclosures. See Note 8 for additional
disclosures.
  In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which
requires an entity to disclose the date through which it has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 is effective for interim and annual reporting periods ending after June 15,
2009. The adoption of SFAS 165 had no impact on the Company’s balance sheet,
statement of operations, or changes in equity.
  In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”). The objective of SFAS 167 is to amend certain requirements
of FASB Interpretation No. 46 (revised December 2003), “Consolidation of
Variable Interest Entities,” (“FIN 46”) to improve financial reporting by
enterprises involved with variable interest entities (“VIE”) and to provide more
relevant and reliable information to users of financial statements. SFAS 167 no
longer exempts qualifying special-purpose entities from the scope of FIN 46. In
addition, the amended guidance requires the continuous reconsideration for
determining whether an enterprise is the primary beneficiary of another entity,
and ignores kick-out rights unless the rights are held by a single enterprise.
Consolidation is required if an entity has power and receives benefits or
absorbs losses that are potentially significant to the VIE. However,
consolidation is not necessary if power is shared amongst unrelated parties.
SFAS 167 requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement
in a VIE. SFAS 167 is effective for interim and annual reporting periods
beginning after November 15, 2009. The Company does not expect SFAS 167 to have
a material impact on the Company’s balance sheet, statement of operations, or
changes in equity.
  In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - A
Replacement of FASB Statement No. 162” (“SFAS 168”). The objective is to replace
SFAS 162 and to establish the FASB Accounting Standards Codification as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. SFAS 168 does not change GAAP. SFAS 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company does not expect SFAS 165 to have a material
impact on the Company’s balance sheet, statement of operations, or changes in
equity.
 3.
                Investments
      in Real Estate Partnerships
  As
of June 30, 2009, the Company had an ownership interest in eight limited
liability companies or limited partnerships.
  The
following is a description of the unconsolidated entities:
 ●
                  Cogdell
      Spencer Medical Partners LLC, a Delaware limited liability company,
      founded in 2008, has no assets as of June 30, 2009, and is 20.0% owned by
      the Company;●
                  BSB
      Health/MOB Limited Partnership No. 2, a Delaware limited partnership,
      founded in 2002, owns nine medical office buildings, and is 2.0% owned by
      the Company;●
                  Shannon
      Health/MOB Limited Partnership No. 1, a Delaware limited partnership,
      founded in 2001, owns ten medical office buildings, and is 2.0% owned by
      the Company; and●
                  McLeod
      Medical Partners, LLC, a South Carolina limited liability company, founded
      in 1982, owns three medical office buildings, and is 1.1% owned by the
      Company.
 9
 
 The
      following is a description of the consolidated
entities:●
                  Genesis
      Property Holdings, LLC, a Florida limited liability company, founded in
      2007, has one medical office building under construction, and is 40.0%
      owned by the Company;●
                  Cogdell
      General Health Campus MOB, LP, a Pennsylvania limited partnership, founded
      in 2006, owns one medical office building, and is 80.9% owned by the
      Company;●
                  Mebane
      Medical Investors, LLC, a North Carolina limited liability company,
      founded in 2006, owns one medical office building, and is 35.1% owned by
      the Company; and●
                  Rocky
      Mount MOB, LLC, a North Carolina limited liability company, founded in
      2002, owns one medical office building, and is 34.5% owned by the
      Company.
  The
Company is the general partner or managing member of these real estate
partnerships and manages the properties owned by these entities. The Company may
receive design/build revenue, development fees, property management fees,
leasing fees, and expense reimbursements from these real estate partnerships.
For the consolidated entities, these revenues and fees are eliminated in
consolidation.
  The
consolidated entities are included in the Company’s condensed consolidated
financial statements because the limited partners or non-managing members do not
have sufficient participation rights in the partnerships to overcome the
presumption of control by the Company as the managing member or general partner.
The limited partners or non-managing members have certain protective rights such
as the ability to prevent the sale of building, the dissolution of the
partnership or limited liability company, or the incurrence of additional
indebtedness, in each case subject to certain exceptions.
  The
Company has a 2.0% ownership in Shannon Health/MOB Limited Partnership No. 1 and
a 2.0% ownership in BSB Health/MOB Limited Partnership No. 2. These ownership
interests were assumed as part of the Consera acquisition (see Note 4 to the
condensed consolidated financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 2008). The partnership agreements and
tenant leases of the limited partners are designed to give preferential
treatment to the limited partners as to the operating cash flows from the
partnerships. The Company, as the general partner, does not generally
participate in the operating cash flows from these entities other than to
receive property management fees. The limited partners can remove the Company as
the property manager and as the general partner. Due to the structures of the
partnership agreements and tenant lease agreements, the Company reports the
properties owned by these two joint ventures as fee managed properties owned by
third parties.
  The
unconsolidated entities are accounted for under the equity method of accounting
based on the Company’s ability to exercise significant influence as the entity’s
managing member or general partner. The following is a summary of financial
information for the unconsolidated entities for the periods indicated and
reflects the financial position and operations of these entities, not just the
Company’s interest in the entities (in thousands):
 June
      30,
                                                                            2009
                                                                          
                                                                          
                                                                          December
      31,
                                                                            2008Financial
      position:Total
      assets
                                                                          
                                                                          $
                                                                          56,137
                                                                          
                                                                          
                                                                          $
                                                                          56,262Total
      liabilities
                                                                          
                                                                          
                                                                          49,575
                                                                          
                                                                          
                                                                          
                                                                          49,831Members’
      equity
                                                                          
                                                                          
                                                                          6,562
                                                                          
                                                                          
                                                                          
                                                                          6,431For
      the Three Months Ended
                                                                          
                                                                          
                                                                          For
      the Six Months EndedJune
      30, 2009
                                                                          
                                                                          
                                                                          June
      30, 2008
                                                                          
                                                                          
                                                                          June
      30, 2009
                                                                          
                                                                          
                                                                          June
      30, 2008Results
      of operations:Total
      revenues
                                                                          
                                                                          $
                                                                          3,091
                                                                          
                                                                          
                                                                          $
                                                                          3,117
                                                                          
                                                                          
                                                                          $
                                                                          6,232
                                                                          
                                                                          
                                                                          $
                                                                          6,104Operating
      and general and administrative expenses
                                                                          
                                                                          
                                                                          1,542
                                                                          
                                                                          
                                                                          
                                                                          1,202
                                                                          
                                                                          
                                                                          
                                                                          2,859
                                                                          
                                                                          
                                                                          
                                                                          2,664Net
      income
                                                                          
                                                                          
                                                                          143
                                                                          
                                                                          
                                                                          
                                                                          525
                                                                          
                                                                          
                                                                          
                                                                          556
                                                                          
                                                                          
                                                                          
                                                                          608
 10
  4.
                  Business
      Segments
  The
Company has two identified reportable segments: (1) Property Operations and (2)
Design-Build and Development. The Company defines business segments by their
distinct customer base and service provided. Each segment operates under a
separate management group and produces discrete financial information, which is
reviewed by the chief operating decision maker to make resource allocation
decisions and assess performance. Inter-segment sales and transfers are
accounted for as if the sales and transfers were made to third parties, which
involves applying a negotiated fee onto the costs of the services performed. All
inter-company balances and transactions are eliminated during the consolidation
process.
  The
Company’s management evaluates the operating performance of its operating
segments based on funds from operations (“FFO”) and funds from operations
modified (“FFOM”). FFO, as defined by the National Association of Real Estate
Investment Trusts, or NAREIT, represents net income (computed in accordance with
GAAP), excluding gains from sales of property, plus real estate depreciation and
amortization (excluding amortization of deferred financing costs) and after
adjustments for unconsolidated partnerships and joint ventures. The Company
adjusts the NAREIT definition to add back noncontrolling interests in real
estate partnerships before real estate related depreciation and amortization.
FFOM adds back to FFO non-cash amortization of non-real estate related
intangible assets associated with purchase accounting. The Company considers FFO
and FFOM important supplemental measures of the Company’s operational
performance. The Company believes FFO is frequently used by securities analysts,
investors and other interested parties in the evaluation of REITs, many of which
present FFO when reporting their results. The Company believes that FFOM allows
securities analysts, investors and other interested parties in evaluating
current period results to results prior to the Erdman transaction. FFO and FFOM
are intended to exclude GAAP historical cost depreciation and amortization of
real estate and related assets, which assumes that the value of real estate
assets diminishes ratably over time. Historically, however, real estate values
have risen or fallen with market conditions. Because FFO and FFOM exclude
depreciation and amortization unique to real estate, gains and losses from
property dispositions and extraordinary items, it provides a performance measure
that, when compared year over year, reflects the impact to operations from
trends in occupancy rates, rental rates, operating costs, development activities
and interest costs, providing perspective not immediately apparent from net
income. The Company’s methodology may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, FFO and FFOM do not represent amounts
available for management’s discretionary use because of needed capital
replacement or expansion, debt service obligations, or other commitments and
uncertainties.
 11
  The
following tables represent the segment information for the three and six months
ended June 30, 2009 and 2008 (in thousands):
 Three
      months ended June 30, 2009:
                      
                      Property
                        Operations
                      
                      
                      Design-Build
                        and
                        Development
                      
                      
                      Intersegment
                        Eliminations
                      
                      
                      Unallocated
                        and
      Other
                      
                      
                      TotalRevenues:Rental
      revenue
                      
                      $
                      19,685
                      
                      
                      $
                      —
                      
                      
                      $
                      (23
                      )
                      
                      $
                      —
                      
                      
                      $
                      19,662Design-Build
      contract revenue and other sales
                      
                      
                      —
                      
                      
                      
                      42,009
                      
                      
                      
                      (5,297
                      )
                      
                      
                      —
                      
                      
                      
                      36,712Property
      management and other fees
                      
                      
                      863
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      863Development
      management and other income
                      
                      
                      —
                      
                      
                      
                      1,434
                      
                      
                      
                      (1,207
                      )
                      
                      
                      —
                      
                      
                      
                      227Total
      revenues
                      
                      
                      20,548
                      
                      
                      
                      43,443
                      
                      
                      
                      (6,527
                      )
                      
                      
                      —
                      
                      
                      
                      57,464Certain
      operating expenses:Property
      operating and management
                      
                      
                      7,884
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7,884Design-Build
      contracts and development management
                      
                      
                      —
                      
                      
                      
                      35,948
                      
                      
                      
                      (4,706
                      )
                      
                      
                      —
                      
                      
                      
                      31,242Selling,
      general, and administrative
                      
                      
                      —
                      
                      
                      
                      4,122
                      
                      
                      
                      (23
                      )
                      
                      
                      —
                      
                      
                      
                      4,099Total
      certain operating expenses
                      
                      
                      7,884
                      
                      
                      
                      40,070
                      
                      
                      
                      (4,729
                      )
                      
                      
                      —
                      
                      
                      
                      43,22512,664
                      
                      
                      
                      3,373
                      
                      
                      
                      (1,798
                      )
                      
                      
                      —
                      
                      
                      
                      14,239Interest
      and other income
                      
                      
                      129
                      
                      
                      
                      2
                      
                      
                      
                      —
                      
                      
                      
                      8
                      
                      
                      
                      139Corporate
      general and administrative expenses
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,576
                      )
                      
                      
                      (2,576
                      )Interest
      expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (5,594
                      )
                      
                      
                      (5,594
                      )Debt
      extinguishment and interest rate derivative expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,490
                      )
                      
                      
                      (2,490
                      )Benefit
      from income taxes applicable to funds from operations
    modified
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,670
                      
                      
                      
                      1,670Non-real
      estate related depreciation and amortization
                      
                      
                      —
                      
                      
                      
                      (196
                      )
                      
                      
                      —
                      
                      
                      
                      (57
                      )
                      
                      
                      (253
                      )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                      
                      
                      4
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                      
                      
                      (224
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (224
                      )Funds
      from operations modified (FFOM)
                      
                      
                      12,573
                      
                      
                      
                      3,179
                      
                      
                      
                      (1,798
                      )
                      
                      
                      (9,039
                      )
                      
                      
                      4,915Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                      
                      
                      (42
                      )
                      
                      
                      (1,338
                      )
                      
                      
                      —
                      
                      
                      
                      538
                      
                      
                      
                      (842
                      )Funds
      from operations (FFO)
                      
                      
                      12,531
                      
                      
                      
                      1,841
                      
                      
                      
                      (1,798
                      )
                      
                      
                      (8,501
                      )
                      
                      
                      4,073Real
      estate related depreciation and amortization
                      
                      
                      (7,347
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (7,347
                      )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                      
                      
                      224
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      224Net
      income (loss)
                      
                      
                      5,408
                      
                      
                      
                      1,841
                      
                      
                      
                      (1,798
                      )
                      
                      
                      (8,501
                      )
                      
                      
                      (3,050
                      )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                      
                      
                      (48
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (48
                      )Operating
      partnership
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      783
                      
                      
                      
                      783Net
      income (loss) attributable to Cogdell Spencer Inc.
                      
                      $
                      5,360
                      
                      
                      $
                      1,841
                      
                      
                      $
                      (1,798
                      )
                      
                      $
                      (7,718
                      )
                      
                      $
                      (2,315
                      )Total
      assets
                      
                      $
                      549,460
                      
                      
                      $
                      200,656
                      
                      
                      $
                      —
                      
                      
                      $
                      852
                      
                      
                      $
                      750,968
 12
 Three
      months ended June 30, 2008:
                              
                              Property
                                Operations
                              
                              
                              Design-Build
                                and
                                Development
                              
                              
                              Intersegment
                                Eliminations
                              
                              
                              Unallocated
                                and
      Other
                              
                              
                              TotalRevenues:Rental
      revenue
                              
                              $
                              19,300
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              19,300Design-Build
      contract revenue and other sales
                              
                              
                              —
                              
                              
                              
                              78,021
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              78,021Property
      management and other fees
                              
                              
                              835
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              835Development
      management and other income
                              
                              
                              —
                              
                              
                              
                              134
                              
                              
                              
                              (24
                              )
                              
                              
                              —
                              
                              
                              
                              110Total
      revenues
                              
                              
                              20,135
                              
                              
                              
                              78,155
                              
                              
                              
                              (24
                              )
                              
                              
                              —
                              
                              
                              
                              98,266Certain
      operating expenses:Property
      operating and management
                              
                              
                              7,841
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              7,841Design-Build
      contracts and development management
                              
                              
                              —
                              
                              
                              
                              66,286
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              66,286Selling,
      general, and administrative
                              
                              
                              —
                              
                              
                              
                              5,800
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              5,800Total
      certain operating expenses
                              
                              
                              7,841
                              
                              
                              
                              72,086
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              79,92712,294
                              
                              
                              
                              6,069
                              
                              
                              
                              (24
                              )
                              
                              
                              —
                              
                              
                              
                              18,339Interest
      and other income
                              
                              
                              151
                              
                              
                              
                              46
                              
                              
                              
                              —
                              
                              
                              
                              21
                              
                              
                              
                              218Corporate
      general and administrative expenses
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (2,688
                              )
                              
                              
                              (2,688
                              )Interest
      expense
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (6,857
                              )
                              
                              
                              (6,857
                              )Benefit
      from income taxes applicable to funds from operations
    modified
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (1,248
                              )
                              
                              
                              (1,248
                              )Non-real
      estate related depreciation and amortization
                              
                              
                              —
                              
                              
                              
                              (306
                              )
                              
                              
                              —
                              
                              
                              
                              (66
                              )
                              
                              
                              (372
                              )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                              
                              
                              8
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              8Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                              
                              
                              (74
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (74
                              )Funds
      from operations modified (FFOM)
                              
                              
                              12,379
                              
                              
                              
                              5,809
                              
                              
                              
                              (24
                              )
                              
                              
                              (10,838
                              )
                              
                              
                              7,326Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                              
                              
                              (42
                              )
                              
                              
                              (4,140
                              )
                              
                              
                              —
                              
                              
                              
                              1,631
                              
                              
                              
                              (2,551
                              )Funds
      from operations (FFO)
                              
                              
                              12,337
                              
                              
                              
                              1,669
                              
                              
                              
                              —
                              
                              
                              
                              (9,207
                              )
                              
                              
                              4,775Real
      estate related depreciation and amortization
                              
                              
                              (7,829
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (7,829
                              )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                              
                              
                              74
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              74Net
      income (loss)
                              
                              
                              4,582
                              
                              
                              
                              1,669
                              
                              
                              
                              —
                              
                              
                              
                              (9,207
                              )
                              
                              
                              (2,980
                              )Net
      loss attributable to the noncontrolling interest in:Real
      estate partnerships
                              
                              
                              48
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              48Operating
      partnership
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,089
                              
                              
                              
                              1,089Net
      income (loss) attributable to Cogdell Spencer Inc.
                              
                              $
                              4,630
                              
                              
                              $
                              1,669
                              
                              
                              $
                              —
                              
                              
                              $
                              (8,118
                              )
                              
                              $
                              (1,843
                              )Total
      assets
                              
                              $
                              549,566
                              
                              
                              $
                              339,905
                              
                              
                              $
                              —
                              
                              
                              $
                              700
                              
                              
                              $
                              890,171
 13
  Six
      months ended June 30, 2009:
                  
                  Property
                    Operations
                  
                  
                  Design-Build
                    and
                    Development
                  
                  
                  Intersegment
                    Eliminations
                  
                  
                  Unallocated
                    and
      Other
                  
                  
                  TotalRevenues:Rental
      revenue
                  
                  $
                  39,375
                  
                  
                  $
                  —
                  
                  
                  $
                  (47
                  )
                  
                  $
                  —
                  
                  
                  $
                  39,328Design-Build
      contract revenue and other sales
                  
                  
                  —
                  
                  
                  
                  93,169
                  
                  
                  
                  (10,068
                  )
                  
                  
                  —
                  
                  
                  
                  83,101Property
      management and other fees
                  
                  
                  1,713
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,713Development
      management and other income
                  
                  
                  —
                  
                  
                  
                  5,070
                  
                  
                  
                  (2,043
                  )
                  
                  
                  —
                  
                  
                  
                  3,027Total
      revenues
                  
                  
                  41,088
                  
                  
                  
                  98,239
                  
                  
                  
                  (12,158
                  )
                  
                  
                  —
                  
                  
                  
                  127,169Certain
      operating expenses:Property
      operating and management
                  
                  
                  15,812
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,812Design-Build
      contracts and development management
                  
                  
                  —
                  
                  
                  
                  81,066
                  
                  
                  
                  (9,659
                  )
                  
                  
                  —
                  
                  
                  
                  71,407Selling,
      general, and administrative
                  
                  
                  —
                  
                  
                  
                  8,660
                  
                  
                  
                  (47
                  )
                  
                  
                  —
                  
                  
                  
                  8,613Impairment
      charges
                  
                  
                  —
                  
                  
                  
                  120,920
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  120,920Total
      certain operating expenses
                  
                  
                  15,812
                  
                  
                  
                  210,646
                  
                  
                  
                  (9,706
                  )
                  
                  
                  —
                  
                  
                  
                  216,75225,276
                  
                  
                  
                  (112,407
                  )
                  
                  
                  (2,452
                  )
                  
                  
                  —
                  
                  
                  
                  (89,583
                  )Interest
      and other income
                  
                  
                  270
                  
                  
                  
                  4
                  
                  
                  
                  —
                  
                  
                  
                  21
                  
                  
                  
                  295Corporate
      general and administrative expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (4,729
                  )
                  
                  
                  (4,729
                  )Interest
      expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (11,620
                  )
                  
                  
                  (11,620
                  )Prepayment
      penalty on early extinguishment of debt
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,490
                  )
                  
                  
                  (2,490
                  )Benefit
      from income taxes applicable to funds from operations
    modified
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,311
                  
                  
                  
                  20,311Non-real
      estate related depreciation and amortization
                  
                  
                  —
                  
                  
                  
                  (390
                  )
                  
                  
                  —
                  
                  
                  
                  (111
                  )
                  
                  
                  (501
                  )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  14
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  14Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  (470
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (470
                  )Funds
      from operations modified (FFOM)
                  
                  
                  25,090
                  
                  
                  
                  (112,793
                  )
                  
                  
                  (2,452
                  )
                  
                  
                  1,382
                  
                  
                  
                  (88,773
                  )Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                  
                  
                  (85
                  )
                  
                  
                  (3,820
                  )
                  
                  
                  —
                  
                  
                  
                  1,523
                  
                  
                  
                  (2,382
                  )Funds
      from operations (FFO)
                  
                  
                  25,005
                  
                  
                  
                  (116,613
                  )
                  
                  
                  (2,452
                  )
                  
                  
                  2,905
                  
                  
                  
                  (91,155
                  )Real
      estate related depreciation and amortization
                  
                  
                  (14,689
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (14,689
                  )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  470
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  470Net
      income (loss)
                  
                  
                  10,786
                  
                  
                  
                  (116,613
                  )
                  
                  
                  (2,452
                  )
                  
                  
                  2,905
                  
                  
                  
                  (105,374
                  )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                  
                  
                  (141
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (141
                  )Operating
      partnership
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  32,982
                  
                  
                  
                  32,982Net
      income (loss) attributable to Cogdell Spencer Inc.
                  
                  $
                  10,645
                  
                  
                  $
                  (116,613
                  )
                  
                  $
                  (2,452
                  )
                  
                  $
                  35,887
                  
                  
                  $
                  (72,533
                  )Total
      assets
                  
                  $
                  549,460
                  
                  
                  $
                  200,656
                  
                  
                  $
                  —
                  
                  
                  $
                  852
                  
                  
                  $
                  750,968
 14
 
 Six
      months ended June 30, 2008:
                  
                  Property
                    Operations
                  
                  
                  Design-Build
                    and
                    Development
                  
                  
                  Intersegment
                    Eliminations
                  
                  
                  Unallocated
                    and
      Other
                  
                  
                  TotalRevenues:Rental
      revenue
                  
                  $
                  37,991
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  37,991Design-Build
      contract revenue and other sales
                  
                  
                  —
                  
                  
                  
                  101,956
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  101,956Property
      management and other fees
                  
                  
                  1,672
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,672Development
      management and other income
                  
                  
                  —
                  
                  
                  
                  226
                  
                  
                  
                  (97
                  )
                  
                  
                  —
                  
                  
                  
                  129Total
      revenues
                  
                  
                  39,663
                  
                  
                  
                  102,182
                  
                  
                  
                  (97
                  )
                  
                  
                  —
                  
                  
                  
                  141,748Certain
      operating expenses:Property
      operating and management
                  
                  
                  15,040
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,040Design-Build
      contracts and development management
                  
                  
                  —
                  
                  
                  
                  87,330
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  87,330Selling,
      general, and administrative
                  
                  
                  —
                  
                  
                  
                  7,681
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,681Total
      certain operating expenses
                  
                  
                  15,040
                  
                  
                  
                  95,011
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  110,05124,623
                  
                  
                  
                  7,171
                  
                  
                  
                  (97
                  )
                  
                  
                  —
                  
                  
                  
                  31,697Interest
      and other income
                  
                  
                  319
                  
                  
                  
                  85
                  
                  
                  
                  —
                  
                  
                  
                  69
                  
                  
                  
                  473Corporate
      general and administrative expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5,108
                  )
                  
                  
                  (5,108
                  )Interest
      expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (11,952
                  )
                  
                  
                  (11,952
                  )Benefit
      from income taxes applicable to funds from operations
    modified
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,312
                  )
                  
                  
                  (1,312
                  )Non-real
      estate related depreciation and amortization
                  
                  
                  —
                  
                  
                  
                  (421
                  )
                  
                  
                  —
                  
                  
                  
                  (112
                  )
                  
                  
                  (533
                  )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  13
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  13Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  (152
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (152
                  )Funds
      from operations modified (FFOM)
                  
                  
                  24,803
                  
                  
                  
                  6,835
                  
                  
                  
                  (97
                  )
                  
                  
                  (18,415
                  )
                  
                  
                  13,126Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                  
                  
                  (84
                  )
                  
                  
                  (5,172
                  )
                  
                  
                  —
                  
                  
                  
                  2,052
                  
                  
                  
                  (3,204
                  )Funds
      from operations (FFO)
                  
                  
                  24,719
                  
                  
                  
                  1,663
                  
                  
                  
                  —
                  
                  
                  
                  (16,363
                  )
                  
                  
                  9,922Real
      estate related depreciation and amortization
                  
                  
                  (15,621
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (15,621
                  )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                  
                  
                  152
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  152Net
      income (loss)
                  
                  
                  9,250
                  
                  
                  
                  1,663
                  
                  
                  
                  —
                  
                  
                  
                  (16,363
                  )
                  
                  
                  (5,547
                  )Net
      loss attributable to the noncontrolling interest in:Real
      estate partnerships
                  
                  
                  62
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  62Operating
      partnership
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,841
                  
                  
                  
                  1,841Net
      income (loss) attributable to Cogdell Spencer Inc.
                  
                  $
                  9,312
                  
                  
                  $
                  1,663
                  
                  
                  $
                  —
                  
                  
                  $
                  (14,522
                  )
                  
                  $
                  (3,644
                  )Total
      assets
                  
                  $
                  549,566
                  
                  
                  $
                  339,905
                  
                  
                  $
                  —
                  
                  
                  $
                  700
                  
                  
                  $
                  890,171
  5.
                  Contracts
  Revenue
and billings to date on uncompleted contracts, from their inception, as of June
30, 2009 and December 31, 2008, are as follows (in thousands):
 June
      30,
                  2009
                
                
                December
      31,
                  2008Costs
      and estimated earnings on uncompleted contracts
                
                $
                160,379
                
                
                $
                165,891Billings
      to date
                
                
                (176,289
                )
                
                
                (176,210
                )Net
      billings in excess of costs and estimated earnings
                
                $
                (15,910
                )
                
                $
                (10,319
                )
 15
  These
amounts are included in the condensed consolidated balance sheet at June 30,
2009 and December 31, 2008 as shown below (in thousands). At June 30, 2009 and
December 31, 2008, the Company had retainage receivables of $6.7 million and
$8.8 million, respectively, which are included in “Tenant and accounts
receivable” in the condensed consolidated balance sheets. The Company estimates
that $2.0 million of the June 30, 2009 retainage receivable balance will be
collected after one year.
 June
      30,
                  2009
                
                
                December
      31,
                  2008Costs
      and estimated earnings in excess of billings (1)
                
                $
                5,646
                
                
                $
                6,706Billings
      in excess of costs and estimated earnings
                
                
                (21,556
                )
                
                
                (17,025
                )Net
      billings in excess of costs and estimated earnings
                
                $
                (15,910
                )
                
                $
                (10,319
                )
  (1)
Included in “Other assets” in the consolidated balance sheets
  6.
                  Goodwill
      and Intangible Assets
  The
Company reviews the value of goodwill and intangible assets on an annual basis
and when circumstances indicate a potential impairment may exist. An interim
review of the Design-Build and Development’s intangible assets was performed on
March 31, 2009, due to a decline in the Company’s stock price, a decline in the
cash flow multiples for comparable public engineering and construction
companies, and changes in the cash flow projections for the Design-Build and
Development business segment resulting from a decline in backlog and delays and
cancellations of client building projects. The Company determined that an
interim review was not necessary as of June 30, 2009.
  As
a result of the March 31, 2009 review, the Company recorded, during the three
months ended March 31, 2009, a pre-tax, non-cash impairment charge of ($120.9
million) and the Company recognized a non-cash income tax benefit of $19.2
million, resulting in an after-tax impairment charge of ($101.7 million). The
Company’s goodwill, amortizing and non-amortizing intangible assets, and
deferred tax liabilities associated with the Design-Build and Development
business segment have been reduced from the December 31, 2008 carrying amounts
as a result of the impairment charge.
  The
goodwill impairment review involved a two-step process. The first step is a
comparison of the reporting unit’s fair value to its carrying value. Fair value
was estimated by using two approaches, an income approach and a market approach.
Each approach was weighted 50% in the Company’s analysis. The income approach
uses the reporting unit’s projected operating results and discounted cash flows
using a weighted-average cost of capital that reflects current market
conditions, which was 14.5% for the March 31, 2009, review. The cash flow
projections use estimates of economic and market information over the projection
period, including growth rates in revenues and costs and estimates of future
expected changes in operating margins and cash expenditures. Other significant
estimates and assumptions include terminal value growth rates, future estimates
of capital expenditures, and changes in future working capital requirements. The
market approach estimates fair value by applying cash flow multiples to the
reporting unit’s operating performance. The multiples are derived from
comparable publicly traded companies with similar operating and profitability
characteristics. Additionally, the Company reconciled the total of the estimated
fair values of all its reporting units to its market capitalization to determine
if the sum of the individual fair values is reasonable compared to the external
market indicators.
  If
the carrying value of the reporting unit is higher than its fair value, as it
was for March 31, 2009, then an indication of impairment may exist and a second
step must be performed to measure the amount of impairment. The amount of
impairment is determined by comparing the implied fair value of the reporting
unit’s goodwill to the carrying value of the goodwill calculated in the same
manner as if the reporting unit was being acquired in a business combination. If
the implied fair value of goodwill is less than the recorded goodwill, then an
impairment charge for the difference would be recorded.
  For
non-amortizing intangible assets, the Company estimates fair value by applying
an estimated market royalty rate, 2.0% for the March 31, 2009 review, to
projected revenues and discounted using a weighted-average cost of capital that
reflects current market conditions, which was 14.5% for the March 31, 2009
review.
 16
  The
following table presents information about the Company’s goodwill and certain
intangible assets measured at fair value as of March 31, 2009 (in
thousands):
 Recorded
      Value as
                      of
      March 31, 2009
                    
                    
                    Fair
      Value Measurement as of March 31, 2009Description
                    
                    Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    Total
      LossesGoodwill
                    
                    $
                    108,683
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    108,683
                    
                    
                    $
                    (71,755
                    )Trade
      names and trademarks
                    
                    
                    41,240
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    41,240
                    
                    
                    
                    (34,728
                    )Acquired
      signed contracts
                    
                    
                    1,398
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,281
                    
                    
                    
                    —Acquired
      proposals
                    
                    
                    2,129
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,129
                    
                    
                    
                    (1,833
                    )Acquired
      customer relationships
                    
                    
                    1,789
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,789
                    
                    
                    
                    (12,604
                    )$
                    155,239
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    159,122
                    
                    
                    $
                    (120,920
                    )
  See
Note 2 within this Form 10-Q for a discussion of the Company’s accounting policy
regarding the fair value of financial and non-financial assets.
  The
following table shows the change in carrying value from the measurement date of
March 31, 2009 to June 30, 2009 (in thousands):
 Description
                  
                  Recorded
      Value as
                    of
      March 31, 2009
                  
                  
                  Amortization
      for the
                    Quarter
      Ended
                    June
      30, 2009
                  
                  
                  Recorded
      Value as
                    of
      June 30, 2009Goodwill
                  
                  $
                  108,683
                  
                  
                  
                  n/a
                  
                  
                  $
                  108,683Trade
      names and trademarks
                  
                  
                  41,240
                  
                  
                  
                  n/a
                  
                  
                  
                  41,240Acquired
      signed contracts
                  
                  
                  1,398
                  
                  
                  
                  (466
                  )
                  
                  
                  932Acquired
      proposals
                  
                  
                  2,129
                  
                  
                  
                  (710
                  )
                  
                  
                  1,419Acquired
      customer relationships
                  
                  
                  1,789
                  
                  
                  
                  (163
                  )
                  
                  
                  1,626$
                  155,239
                  
                  
                  
                  
                  
                  
                  $
                  153,900
  The
Company had goodwill of $108.7 million and $180.4 million at June 30, 2009 and
December 31, 2008, respectively, and non-amortizing trade names and trademarks
intangible assets of $41.2 million and $76.0 million at June 30, 2009 and
December 31, 2008, respectively.
  Related
to the Erdman acquisition in March 2008, the $18.0 million remaining in escrow
that was scheduled to be released to the sellers in June 2009 is being held
pending the outcome of discussions between the parties regarding certain
unresolved claims made by the Company in connection with the transaction. If any
of the escrow be returned to the Company, then goodwill and the payable to prior
Erdman shareholders would be reduced by an amount equal to the escrow amount
returned to the Company.
  Amortizing
intangible assets consisted of the following for the periods shown (in
thousands):
 June
      30, 2009
                          
                          
                          December
      31, 2008Gross
                            Amount
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          Gross
                            Amount
                          
                          
                          Accumulated
                            AmortizationAcquired
      signed contracts
                          
                          $
                          13,253
                          
                          
                          $
                          12,321
                          
                          
                          $
                          13,253
                          
                          
                          $
                          11,389Acquired
      proposals
                          
                          
                          4,335
                          
                          
                          
                          2,916
                          
                          
                          
                          6,168
                          
                          
                          
                          886Acquired
      customer relationships
                          
                          
                          3,128
                          
                          
                          
                          1,502
                          
                          
                          
                          15,732
                          
                          
                          
                          644Acquired
      above market leases
                          
                          
                          1,559
                          
                          
                          
                          850
                          
                          
                          
                          1,559
                          
                          
                          
                          748Acquired
      in place lease value and deferred leasing costs
                          
                          
                          41,046
                          
                          
                          
                          25,888
                          
                          
                          
                          41,046
                          
                          
                          
                          23,573Acquired
      ground leases
                          
                          
                          3,562
                          
                          
                          
                          452
                          
                          
                          
                          3,562
                          
                          
                          
                          389Acquired
      property management contracts
                          
                          
                          2,097
                          
                          
                          
                          509
                          
                          
                          
                          2,097
                          
                          
                          
                          425Total
      amortizing intangible assets
                          
                          $
                          68,980
                          
                          
                          $
                          44,438
                          
                          
                          $
                          83,417
                          
                          
                          $
                          38,054
 17
  Amortization
expense related to intangibles for the six months ended June 30, 2009 and 2008
was $6.4 million and $8.7 million, respectively. Goodwill and trade names and
trademarks are not amortized and are associated with the Design-Build and
Development business segment. The Company expects to recognize amortization
expense from the acquired intangible assets for the remainder of the current
year 2009 and thereafter as follows (in thousands):
 For
      the period ending:
                      
                      Future
      Amortization Expense2009
                      
                      $
                      4,3932010
                      
                      
                      3,8162011
                      
                      
                      2,7812012
                      
                      
                      1,6922013
                      
                      
                      1,167Thereafter
                      
                      
                      5,212
  7.
                  Mortgage
      Notes Payable and Borrowing
Agreements
  Term
Loan
 In the first six months of
2009, Erdman experienced delays in client project starts and some contract
cancellations and Erdman could face additional delays and cancellations
over the next several quarters.  Due to the uncertainty of Erdman’s
future operating results, the Company and the Term Loan lenders amended the
Erdman senior secured term loan agreement (“Term Loan”) in June 2009 and the
Company repaid $50.0 million of the $100.0 million outstanding under the Term
Loan.As a result of the amendment, all unamortized Term Loan deferred finance
costs and costs paid to the lenders that
were party to the amendment were expensed during the second quarter of 2009. The
second quarter charge to debt extinguishment and interest rate derivative
expense was approximately $0.9 million, before income tax benefit. The Company
recorded an income tax benefit of approximately $0.4 million related to this
charge. The amendment, among other things, amends certain financial covenants
relating to Erdman, as well as certain other provisions of the Term Loan,
including (1) the elimination of the minimum adjusted consolidated EBITDA
covenant (previously $22.5 million), (2) a modification of the maximum adjusted
consolidated senior indebtedness to adjusted consolidated EBITDA covenant to
3.50 to 1.00 through March 2011, with a one-time ability to exceed 3.50 to 1.00
but not greater than 3.75 to 1.00, and 3.00 to 1.00 from April 2011 to final
maturity (previously 4.25 to 1.00 as of March 31, 2009, decreasing to 3.75 to
1.00 as of July 1, 2009), (3) an increase in the interest rate from LIBOR plus
3.50% to LIBOR plus 4.50%, and (4) payment of a market based modification fee.
The Amendment was subject to the repayment of $50.0 million of the outstanding
balance under the Term Loan by the Borrower (which amount was repaid on June 3,
2009) and certain other customary terms and conditions.
  Construction
Financing
  In
January 2009, the Company obtained financing in an amount of $14.8 million from
a construction loan on the Medical Physicians Tower in Jackson, Tennessee. The
loan provides for interest-only payments during the construction period at a
rate of one-month LIBOR plus 2.50%. In September 2010, the loan converts to an
amortizing loan with monthly payments based on a 25-year amortization schedule
at an interest rate of one-month LIBOR plus 2.50%. The Company has entered into
a forward starting interest rate swap agreement that effectively fixes the
interest rate at 6.19% after the construction period through maturity. The loan
matures September 2020.
  In April 2009, the Company obtained financing in an amount of $10.4
million from a construction loan on the University Physicians-Grants Ferry
project in Brandon, Mississippi. The loan provides for interest-only payments
during the construction period at a rate of one-month LIBOR plus 2.25%. In
October 2010, the loan converts to an amortizing loan with monthly payments
based on a 25-year amortization schedule at an interest rate of one-month LIBOR
plus 2.25%. The Company has entered into a forward starting interest rate swap
agreement that effectively fixes the interest rate at 5.95% after the
construction period through maturity. The loan matures April 2019.
  In
May 2009, the Company obtained financing in an amount of $14.0 million from a
construction loan on the HealthPartners Central Minnesota Clinic project in St.
Cloud, Minnesota. The loan provides for interest-only payments during the
construction period at a rate of one-month LIBOR plus 3.25%, but not less than
6.0%. In December 2010, the loan converts to an amortizing loan with monthly
payments based on a 22.5-year amortization schedule at an interest rate of
one-month LIBOR plus 3.25%, but not less than 6.0%. The loan matures November
2014.
 18
  Mortgage
Notes Payable
  In
May 2009, the Company refinanced the mortgage note payable for Roper MOB, LLC,
located in Charleston, South Carolina. The principal amount was increased from
$9.1 million to $9.5 million and the additional proceeds were used for working
capital purposes. The note payable matures in June 2019 and requires monthly
principal and interest payments based on a 25-year amortization. The interest
rate is fixed at 7.1%.
  In
May 2009, the Company refinanced the mortgage note payable for the Medical Arts
Center of Orangeburg in Orangeburg, South Carolina. There was no change in the
principal balance of $2.4 million as of June 30, 2009. The interest rate is
LIBOR plus 3.25% (3.56% as of June 30, 2009) with a 6.0% minimum interest rate
and the maturity date is May 2014.
  In
June 2009, the Company obtained mortgage financing for the Lancaster
Rehabilitation Hospital property located in Lancaster, Pennsylvania. The $9.7
million note payable matures in June 2014 and requires monthly principal and
interest payments based on a 25-year amortization schedule. The interest rate is
fixed at 6.71%. Proceeds were used to reduce borrowings under the secured
revolving credit facility (the “Credit Facility”) and for working capital
purposes.
  Scheduled
Maturities
  The
Company’s mortgages are collateralized by property and principal and interest
payments are generally made monthly. Scheduled maturities of mortgages, notes
payable under the Credit Facility, and the Term Loan as of June 30, 2009, are as
follows (in thousands):
 For
      the period ending:2009
                  
                  $
                  37,7722010
                  
                  
                  32,0622011
                  
                  
                  156,5272012
                  
                  
                  23,6242013
                  
                  
                  14,377Thereafter
                  
                  
                  121,084385,446Unamortized
      premium
                  
                  
                  176$
                  385,622
  As
of June 30, 2009, the Company had approximately $37.8 million of principal and
maturity payments remaining due in 2009 related to mortgage note payables and
$32.1 million due in 2010. Of this $69.9 million, $30.0 million, due October 31,
2009, can be extended for a two-year period at the Company’s conditional option
and subject to appraisal. The Company believes, based on the current loan to
value ratios at individual properties and preliminary discussions with lenders,
it will be able either to extend or refinance the remaining balloon maturities
due in 2009 and 2010. In addition, the Company has approximately $75.4 million
combined cash and cash equivalents and Credit Facility availability as of June
30, 2009, which exceeds the principal and maturity payments due in 2009 and
2010.
  At
June 30, 2009, the Company believes it was in compliance with all its loan
covenants. See “Liquidity and Capital Resources.”
 19
  8.
                  Derivative
      Financial Instruments
  Interest
rate swap agreements are utilized to reduce exposure to variable interest rates
associated with certain mortgage notes payable and credit facilities. These
agreements involve an exchange of fixed and floating interest payments without
the exchange of the underlying principal amount (the “notional amount”). The
interest rate swap agreements are reported at fair value in the condensed
consolidated balance sheet within “Other assets” or “Other liabilities” and
changes in the fair value, net of tax where applicable, are reported in
accumulated other comprehensive income (loss) (“AOCI”) exclusive of
ineffectiveness amounts. The following table summarizes the terms of the
agreements and their fair values at June 30, 2009 and December 31, 2008 (dollars
in thousands):
 Notional
                          Amount
      as of
                          June
      30, 2009Effective
                          Date
                        
                        Expiration
                          Date
                        
                        June
      30, 2009
                        
                        December
      31, 2008Entity
                        
                        
                        Receive
      Rate
                        
                        Pay
      Rate
                        
                        
                        
                        Asset
                        
                        Liability
                        
                        Asset
                        
                        LiabilityBrandon
      MOB Investors, LLC
                        
                        $
                        10,439
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.70
                        %
                        
                        10/1/2010
                        
                        
                        4/1/2019
                        
                        $
                        257
                        
                        $
                        —
                        
                        $
                        —
                        
                        $
                        —West
      Tennessee Investors, LLC
                        
                        
                        14,770
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.69
                        %
                        
                        9/1/2010
                        
                        
                        3/1/2019
                        
                        
                        340
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —Genesis Property Holdings,
      LLC
                        
                        
                        16,797
                        
                        
                        1
      Month LIBOR
                        
                        
                        4.71
                        %
                        
                        4/1/2010
                        
                        
                        10/1/2018
                        
                        
                        —
                        
                        
                        992
                        
                        
                        —
                        
                        
                        2,365Cogdell
      Health Campus MOB, LP
                        
                        
                        10,747
                        
                        
                        1
      Month LIBOR
                        
                        
                        4.03
                        %
                        
                        3/14/2008
                        
                        
                        3/2/2015
                        
                        
                        —
                        
                        
                        580
                        
                        
                        —
                        
                        
                        1,064River
      Hills Medical Associates, LLC
                        
                        
                        3,824
                        
                        
                        1
      Month LIBOR
                        
                        
                        1.78
                        %
                        
                        1/15/2009
                        
                        
                        1/31/2012
                        
                        
                        —
                        
                        
                        11
                        
                        
                        —
                        
                        
                        25East
      Jefferson Medical Plaza
                        
                        
                        11,600
                        
                        
                        1
      Month LIBOR
                        
                        
                        1.80
                        %
                        
                        1/15/2009
                        
                        
                        12/23/2011
                        
                        
                        —
                        
                        
                        39
                        
                        
                        —
                        
                        
                        81Beaufort
      Medical Plaza, LLC
                        
                        
                        4,826
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.80
                        %
                        
                        8/18/2008
                        
                        
                        8/18/2011
                        
                        
                        —
                        
                        
                        240
                        
                        
                        —
                        
                        
                        296St.
      Francis Community MOB, LLC
                        
                        
                        6,961
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.32
                        %
                        
                        10/15/2008
                        
                        
                        6/15/2011
                        
                        
                        —
                        
                        
                        274
                        
                        
                        —
                        
                        
                        331St.
      Francis Medical Plaza, LLC
                        
                        
                        7,477
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.32
                        %
                        
                        10/15/2008
                        
                        
                        6/15/2011
                        
                        
                        —
                        
                        
                        294
                        
                        
                        —
                        
                        
                        356Cogdell
      Spencer LP
                        
                        
                        30,000
                        
                        
                        1
      Month LIBOR
                        
                        
                        3.11
                        %
                        
                        10/15/2008
                        
                        
                        3/10/2011
                        
                        
                        —
                        
                        
                        971
                        
                        
                        —
                        
                        
                        1,218MEA
      Holdings, LLC
                        
                        
                        100,000
                        
                        
                        1
      Month LIBOR
                        
                        
                        2.82
                        %
                        
                        4/1/2008
                        
                        
                        3/1/2011
                        
                        
                        —
                        
                        
                        2,741
                        
                        
                        —
                        
                        
                        3,458Indianapolis
      MOB LLC
                        
                        
                        30,000
                        
                        
                        1
      Month LIBOR
                        
                        
                        4.95
                        %
                        
                        11/2/2006
                        
                        
                        10/31/2009
                        
                        
                        —
                        
                        
                        553
                        
                        
                        —
                        
                        
                        1,106Roper
      MOB, LLC
                        
                        
                        9,003
                        
                        
                        1
      Month LIBOR
                        
                        
                        4.95
                        %
                        
                        11/2/2006
                        
                        
                        7/10/2009
                        
                        
                        —
                        
                        
                        35
                        
                        
                        —
                        
                        
                        221$
                        597
                        
                        $
                        6,730
                        
                        $
                        —
                        
                        $
                        10,521
  The
following tables show the effect of the Company’s derivative instruments
designated as cash flow hedges for the three and six months ended June 30, 2009
(in thousands):
 Three
      Months Ended June 30, 2009Gain
      or (Loss)
                                        Recognized
      in AOCI,
                                        Noncontrolling
                                        Interests
      in
                                        Operating
                                        Partnership,
      and
                                        Noncontrolling
                                        Interests
      in Real
                                        Estate
      Partnerships -
                                        Effective
      Portion (1)
                                      
                                      Location
      of Gain or
                                        (Loss)
      Reclassified
                                        from
      AOCI,
                                        Noncontrolling
                                        Interests
      in
                                        Operating
                                        Partnership,
      and
                                        Noncontrolling
                                        Interests
      in Real
                                        Estate
      Partnerships
                                        into
      Income -
                                        Effective
      Portion
                                      
                                      Gain
      or (Loss)
                                        Reclassified
      from
                                        AOCI,
                                        Noncontrolling
                                        Interests
      in
                                        Operating
                                        Partnership,
      and
                                        Noncontrolling
                                        Interests
      in Real
                                        Estate
      Partnerships
                                        into
      Income -
                                        Effective
      Portion (1)
                                      
                                      Location
      of Gain or
                                        (Loss)
      Recognized -
                                        Ineffective
      Portion
                                        and
      Amount
                                        Excluded
      from
                                        Effectiveness
                                        Testing
                                      
                                      Gain
      or (Loss)
                                        Recognized
      -
                                        Ineffective
      Portion
                                        and
      Amount
                                        Excluded
      from
                                        Effectiveness
                                        TestingInterest
      rate swap agreements
                                      
                                      $
                                      4,970
                                      
                                      
                                      Interest
      Expense
                                      
                                      $
                                      (1,246
                                      )
                                      
                                      Debt
      extinguishment
                                        and
      interest rate
                                        derivative
      expense
                                      
                                      $
                                      (1,529
                                      )
 
 Six
      Months Ended June 30, 2009Gain
      or (Loss)
                                  Recognized
      in AOCI,
                                  Noncontrolling
                                  Interests
      in
                                  Operating
                                  Partnership,
      and
                                  Noncontrolling
                                  Interests
      in Real
                                  Estate
      Partnerships -
                                  Effective
      Portion (1)
                                
                                Location
      of Gain or
                                  (Loss)
      Reclassified
                                  from
      AOCI,
                                  Noncontrolling
                                  Interests
      in
                                  Operating
                                  Partnership,
      and
                                  Noncontrolling
                                  Interests
      in Real
                                  Estate
      Partnerships
                                  into
      Income -
                                  Effective
      Portion
                                
                                Gain
      or (Loss)
                                  Reclassified
      from
                                  AOCI,
                                  Noncontrolling
                                  Interests
      in
                                  Operating
                                  Partnership,
      and
                                  Noncontrolling
                                  Interests
      in Real
                                  Estate
      Partnerships
                                  into
      Income -
                                  Effective
      Portion (1)
                                
                                Location
      of Gain or
                                  (Loss)
      Recognized -
                                  Ineffective
      Portion
                                  and
      Amount
                                  Excluded
      from
                                  Effectiveness
                                  Testing
                                
                                Gain
      or (Loss)
                                  Recognized
      -
                                  Ineffective
      Portion
                                  and
      Amount
                                  Excluded
      from
                                  Effectiveness
                                  TestingInterest
      rate swap agreements
                                
                                $
                                4,806
                                
                                
                                Interest
      Expense
                                
                                $
                                (2,740
                                )
                                
                                Debt
      extinguishment
                                  and
      interest rate
                                  derivative
      expense
                                
                                $
                                (1,529
                                )
 
 (1)
                  Refer
      to the Condensed Consolidated Statement of Changes in Equity of this Form
      10-Q, which summarizes the activity in Unrealized gain on interest rate
      swaps, net of tax related to the interest rate swap
      agreements.
  The
following table presents information about the Company’s liabilities measured at
fair value on a recurring basis as of June 30, 2009, and indicates the fair
value hierarchy, as defined under SFAS 157 referenced in Note 2 within this Form
10-Q, of the valuation techniques utilized by the Company to determine such fair
value (in thousands):
 Fair
      Value Measurements as of
                    June
      30, 2009Total
                  
                  Level
      1
                  
                  Level
      2
                  
                  Level
      3Assets
      -Derivative
      financial instruments
                  
                  $
                  597
                  
                  
                  $
                  —
                  
                  
                  $
                  597
                  
                  
                  $
                  —Liabilities
      -Derivative
      financial instruments
                  
                  $
                  (6,730
                  )
                  
                  $
                  —
                  
                  
                  $
                  (6,730
                  )
                  
                  $
                  —
 20
  The
valuation of derivative financial instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative.The fair values of
variable to fixed interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash payments and the
discounted expected variable cash receipts. The variable cash receipts are based
on an expectation of future interest rates forward curves derived from
observable market interest rate curves.To comply with the
provisions of SFAS 157, the Company incorporates credit valuation adjustments to
appropriately reflect both its nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In adjusting
the fair value of its derivative contracts for the effect of nonperformance
risk, the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
  The
Company previously entered into a $100.0 million interest rate swap agreement
that fixed the floating rate portion of the $100.0 million Term Loan. Due to the
repayment and the amendment to the Term Loan, approximately $1.6 million related
to swap derivative hedge ineffectiveness was charged to debt extinguishment and
interest rate derivative expense during the second quarter of 2009. The non-cash
charge represents the portion of the mark to market fair value liability of the
interest rate swap agreement for which there are no more future interest
payments under the Term Loan. The Company recorded an income tax benefit of
approximately $0.6 million related to this charge, resulting in after-tax charge
of approximately $1.0 million.
  The
$100.0 million interest rate swap agreement was designated as a hedge instrument
from its inception through June 3, 2009, the date of the $50.0 million repayment
and amendment of the Term Loan. The agreement was not designated as a hedge
instrument from June 4, 2009, through July 19, 2009. On July 20, 2009, the
agreement was re-designated as a hedge instrument and will be used to fix the
floating rate portion on $50.0 million outstanding on the Term Loan and $50.0
million outstanding under the Credit Facility.
 9.
                Equity
  Cogdell
Spencer Inc. Stockholders’ Equity
  In
June 2009, the Company issued 23.0 million shares, resulting in net proceeds to
the Company of $76.5 million. The net proceeds were used to fund the $50.0
million repayment under the Term Loan, to reduce borrowings under the Credit
Facility, and for working capital purposes.
  The
following is a summary of changes of the Company’s common stock for the six
months ended June 30, 2009 and 2008 (in thousands):
 For
      the Six Months EndedJune
      30, 2009
                                          
                                          
                                          June
      30, 2008Common
      stock balance at beginning of period
                                          
                                          
                                          17,699
                                          
                                          
                                          
                                          11,948Issuance
      of common stock
                                          
                                          
                                          23,000
                                          
                                          
                                          
                                          3,449Conversion
      of OP units to common stock
                                          
                                          
                                          1,814
                                          
                                          
                                          
                                          —Restricted
      stock grants
                                          
                                          
                                          13
                                          
                                          
                                          
                                          6Common
      stock balance at end of period
                                          
                                          
                                          42,526
                                          
                                          
                                          
                                          15,403
  The
following is net loss attributable to Cogdell Spencer Inc. and the issuance of
common stock in exchange for redemptions of Operating Partnership Units (“OP
units”) for the six months ended June 30, 2009 and 2008 (in
thousands):
 For
      the Six Months EndedJune
      30, 2009
                                          
                                          
                                          June
      30, 2008Net
      loss attributable to Cogdell Spencer Inc.
                                          
                                          $
                                          (72,533
                                          )
                                          
                                          $
                                          (3,644
                                          )Increase
      in Cogdell Spencer Inc. additional paid-in capital for the conversion of
      OP units into common stock
                                          
                                          
                                          17,695
                                          
                                          
                                          
                                          —Change
      from net loss attributable to Cogdell Spencer Inc. and transfers from
      noncontrolling interests
                                          
                                          $
                                          (54,838
                                          )
                                          
                                          $
                                          (3,644
                                          )
  Noncontrolling
Interests in Operating Partnership
  As
of June 30, 2009, there were 50.1 million OP Units outstanding, of which 42.5
million, or 84.9%, were owned by the Company and 7.5 million, or 15.1%, were
owned by other limited partners, including certain directors, officers and other
members of senior management. As of June 30, 2009, the fair market value of the
OP Units not owned by the Company was $32.4 million, based on a market value of
$4.29 per unit, which was the closing stock price of the Company’s shares on
June 30, 2009. Cash distributions paid during the three and six months ended
June 30, 2009 were $1.7 and $3.8 million, respectively.
 21




Dividends
and Distributions




On
June 12, 2009, the Company announced that its Board of Directors had declared a
quarterly dividend and distribution of $0.10 per share or OP Unit that was paid
in cash on July 22, 2009 to stockholders and holders of OP Units of record on
June 25, 2009. The dividend and distribution covered the second quarter of 2009
and $5.0 million is included in “Other liabilities” in the June 30, 2009
condensed consolidated balance sheet.




10.
Incentive and Share-Based Compensation




The
Company’s 2005 Long-Term Stock Incentive Plan (“2005 Incentive Plan”) provides
for the grant of incentive awards to employees, directors and consultants to
attract and retain qualified individuals and reward them for superior
performance in achieving the Company’s business goals and enhancing stockholder
value. Awards issuable under the incentive award plan include stock options,
restricted stock, dividend equivalents, stock appreciation rights, long-term
incentive plan units (“LTIP units”), cash performance bonuses and other
incentive awards. Only employees are eligible to receive incentive stock options
under the incentive award plan. The Company has reserved a total of 1,000,000
shares of common stock for issuance pursuant to the incentive award plan,
subject to certain adjustments set forth in the plan. Each LTIP unit issued
under the incentive award plan will count as one share of stock for purposes of
calculating the limit on shares that may be issued under the plan and the
individual award limit discussed below.




In
January 2009, the Company issued 500 LTIP units that vested upon issuance to an
employee. The LTIP units were valued at $9.31 per unit, which was the Company’s
closing stock price on the grant date. The Company has recorded compensation
expense of less than $0.1 million in connection with this issuance.




In
February 2009, each non-employee member of the Company’s Board of Directors was
granted shares of the Company’s restricted stock or LTIP units in the Operating
Partnership that all vested upon issuance. Messrs. Georgius, Lee, Lubar, and
Neugent were each granted 6,569 LTIP units and Mr. Jennings and Dr. Smoak were
each granted 6,569 shares of restricted stock. The restricted stock and LTIP
units were valued at $6.09 per share, which was the Company’s closing stock
price on the grant date. The Company has recorded compensation expense of $0.2
million in connection with these issuances.




In
February 2009, 3,334 LTIP units of previously issued, but unvested, LTIP units
became vested based on 2008 Company performance. Compensation expense of $0.1
million was recorded for the year ended December 31, 2008. As of March 31, 2009,
there were 114,535 unvested LTIP units that will vest if, and when, the Company
achieves certain performance standards as provided in the awards. Any portions
of the unvested LTIP units that are not vested as of December 2015 are
forfeited. As of June 30, 2009, the Company assessed the probability of the
performance conditions being achieved and has recorded no compensation expenses
associated with 2009 Company performance.




In
February 2009, the Company issued an aggregate of 80,586 LTIP units, all of
which vested upon issuance, to certain employees based on 2008 performance
goals. The LTIP units were valued at $6.09 per unit, which was the Company’s
closing stock price on the grant date. The Company accrued compensation expense
in 2008 related to this issuance.




In
February 2009, the Company issued 4,926 LTIP units that will vest in February
2010 if employment is maintained through February 2010. The LTIP units were
valued at $6.09 per unit, which was the Company’s closing stock price on the
grant date. The Company will record compensation expense for the year ended
December 31, 2009 of less than $0.1 million.




The
following is a summary of restricted stock and LTIP unit activity for the six
months ended June 30, 2009 (in thousands, except weighted average grant
price):


Restricted
                Stock
              
              
              LTIP
      Units
              
              
              Weighted
      Average
                Grant
      PriceUnvested
      balance at December 31, 2008
              
              
              12
              
              
              
              118
              
              
              $
              15.89Granted
              
              
              13
              
              
              
              112
              
              
              
              6.10Vested
              
              
              (19
              )
              
              
              (111
              )
              
              
              6.87Forfeited
              
              
              (1
              )
              
              
              —
              
              
              
              17.00Unvested
      balance at end of the period
              
              
              5
              
              
              
              119
              
              
              $
              15.43


22


11.
Related Party Transactions




The
Fork Farm, a working farm owned by the Company’s Chairman, periodically hosts
events on behalf of the Company. Charges of less than $10,000 for each six month
period ended June 30, 2009 and 2008, respectively, are reflected in “Selling,
general, and administrative” expenses in the condensed consolidated statement of
operations.




The
Company has certain design-build contracts for the construction of two medical
facilities with certain entities in which Mr. Lubar, a member of the Company’s
Board of Directors, has an indirect ownership interest and is a director. Mr.
Lubar resigned as an officer of these entities in 2008. The total contract
amount for the two medical facilities was $30.7 million and construction was in
process at the time of the Erdman transaction. During 2008, construction was
completed on one medical facility. For the three and six months ended June 30,
2008, the Company recognized $4.6 million and $8.8 million of revenue,
respectively, had accounts receivable of $2.1 million and $2.1 million,
respectively, and billings in excess of costs and estimated earnings on
uncompleted contracts of $3.6 million and $3.6 million, respectively, related to
both projects. For the three and six months ended June 30, 2009, the Company
recognized $3.0 million of revenue, and had no accounts receivable or billings
in excess of costs and estimated earnings on uncompleted contracts related to
the second remaining medical facility still under construction.


23




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




When
used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the
words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,”
and similar expressions are intended to identify forward-looking statements with
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and in Section 21F of the Securities and
Exchange Act of 1934, as amended. Actual results may differ materially due to
uncertainties including:


●
            the
      Company’s business strategy;●
            the
      Company’s ability to comply with financial covenants in its debt
      instruments;●
            the
      Company’s access to capital;●
            the
      Company’s ability to obtain future financing
  arrangements;●
            estimates
      relating to the Company’s future distributions;●
            the
      Company’s understanding of the Company’s competition;●
            the
      Company’s ability to renew the Company’s ground leases;●
            legislative
      and regulatory changes (including changes to laws governing the taxation
      of REITs and individuals);●
            increases
      in costs of borrowing as a result of changes in interest rates and other
      factors;●
            the
      Company’s ability to maintain its qualification as a REIT due to economic,
      market, legal, tax or other considerations;●
            changes
      in the reimbursement available to the Company’s tenants by government or
      private payors;●
            the
      Company’s tenants’ ability to make rent payments;●
            defaults
      by tenants;●
            Erdman’s
      customers’ access to financing;●
            delays
      in project starts and cancellations by Erdman’s
  customers;●
            the
      timing of capital expenditures by healthcare systems and
      providers;●
            market
      trends; and●
            projected
      capital expenditures




Forward-looking
statements are based on estimates as of the date of this report. The Company
disclaims any obligation to publicly release the results of any revisions to
these forward-looking statements reflecting new estimates, events or
circumstances after the date of this report.




The
risks included here are not exhaustive. Other sections of this report may
include additional factors that could adversely affect the Company’s business
and financial performance. Moreover, the Company operates in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the Company’s business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.


24




Overview




The
Company is a fully-integrated, self-administered, and self-managed real estate
investment trust (“REIT”) that invests in specialty office buildings for the
medical profession, including medical offices and ambulatory surgery and
diagnostic centers. The Company focuses on the ownership, delivery, acquisition,
and management of strategically located medical office buildings and other
healthcare related facilities in the United States of America. The Company has
been built around understanding and addressing the full range of specialized
real estate needs of the healthcare industry.




The
Company derives a majority of its revenues from two sources: (1) rents received
from tenants under existing leases in Medical Office Buildings (“MOB”) and other
healthcare related facilities, and (2) from design-build services for healthcare
customers. The Company expects that rental revenue will remain stable due to
multi-year, non-cancellable leases with annual rental increases based on CPI.
The Company’s design-build revenue is derived from Erdman. The demand for
Erdman’s services has been, and will likely continue to be, cyclical in nature.
In periods of adverse economic conditions, Erdman’s customers may be unwilling
or unable to make capital expenditures, and they may be unable to obtain debt or
equity financings for projects. As a result, customers may defer projects to a
later date, which could reduce Erdman’s revenues. Due to the current adverse
economic environment and the volatility in the credit markets, Erdman is
experiencing delays in client project starts and cancellations. As a result, the
Company implemented a reduction in force in December 2008 and May 2009 and has
reduced incentive compensation for 2009. The Company expects its design-build
revenue and FFOM contribution in 2009 to be less than 2008 revenue and FFOM
contribution.




Generally,
the Company’s property operating revenues and expenses have remained consistent
over time except for growth due to property and business acquisitions. Erdman’s
financial results can be affected by the amount and timing of capital spending
by healthcare systems and providers, the demand for Erdman’s services in the
healthcare facilities market, the availability of construction level financing,
and weather at the construction sites. Deterioration of market or economic
conditions and volatility in the financial market has and could continue to
influence future revenues, interest, and other costs, and could result in future
impairment of goodwill or other intangible assets.




The
Company reviews the value of goodwill and intangible assets on an annual basis
and when circumstances indicate a potential impairment may exist. An interim
review of the Design-Build and Development’s intangible assets was performed on
March 31, 2009, due to a decline in the Company’s stock price, a decline in the
cash flow multiples for comparable public engineering and construction
companies, and changes in the cash flow projections for the Design-Build and
Development business segment resulting from a decline in backlog and delays and
cancellations of client building projects. The Company determined that an
interim review was not necessary as of June 30, 2009.




As
a result of the March 31, 2009 review, the Company recorded, during the three
months ended March 31, 2009, a pre-tax, non-cash impairment charge of ($120.9
million) and the Company recognized a non-cash income tax benefit of $19.2
million, resulting in an after-tax impairment charge of ($101.7 million). The
Company’s goodwill, amortizing and non-amortizing intangible assets, and
deferred tax liabilities associated with the Design-Build and Development
business segment have been reduced from the December 31, 2008 carrying amounts
as a result of the impairment charge.




In
January 2009, the Company began construction on a five-story, 107,000 square
foot medical office building development project in Jackson, Tennessee. This
$21.1 million West Tennessee MOB project is 75% pre-leased and scheduled for
completion during first quarter 2010. The Company expects to own approximately
50% of the building through a joint venture with physician investors. The
Company obtained financing in an amount of $14.8 million from a construction
loan on the West Tennessee MOB facility. The loan provides for interest-only
payments during the construction period at a rate of one-month LIBOR plus 2.50%.
In September 2010, the loan converts to an amortizing loan with monthly payments
based on a 25-year amortization schedule at an interest rate of one-month LIBOR
plus 2.50%. The Company has entered into a forward starting interest rate swap
agreement that effectively fixes the interest rate at 6.19% after the
construction period through maturity. The loan matures September
2020.


25




In
May 2009, the Company began construction on a 60,000 square foot facility in St.
Cloud, Minnesota. The $20.2 million HealthPartners Central Minnesota Clinic is
85% pre-leased and scheduled for completion during the second quarter of 2010.
The Company will own 100% of the facility and the Company’s subsidiary, Erdman,
will perform the development and design-build services. The Company obtained
financing in an amount of $14.0 million from a construction loan on the
facility. The loan provides for interest-only payments during the construction
period at a rate of one-month LIBOR plus 3.25%, but not less than 6.0%. In
December 2010, the loan converts to an amortizing loan with monthly payments
based on a 22.5-year amortization schedule at an interest rate of one-month
LIBOR plus 3.25%, but not less than 6.0%. The loan matures November
2014.




In
June 2009, the Company began construction on a 50,575 square foot medical office
building in Brandon, Mississippi to serve the communities of the Jackson,
Mississippi metro area. The $13.9 million University Physicians-Grants Ferry
project is 100% pre-leased and scheduled for completion during the second
quarter of 2010. The Company will own 100% of the project and the Company’s
subsidiary, Erdman, will perform the development and design-build services. The
Company obtained financing in an amount of $10.4 million from a construction
loan on the medical office building. The loan provides for interest-only
payments during the construction period at a rate of one-month LIBOR plus 2.25%.
In October 2010, the loan converts to an amortizing loan with monthly payments
based on a 25-year amortization schedule at an interest rate of one-month LIBOR
plus 2.25%. The Company has entered into a forward starting interest rate swap
agreement that effectively fixes the interest rate at 5.95% after the
construction period through maturity. The loan matures April 2019.




As
of June 30, 2009, the Company’s portfolio consisted of 115 medical office
buildings and healthcare related facilities, serving 22 hospital systems in 12
states. The Company’s aggregate portfolio at June 30, 2009, was comprised of 62
consolidated wholly-owned and joint venture properties, three unconsolidated
joint venture properties (see Note 3 of the accompanying condensed consolidated
financial statements in this Form 10-Q), and 50 managed medical office
buildings. At June 30, 2009, approximately 80.9% of the net rentable square feet
of the Company’s wholly-owned properties were situated on hospital campuses. As
such, the Company believes that its assets occupy a premier franchise location
in relation to local hospitals, providing its properties with a distinct
competitive advantage over alternative medical office space in an area. The
Company believes that its property locations and relationships with hospitals
will allow the Company to capitalize on the increasing healthcare trend of
outpatient procedures.




At
June 30, 2009, the Company’s aggregate portfolio contained approximately 5.8
million net rentable square feet, consisting of approximately 3.3 million net
rentable square feet from consolidated wholly-owned and joint venture
properties, approximately 0.2 million net rentable square feet from
unconsolidated joint venture properties, and approximately 2.2 million net
rentable square feet from properties owned by third parties and managed by the
Company. As of June 30, 2009, the Company’s 62 in-service, consolidated
wholly-owned and joint venture properties were approximately 90.9% occupied,
with a weighted average remaining lease term of approximately 4.2
years.




Critical
Accounting Policies




The
Company’s discussion and analysis of financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared on the accrual basis of accounting in conformity with GAAP.
All significant intercompany balances and transactions have been eliminated in
consolidation.




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses in the reporting period. The Company’s actual results may
differ from these estimates. Management has provided a summary of the Company’s
significant accounting policies in Note 2 to the consolidated financial
statements included in its Annual Report on Form 10-K for the year ended
December 31, 2008. Critical accounting policies are those judged to involve
accounting estimates or assumptions that may be material due to the levels of
subjectivity and judgment necessary to account for uncertain matters or
susceptibility of such matters to change. Other companies in similar businesses
may utilize different estimation policies and methodologies, which may impact
the comparability of the Company’s results of operations and financial condition
to those companies.


26




Acquisition
of Real Estate




The
price that the Company pays to acquire a property is impacted by many factors,
including the condition of the buildings and improvements, the occupancy of the
building, the existence of above and below market tenant leases, the
creditworthiness of the tenants, favorable or unfavorable financing, above or
below market ground leases and numerous other factors. Accordingly, the Company
is required to make subjective assessments to allocate the purchase price paid
to acquire investments in real estate among the assets acquired and liabilities
assumed based on the Company’s estimate of the fair values of such assets and
liabilities. This includes determining the value of the buildings and
improvements, land, any ground leases, tenant improvements, in-place tenant
leases, tenant relationships, the value (or negative value) of above (or below)
market leases and any debt assumed from the seller or loans made by the seller
to the Company. Each of these estimates requires significant judgment and some
of the estimates involve complex calculations. The Company’s calculation
methodology is summarized in Note 2 to the consolidated financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 2008.
These allocation assessments have a direct impact on the Company’s results of
operations because if the Company were to allocate more value to land there
would be no depreciation with respect to such amount or if the Company were to
allocate more value to the buildings as opposed to allocating to the value of
tenant leases, this amount would be recognized as an expense over a much longer
period of time, since the amounts allocated to buildings are depreciated over
the estimated lives of the buildings whereas amounts allocated to tenant leases
are amortized over the terms of the leases. Additionally, the amortization of
value (or negative value) assigned to above (or below) market rate leases is
recorded as an adjustment to rental revenue as compared to amortization of the
value of in-place leases and tenant relationships, which is included in
depreciation and amortization in the Company’s consolidated and combined
statements of operations.




Acquisition
of Business




The
price that the Company pays to acquire a business is impacted by many factors,
including projected future cash flows, customer lists, contracts and proposals,
trade names and trademarks, condition of property, plant, and equipment, and
numerous other factors. Accordingly, the Company is required to make subjective
assessments to allocate the purchase price paid to acquire investments in
business among the assets acquired and liabilities assumed based on the
Company’s estimate of the fair values of such assets and liabilities. This
includes determining the value of contacts, proposals, customer lists,
workforce, trade names and trademarks, receivables, accruals and reserves, and
property, plant, and equipment. Each of these estimates requires significant
judgment and some of the estimates involve complex calculations. The Company’s
calculation methodology is summarized in Note 2 to the consolidated financial
statements included in its Annual Report on Form 10-K for the year ended
December 31, 2008. These allocation assessments have a direct impact on the
Company’s results of operations because if the Company were to allocate more
value to goodwill or a non-amortizing intangible asset there would be no
amortization with respect to such amount or if the Company were to allocate more
value to a longer-lived asset as opposed to allocating to a shorter-lived asset,
this amount would be recognized as an expense over a longer period of
time.




Useful
Lives of Assets




The
Company is required to make subjective assessments as to the useful lives of the
Company’s properties and intangible assets for purposes of determining the
amount of depreciation and amortization to record on an annual basis with
respect to the Company’s assets. These assessments have a direct impact on the
Company’s net income (loss) because if the Company were to shorten the expected
useful lives, then the Company would depreciate or amortize such assets over
fewer years, resulting in more depreciation or amortization expense on an annual
basis.




Asset
Impairment Valuation




The
Company reviews the carrying value of its properties, investments in real estate
partnerships, and amortizing intangible assets annually and when circumstances,
such as adverse market conditions, indicate that a potential impairment may
exist. The Company bases its review on an estimate of the future cash flows
(excluding interest charges) expected to result from the real estate or business
investment’s use and eventual disposition. The Company considers factors such as
future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If the Company’s evaluation indicates
that it may be unable to recover the carrying value of an investment, an
impairment loss is recorded to the extent that the carrying value exceeds the
estimated fair value of the asset. These losses have a direct impact on the
Company’s net income (loss) because recording an impairment loss results in an
immediate negative adjustment to operating results. The evaluation of
anticipated cash flows is highly subjective and is based in part on assumptions
regarding future sales, backlog, occupancy, rental rates and capital
requirements that could differ materially from actual results in future periods.
Because cash flows on properties considered to be long-lived assets to be held
and used are considered on an undiscounted basis to determine whether an asset
has been impaired, the Company’s strategy of holding properties over the
long-term directly decreases the likelihood of recording an impairment loss for
properties. If the Company’s strategy changes or market conditions otherwise
dictate an earlier sale date, an impairment loss may be recognized and such loss
could be material. If the Company determines that impairment has occurred, the
affected assets must be reduced to their fair value. The Company estimates the
fair value of rental properties utilizing a discounted cash flow analysis that
includes projections of future revenues, expenses and capital improvement costs,
similar to the income approach that is commonly utilized by
appraisers.


27




The
Company reviews the value of goodwill using an income approach and market
approach on an annual basis and when circumstances indicate a potential
impairment may exist. The Company’s methodology to review goodwill impairment,
which includes a significant amount of judgment and estimates, provides a
reasonable basis to determine whether impairment has occurred. However, many of
the factors employed in determining whether or not goodwill is impaired are
outside of the Company’s control and it is likely that assumptions and estimates
will change in future periods. These changes can result in future impairments
which could be material.




The
goodwill impairment review involves a two-step process. The first step is a
comparison of the reporting unit’s fair value to its carrying value. Fair value
is estimated by utilizing two approaches, an income approach and a market
approach. The income approach uses the reporting unit’s projected operating
results and discounted cash flows using a weighted-average cost of capital that
reflects current market conditions. The cash flow projections use estimates of
economic and market information over the projection period, including growth
rates in revenues and costs and estimates of future expected changes in
operating margins and cash expenditures. Other significant estimates and
assumptions include terminal value growth rates, future estimates of capital
expenditures, and changes in future working capital requirements. The market
approach estimates fair value by applying cash flow multiples to the reporting
unit’s operating performance. The multiples are derived from comparable publicly
traded companies with similar operating and profitability characteristics.
Additionally, the Company reconciles the total of the estimated fair values of
all its reporting units to its market capitalization to determine if the sum of
the individual fair values is reasonable compared to the external market
indicators.




If
the carrying value of the reporting unit is higher than its fair value, then an
indication of impairment may exist and a second step must be performed to
measure the amount of impairment. The amount of impairment is determined by
comparing the implied fair value of the reporting unit’s goodwill to the
carrying value of the goodwill calculated in the same manner as if the reporting
unit was being acquired in a business combination. If the implied fair value of
goodwill is less than the recorded goodwill, then an impairment charge for the
difference would be recorded. For non-amortizing intangible assets, the Company
estimates fair value by applying an estimated market royalty rate to projected
revenues and discounted using a weighted-average cost of capital that reflects
current market conditions.




If
market and economic conditions deteriorate and cause (1) declines in the
Company’s stock price, (2) increases the estimated weighted-average cost of
capital, (3) changes in cash flow multiples or projections, or (4) changes in
other inputs to goodwill assessment estimates, then a goodwill impairment review
may be required prior to the Company’s next annual test. It is reasonably
possible that changes in the numerous variables associated with the judgments,
assumptions, and estimates could cause the goodwill or non-amortizing intangible
assets to become impaired. If goodwill or non-amortizing intangible assets are
impaired, the Company would be required to record a non-cash charge that could
have a material adverse affect on its consolidated financial
statements.




Revenue
Recognition




Rental
income related to non-cancelable operating leases is recognized using the
straight line method over the terms of the tenant leases. Deferred rents
included in the Company’s consolidated balance sheets represent the aggregate
excess of rental revenue recognized on a straight line basis over the rental
revenue that would be recognized under the cash flow received, based on the
terms of the leases. The Company’s leases generally contain provisions under
which the tenants reimburse the Company for all property operating expenses and
real estate taxes incurred by the Company. Such reimbursements are recognized in
the period that the expenses are incurred. Lease termination fees are recognized
when the related leases are canceled and the Company has no continuing
obligation to provide services to such former tenants. The Company recognizes
amortization of the value of acquired above or below market tenant leases as a
reduction of rental income in the case of above market leases or an increase to
rental revenue in the case of below market leases.


28




For
design-build contracts, the Company recognizes revenue under the percentage of
completion method. Due to the volume, varying complexity, and other factors
related to the Company’s design-build contracts, the estimates required to
determine percentage of completion are complex and use subjective judgments.
Changes in labor costs and material inputs can have a significant impact on the
percentage of completion calculations. The Company has a long history of
developing reasonable and dependable estimates related to design-build contracts
with clear requirements and rights of the parties to the contracts. As long-term
design-build projects extend over one or more years, revisions in cost and
estimate earnings during the course of the work are reflected in the accounting
period in which the facts which require the revision become known. At the time a
loss on a design-build project becomes known, the entire amount of the estimated
ultimate loss is recognized in the consolidated financial
statements.




The
Company receives fees for property management and development and consulting
services from time to time from third parties which are reflected as fee
revenue. Management fees are generally based on a percentage of revenues for the
month as defined in the related property management agreements. Revenue from
development and consulting agreements is recognized as earned per the
agreements. Due to the amount of control retained by the Company, most joint
venture developments will be consolidated; therefore, those development fees
will be eliminated in consolidation.




Other
income shown in the statement of operations generally includes interest income,
primarily from the amortization of unearned income on a sales-type capital lease
recognized in accordance with Statement of Financial Accounting Standards No.
13, and other income incidental to the Company’s operations and is recognized
when earned.




The
Company must make subjective estimates as to when the Company’s revenue is
earned and the collectibility of the Company’s accounts receivable related to
design-build contracts and other sales, minimum rent, deferred rent, expense
reimbursements, lease termination fees and other income. The Company
specifically analyzes accounts receivable and historical bad debts, tenant and
customer concentrations, tenant and customer creditworthiness, and current
economic trends when evaluating the adequacy of the allowance for bad debts.
These estimates have a direct impact on the Company’s net income because a
higher bad debt allowance would result in lower net income, and recognizing
rental revenue as earned in one period versus another would result in higher or
lower net income for a particular period.




REIT
Qualification Requirements




The
Company is subject to a number of operational and organizational requirements to
qualify and then maintain qualification as a REIT. If the Company does not
qualify as a REIT, its income would become subject to U.S. federal, state and
local income taxes at regular corporate rates that would be substantial and the
Company cannot re-elect to qualify as a REIT for four taxable years following
the year it failed to quality as a REIT. The resulting adverse effects on the
Company’s results of operations, liquidity and amounts distributable to
stockholders would be material.




Changes
in Financial Condition




In
June 2009, the Company issued 23.0 million shares of common stock in a public
offering at a price of $3.50 per share resulting in net proceeds to the Company
of approximately $76.5 million. The net proceeds were used to fund the $50.0
million repayment under the Term Loan, to reduce borrowings under the Company’s
Credit Facility, and for working capital purposes. For more information on the
Credit Facility, see “Liquidity and Capital Resources.”




Results
of Operations




The
Company’s loss from operations is generated primarily from operations of its
properties and design-build services. The changes in operating results from
period to period reflect changes in existing property performance, changes in
the number of properties due to development, acquisition, or disposition of
properties, and the operating results of the Design-Build and Development
business segment. For the six months ended June 30, 2009, a significant
proportion of the Company’s loss from operations is due to the ($101.7 million),
net of tax, non-cash impairment charge discussed previously in the “Overview”
section.




The
Company acquired Erdman in March 2008 and results for the six months ended June
30, 2008, reflect four month of operating activity related to the Erdman
subsidiary, reflecting operations from the acquisition date to June 30, 2008.
For the six months ended June 30, 2009, there are six months of operating
activity.




Business
Segments




The
Company has two identified reportable segments: (1) Property Operations and (2)
Design-Build and Development. The Company defines business segments by their
distinct customer base and service provided. Each segment operates under a
separate management group and produces discrete financial information, which is
reviewed by the chief operating decision maker to make resource allocation
decisions and assess performance. See Note 4 of the accompanying consolidated
financial statements.


29




Property
Summary




The
following is an activity summary of the Company’s property portfolio (excluding
unconsolidated partnership properties) for the three and six months ended June
30, 2009 and 2008 and the year ended December 31, 2008:


Three
      Months Ended
                                                                
                                                                
                                                                Six
      Months EndedJune
      30, 2009
                                                                
                                                                
                                                                June
      30, 2008
                                                                
                                                                
                                                                June
      30, 2009
                                                                
                                                                
                                                                June
      30, 2008Properties
      at beginning of the period
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                61
                                                                
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                59Acquisitions
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2Developments
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1Properties
      at end of the period
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                62Year
    EndedDecember
      31, 2008Properties
      at January 1
                                                                
                                                                
                                                                59Acquisitions
                                                                
                                                                
                                                                2Developments
                                                                
                                                                
                                                                1Properties
      at December 31
                                                                
                                                                
                                                                62




The
above tables include East Jefferson Medical Specialty Building, which is
accounted for as a sales-type capital lease.




A
property is considered “in-service” upon the earlier of (1) lease-up and
substantial completion of tenant improvements, or (2) one year after cessation
of major construction. For portfolio and operational data, a single in-service
date is used. For GAAP reporting, a property is placed into service in stages as
construction is completed and the property and tenant space is available for its
intended use.




Comparison
of the three and six months ended June 30, 2009 and 2008




Funds
from Operations Modified (“FFOM”)




For
the three and six months ended June 30, 2009, FFOM, excluding impairment charge
net of income tax benefit, decreased $2.4 million, or 32.9%, and $0.1 million,
or 1.1%, compared to the same periods last year, respectively. The decrease for
the three months ended June 30, 2009, is due primarily to a $1.5 million debt
extinguishment and interest rate derivative charge, net of income tax benefit,
and fewer active third-party design-build projects. The following is a summary
of FFOM for the three and six months ended June 30, 2009 and 2008 (in
thousands):


Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008FFOM
      attributable to:Property
      operations
              
              $
              12,573
              
              
              $
              12,379
              
              
              $
              25,090
              
              
              $
              24,803Design-Build
      and development, excluding impairment charge
              
              
              3,179
              
              
              
              5,809
              
              
              
              8,127
              
              
              
              6,835Intersegment
      eliminations
              
              
              (1,798
              )
              
              
              (24
              )
              
              
              (2,452
              )
              
              
              (97
              )Unallocated
      and other, excluding tax benefit of impairment charge
              
              
              (9,039
              )
              
              
              (10,838
              )
              
              
              (17,792
              )
              
              
              (18,415
              )FFOM,
      excluding impairment charge, net of income tax benefit
              
              
              4,915
              
              
              
              7,326
              
              
              
              12,973
              
              
              
              13,126Impairment
      charge, net of income tax benefit
              
              
              —
              
              
              
              —
              
              
              
              (101,746
              )
              
              
              —FFOM
              
              $
              4,915
              
              
              $
              7,326
              
              
              $
              (88,773
              )
              
              $
              13,126


30


See
Note 4 to the accompanying condensed consolidated financial statements in this
Form 10-Q for business segment information and management’s use of FFO and FFOM
to evaluate operating performance. The following table presents the
reconciliation of FFO and FFOM to net loss, which is the most directly
comparable GAAP measure to FFO and FFOM, for the three and six months ended June
30, 2009 and 2008 (in thousands):


Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008Net
      loss
              
              $
              (3,050
              )
              
              $
              (2,980
              )
              
              $
              (105,374
              )
              
              $
              (5,547
              )Add:Real
      estate related depreciation and amortization:Wholly-owned
      and consolidated properties
              
              
              7,344
              
              
              
              7,826
              
              
              
              14,684
              
              
              
              15,615Unconsolidated
      real estate partnerships
              
              
              3
              
              
              
              3
              
              
              
              5
              
              
              
              6Less:Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
              
              
              (224
              )
              
              
              (74
              )
              
              
              (470
              )
              
              
              (152
              )FFO
              
              
              4,073
              
              
              
              4,775
              
              
              
              (91,155
              )
              
              
              9,922Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
              
              
              842
              
              
              
              2,551
              
              
              
              2,382
              
              
              
              3,204FFOM
              
              $
              4,915
              
              
              
              7,326
              
              
              $
              (88,773
              )
              
              
              13,126




FFOM
attributable to Property Operations




The
following is a summary of FFOM attributable to property operations for the three
and six months ended June 30, 2009 and 2008 (in thousands):


Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008Rental
      revenue
              
              $
              19,685
              
              
              $
              19,300
              
              
              $
              39,375
              
              
              $
              37,991Property
      management and other fee revenue
              
              
              863
              
              
              
              835
              
              
              
              1,713
              
              
              
              1,672Property
      operating and management expenses
              
              
              (7,884
              )
              
              
              (7,841
              )
              
              
              (15,812
              )
              
              
              (15,040
              )Other
      income (expense)
              
              
              129
              
              
              
              151
              
              
              
              270
              
              
              
              319Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
              
              
              4
              
              
              
              8
              
              
              
              14
              
              
              
              13Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
              
              
              (224
              )
              
              
              (74
              )
              
              
              (470
              )
              
              
              (152
              )FFOM
              
              $
              12,573
              
              
              $
              12,379
              
              
              $
              25,090
              
              
              $
              24,803




See
Note 4 of the accompanying condensed consolidated financial statements in the
Form 10-Q for a reconciliation of above segment FFOM to net loss.




For
the three and six months ended June 30, 2009, FFOM attributable to property
operations increased $0.2 million, or 1.6%, and $0.3 million, or 1.2%, compared
to the same periods last year, respectively.




The
increases in rental revenue, property operating and management expenses, and
noncontrolling interests in real estate partnerships before real estate related
depreciation and amortization are primarily due to the addition of the Alamance
Regional Mebane Outpatient Center property, which began operations in June 2008.
In addition, rental revenue increased due to increases in rental rates
associated with consumer price index (“CPI”) increases and reimbursable
expenses.


31




FFOM
attributable to Design-Build and Development, net of intersegment
eliminations




The
Design-Build and Development segment includes Erdman, which the Company acquired
in March 2008, and results for the three and six months ended June 30, 2008,
reflect three and four months, respectively, of operating activity related to
the Erdman subsidiary, reflecting operations from the acquisition date to June
30, 2008. Results for the three and six months ended June 30, 2009, reflect
three and six months, respectively, of operating activity. The following is a
summary of FFOM attributable to Design-Build and Development, net of
intersegment eliminations, for the three and six months ended June 30, 2009 and
2008 (in thousands):


Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008Design-Build
      contract revenue and other sales
              
              $
              36,712
              
              
              $
              78,021
              
              
              $
              83,101
              
              
              $
              101,956Development
      management and other income
              
              
              227
              
              
              
              110
              
              
              
              3,027
              
              
              
              129Design-Build
      contract and development management expenses
              
              
              (31,242
              )
              
              
              (66,286
              )
              
              
              (71,407
              )
              
              
              (87,330
              )Selling,
      general, and administrative expenses
              
              
              (4,099
              )
              
              
              (5,800
              )
              
              
              (8,613
              )
              
              
              (7,681
              )Other
      income (expense)
              
              
              2
              
              
              
              46
              
              
              
              4
              
              
              
              85Depreciation
      and amortization
              
              
              (196
              )
              
              
              (306
              )
              
              
              (390
              )
              
              
              (421
              )FFOM,
      excluding impairment charge
              
              
              1,404
              
              
              
              5,785
              
              
              
              5,722
              
              
              
              6,738Impairment
      charge
              
              
              —
              
              
              
              —
              
              
              
              (120,920
              )
              
              
              —FFOM
              
              $
              1,404
              
              
              $
              5,785
              
              
              $
              (115,198
              )
              
              $
              6,738




See
Note 4 of the accompanying condensed consolidated financial statements in the
Form 10-Q for a reconciliation of above segment FFOM to net loss.




For
the three and six months ended June 30, 2009, FFOM, excluding impairment charge,
attributable to design-build and development, net of intersegment eliminations,
decreased $4.4 million, or 75.7%, and $1.0 million, or 15.1%, compared to the
same periods last year.




For
both the three and six months periods ended June 30, 2009, compared to the same
periods last year, design-build contract revenue and other sales and
design-build contracts and development management expenses decreased due to a
lower volume of activity. The number of active revenue generating construction
projects decreased from 42 at June 30, 2008 to 24 at June 30, 2009. The
decreased activity is due to the current economic environment and the volatility
in the credit markets, which has resulted in clients delaying project starts and
client project cancellations. The decrease for the six months ended June 30,
2009, compared to the same period last year was offset by two additional months
of activity in 2009 as compared to 2008 because the Erdman acquisition occurred
in March 2008.




For
the three and six months ended June 30, 2009, development management and other
income increased $0.1 million, or 106.4%, and $2.9 million, or 2246.5%, compared
to the same periods last year. The increase is due to two active third party
development engagements during 2009 compared to one engagement in 2008. One of
the development engagements, which accounted for $2.0 million of the increase in
three months ended March 31, 2009, related to the St. Luke’s Riverside
engagement in Bethlehem, Pennsylvania. This was a three building engagement
project, of which the Company was to wholly-own or partially-own one of the
three buildings. Due to changes in the scope, size, and timing of the project,
the Company no longer intends to invest in the building under the original
terms. In accordance with the development agreement, the hospital system client
was invoiced during the first quarter of 2009 for all reimbursable projects
costs and for development services performed by the Company.




For
the three and six months ended June 30, 2009, selling, general, and
administrative expenses decreased $1.7 million, or 29.3%, and increased $0.9
million, or 12.1%. Selling, general, and administrative decreased due to
reductions in force that occurred in December 2008 and May 2009, resulting in
fewer employees in 2009 compared to 2008, and incentive compensation was
eliminated in 2009 due to the decreased profitability related to the business
segment. For the six month periods, the decrease was offset by two additional
months of costs in 2009 as compared to 2008 because the Erdman acquisition
occurred in March 2008.




Gross
margin percentage (defined as design-build contract revenue and other sales less
design-build contract and development management expenses as a percentage of
design-build contract revenue and other sales) was 14.9% and 15.0% for the three
months ended June 30, 2009 and 2008, respectively, and 14.1% and 14.3% for the
six months ended June 30, 2009 and 2008, respectively.




Selling,
general, and administrative




For
the three months ended June 30, 2009, selling, general, and administrative
expenses decreased $1.8 million, or 21.4%, as compared to the same period last
year. Excluding the decrease attributed to the Design-Build and Development
segment, which is discussed above, selling, general, and administrative
decreased $0.1 million.




For
the six months ended June 30, 2009, selling, general, and administrative
expenses increased $0.6 million, or 4.3%, as compared to the period last year.
Excluding the increase attributed to the Design-Build and Development segment,
which is discussed above, selling, general, and administrative decreased $0.4
million.


32




Depreciation
and amortization




For
the three months ended June 30, 2009, depreciation and amortization expenses
decreased $3.4 million, or 27.5%, as compared to the same period last year. The
decrease was primarily due to a decrease in intangible amortization related to
the Erdman acquisition. As a result of the impairment recorded in the first
quarter of 2009, the intangible asset values are smaller and the resulting
amortization is smaller.




For
the six months ended June 30, 2009, depreciation and amortization expenses
decreased $2.3 million, or 10.8%, as compared to the same period last year. The
decrease was primarily due to the decrease in intangible amortization discussed
above, offset by two additional months of expense in 2009 as compared to 2008
because the Erdman acquisition occurred in March 2008. In addition, amortization
of acquired in place lease intangible assets has decreased compared to the prior
year as the value associated with properties acquired in 2005 became fully
amortized.




Impairment
charge




The
Company reviews the value of goodwill and intangible assets on an annual basis
and when circumstances indicate a potential impairment may exist. An interim
review of the Design-Build and Development’s intangible assets was performed on
March 31, 2009, due to a decline in the Company’s stock price, a decline in the
cash flow multiples for comparable public engineering and construction
companies, and changes in the cash flow projections for the Design-Build and
Development business segment resulting from a decline in backlog and delays and
cancellations of client building projects. The Company determined that an
interim review was not necessary as of June 30, 2009.




As
a result of the March 31, 2009 review, the Company recorded, during the three
months ended March 31, 2009, a pre-tax, non-cash impairment charge of ($120.9
million) and the Company recognized a non-cash income tax benefit of $19.2
million, resulting in an after-tax impairment charge of ($101.7 million). The
Company’s goodwill, amortizing and non-amortizing intangible assets, and
deferred tax liabilities associated with the Design-Build and Development
business segment have been reduced from the December 31, 2008 carrying amounts
as a result of the impairment charge.




There
was no such charge in the same periods last year.




Interest
expense




For
the three months ended June 30, 2009, interest expense decreased $1.3 million,
or 18.4%, as compared to the same period last year. The decrease was due to: 1)
lower debt balances as the Company used a majority of the proceeds from its May
2009 and September 2008 equity offerings to repay debt, 2) a decrease in
interest rates, primarily one-month LIBOR, and 3) $0.3 million interest expense
reduction in second quarter of 2009 associated with a mark-to-market value
change related to an interest rate contract that was not accounted for as a
hedged contract during the quarter.




For
the six months ended June 30, 2009, interest expense decreased $0.3 million, or
2.8%, as compared to the same period last year. The decrease was due to the
reasons discussed above, offset by two additional months of interest expense in
2009 compared to 2008 related to larger debt balances resulting from the Erdman
acquisition in March 2008.




Income
tax benefit (expense)




For
the three months ended June 30, 2009, income tax benefit increased $2.6 million,
or 676.5%, as compared to the same period last year. The increase was primarily
due to the decreased FFOM for the Design-Build and Development segment for the
comparable period and due to the debt extinguishment and interest rate
derivative expenses that occurred in the second quarter of 2009, where as there
was no such expenses in same period last year.




For
the six months ended June 30, 2009, income tax benefit increased $22.6 million,
or 3,050.5%, as compared to the same period last year. The increase was
primarily due to the non-cash income tax benefit associated with the goodwill
and intangible asset impairment charge recorded during the first quarter of
2009.




Net
loss attributable to the noncontrolling interest in Operating
Partnership




For
the three months ended June 30, 2009, net loss attributable to the
noncontrolling interest in Operating Partnership decreased $0.3 million, or
28.1%, as compared to the same period last year. The decrease was due to the
increase in net loss, offset by a smaller noncontrolling ownership percentage
due to the common stock equity raise in June 2009.


33




For
the six months ended June 30, 2009, net loss attributable to the noncontrolling
interest in Operating Partnership increased $31.1 million, or 1,691.5%, as
compared to the same period last year. The increase was primarily due to the
increase in net loss, which primarily increased due to the impairment
charge.




Cash
Flows




Comparison
of the six months ended June 30, 2009 and 2008




Cash
provided by operating activities increased $15.9 million for the six months
ended June 30, 2009, as compared to the same period last year and is summarized
below for the six months ended June 30, 2009 and 2008 (in
thousands):


Six
      Months EndedJune
      30, 2009
                                    
                                    
                                    June
      30, 2008Net
      loss plus non-cash adjustments
                                    
                                    $
                                    16,781
                                    
                                    
                                    $
                                    15,491Changes
      in operating assets and liabilities
                                    
                                    
                                    155
                                    
                                    
                                    
                                    (14,457
                                    )Net
      cash provided by operating activities
                                    
                                    $
                                    16,936
                                    
                                    
                                    $
                                    1,034




The
net loss plus non-cash adjustments increased $1.3 million, or 8.3%, for the six
months ended June 30, 2009, as compared to the same period last year. The
increase is primarily due to the timing and recognition of non-cash deferred
income taxes. The changes in operating assets and liabilities increased $14.6
million, or 101.1%, for the six months ended June 30, 2009 as compared to the
same period last year. The increase is primarily due to the following: 1) a
decrease in Design-Build and Development accounts receivable, which increases
cash provided by operations, 2) an increase in Design-Build and Development
billings in excess of costs and estimated earnings on uncompleted contracts,
which increases cash provided by operations, 3) decreased incentive compensation
accrued liabilities, which increases cash provided by operations, and 4)
severance costs paid in the first quarter of 2009 compared to no such payments
in 2008, which decreases cash provided by operations.




Cash
used in investing activities decreased $149.3 million, or 87.3%, for the six
months ended June 30, 2009, as compared to the same period last year. The
decrease is primarily due to the cash paid for the Erdman transaction in 2008.
The increase in purchases of corporate property, plant, and equipment is
primarily due the construction of a steel fabrication facility for Erdman.
Erdman is currently leasing a facility on a month-to-month basis. Investment in
real estate properties consisted of the following for the six months ended June
30, 2009 and 2008 (in thousands):


Six
      Months EndedJune
      30, 2009
                                    
                                    
                                    June
      30, 2008Development,
      redevelopment, and acquisitions
                                    
                                    $
                                    18,702
                                    
                                    
                                    $
                                    24,979Second
      generation tenant improvements
                                    
                                    
                                    1,353
                                    
                                    
                                    
                                    2,195Recurring
      property capital expenditures
                                    
                                    
                                    475
                                    
                                    
                                    
                                    1,416Investment
      in real estate properties
                                    
                                    $
                                    20,530
                                    
                                    
                                    $
                                    28,590




Cash
provided by financing activities decreased $188.0 million, or 109.6%, for the
six months ended June 30, 2009, as compared to same period last year. The
decrease is primarily due to fewer debt and equity proceeds received in
2009 compared to 2008.




Construction
in Progress




Construction
in progress consisted of the following as June 30, 2009 (dollars in
thousands):


Property
                              
                              Location
                              
                              Estimated
                                Completion
      Date
                              
                              
                              Net
      Rentable
                                Square
      Feet
                              
                              
                              Investment
                                to
      Date
                              
                              
                              Estimated
                                Total
                                InvestmentAlamance
      Regional Cancer Center
                              
                              Mebane,
      NC
                              
                              3Q
      2009
                              
                              
                              
                              8,500
                              
                              
                              $
                              1,241
                              
                              
                              $
                              1,800The
      Woodlands Center for Specialized Medicine
                              
                              Pensacola,
      FL
                              
                              4Q
      2009
                              
                              
                              
                              76,000
                              
                              
                              
                              18,142
                              
                              
                              
                              25,900The
      Medical Physicians Tower
                              
                              Jackson,
      TN
                              
                              1Q
      2010
                              
                              
                              
                              107,000
                              
                              
                              
                              5,089
                              
                              
                              
                              21,100HealthPartners
      Central Minnesota Clinic
                              
                              St.
      Cloud, MN
                              
                              2Q
      2010
                              
                              
                              
                              60,000
                              
                              
                              
                              4,108
                              
                              
                              
                              20,200University
      Physicians - Grants Ferry
                              
                              Flowood,
      MS
                              
                              2Q
      2010
                              
                              
                              
                              50,600
                              
                              
                              
                              2,752
                              
                              
                              
                              13,900Land
      and pre-construction developments
                              
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              
                              5,087
                              
                              
                              
                              —302,100
                              
                              
                              $
                              36,419
                              
                              
                              $
                              82,900


34




Liquidity and Capital
Resources




As
of June 30, 2009, the Company had approximately $13.4 million available in cash
and cash equivalents. The Company is required to distribute at least 90% of the
Company’s net taxable income, excluding net capital gains, to the Company’s
stockholders on an annual basis due to qualification requirements as a REIT.
Therefore, as a general matter, it is unlikely that the Company will have any
substantial cash balances that could be used to meet the Company’s liquidity
needs. Instead, these needs must be met from cash generated from operations and
external sources of capital.




The
Company has a $150.0 million secured revolving credit facility with a syndicate
of financial institutions (including Bank of America, N.A., Citicorp North
America, Inc., Branch Banking and Trust Company, Banc of America Securities LLC,
and Citigroup Global Markets Inc.) (collectively, the “Lenders”). The Credit
Facility is available to fund working capital and for other general corporate
purposes; to finance acquisition and development activity; and to refinance
existing and future indebtedness. The Credit Facility permits the Company to
borrow up to $150.0 million of revolving loans, with sub-limits of $25.0 million
for swingline loans and $25.0 million for letters of credit.




The
Credit Facility will terminate and all amounts outstanding thereunder shall be
due and payable in March 2011. The Credit Facility provides for a one-year
extension at the Company’s option conditioned upon the Lenders being satisfied
with the Company and its subsidiaries’ financial condition and liquidity, and
taking into consideration any payment, extension or refinancing of the Term
Loan. There can be no assurance if and on what terms the Lenders may be willing
to extend the Credit Facility upon its maturity in March 2011.




The
Credit Facility also allows for up to $100.0 million of increased availability
(to a total aggregate available amount of $250.0 million), at the Company’s
option but subject to each Lender’s option to increase its commitment. The
interest rate on loans under the Credit Facility equals, at the Company’s
election, either (1) LIBOR (0.31% as of June 30, 2009) plus a margin of between
95 to 140 basis points based on the Company’s total leverage ratio (1.15% as of
June 30, 2009) or (2) the higher of the federal funds rate plus 50 basis points
or Bank of America, N.A.’s prime rate (3.25% as of June 30, 2009).




The
Credit Facility contains customary terms and conditions for credit facilities of
this type, including, but not limited to: (1) affirmative covenants relating to
the Company’s corporate structure and ownership, maintenance of insurance,
compliance with environmental laws and preparation of environmental reports,
maintenance of the Company’s REIT qualification and listing on the New York
Stock Exchange, (2) negative covenants relating to restrictions on liens,
indebtedness, certain investments (including loans and certain advances),
mergers and other fundamental changes, sales and other dispositions of property
or assets and transactions with affiliates, and (3) financial covenants to be
met by the Company at all times, including a maximum total leverage ratio (70%),
maximum real estate leverage ratio (70%), minimum fixed charge coverage ratio
(1.50 to 1.00), maximum total debt to real estate value ratio (90%) and minimum
consolidated tangible net worth ($45 million plus 85% of the net proceeds of
equity issuances issued after the closing date).




As
of June 30, 2009, there was $62.0 million available under the Credit Facility.
There was $80.0 million outstanding at June 30, 2009 and $8.0 million of
availability was restricted related to outstanding letters of
credit.


35




The
Company, through Erdman, has $50.0 million outstanding under a $50.0 million
Term Loan. The Term Loan was initially $100.0 million and the company
repaid $50.0 million in June 2009. The Term Loan is secured by the stock
and certain accounts receivable of Erdman and is guaranteed by the Company. The
Term Loan matures in March 2011, and is subject to a one-time right to a
one-year extension at the Company’s option (and the payment of an extension
fee). The Term Loan contains customary covenants similar to the Credit Facility
and financial covenants to be met by the Company at all times under the
guaranty, including a maximum total leverage ratio (70%), maximum real estate
leverage ratio (70%), minimum fixed charge coverage ratio (1.50 to 1.00),
maximum total debt to real estate value ratio (90%) and minimum consolidated
tangible net worth ($45 million plus 85% of the net proceeds of equity
issuances), as well as being cross defaulted to the Company’s Credit Facility.
The Term Loan, as amended, also has the following financial covenants relating
only to Erdman as of June 30, 2009:


Financial
      Covenant
                      
                      As
      of and for the 12 Months
                        Ended
      June 30, 2009Minimum
      adjusted consolidated EBITDA to consolidated fixed charges (2.00 to
      1.00)
                      
                      4.13
      to 1.00Maximum
      consolidated senior indebtedness to adjusted consolidated EBITDA (3.50 to
      1.00, with a one-time ability to exceed 3.50 to 1.00, but not greater than
      3.75 to 1.00)
                      
                      1.99
      to 1.00Maximum
      consolidated indebtedness to adjusted consolidated EBITDA (5.50 to
      1.00)
                      
                      1.99
      to
1.00




If
the Company were in default under the Credit Facility or the Term Loan, then the
Lenders can declare the Company in default under the other agreement as well. As
of June 30, 2009, the Company believes that it is in compliance with all of its
debt covenants under the Credit Facility and the Term Loan.




The
current economic environment and the volatility in the credit markets have
affected and, most likely, will continue to affect the Company’s results of
operations and financial position and in particular, the results of operations
and financial position of Erdman. In the first six months of 2009, Erdman
experienced delays in client project starts and some contract cancellations, and
Erdman could face additional delays and cancellations over the next several
quarters. Due to the uncertainty of Erdman’s future operating results, the
Company and the Term Loan lenders amended the Term Loan in June 2009. The
amendment, among other things, amends certain financial covenants relating to
Erdman, as well as certain other provisions of the Term Loan, including (1) the
elimination of the minimum adjusted consolidated EBITDA covenant (previously
$22.5 million), (2) a modification of the maximum adjusted consolidated senior
indebtedness to adjusted consolidated EBITDA covenant to 3.50 to 1.00 through
March 2011, with a one-time ability to exceed 3.50 to 1.00 but not greater than
3.75 to 1.00, and 3.00 to 1.00 from April 2011 to final maturity (previously
4.25 to 1.00 as of March 31, 2009, decreasing to 3.75 to 1.00 as of July 1,
2009), (3) an increase in the interest rate from LIBOR plus 3.50% to LIBOR plus
4.50%, and (4) payment of a market based modification fee. The Amendment was
subject to the repayment of $50.0 million of the outstanding balance under the
Term Loan by the Borrower (which amount was repaid on June 3, 2009) and certain
other customary terms and conditions.




Short-Term Liquidity
Needs




The
Company believes that it will have sufficient capital resources as a result of
operations and the borrowings in place to fund ongoing operations and
distributions required to maintain REIT compliance. As of June 30, 2009, the
Company had approximately $37.8 million of principal and maturity payments
remaining due in 2009 related to mortgage note payables and $32.1 million due in
2010. Of this $69.9 million, $30.0 million, due October 31, 2009, can be
extended for a two-year period at the Company’s conditional option and subject
to appraisal. The Company believes, based on the current loan to value ratios at
individual properties and preliminary discussions with lenders, it will be able
either to extend or refinance the remaining balloon maturities due in 2009 and
2010. In addition, the Company has approximately $75.4 million combined cash and
cash equivalents and Credit Facility availability as of June 30, 2009, which
exceeds the principal and maturity payments due in 2009 and 2010. The company
expects to fund interest payment from cash generated from property operations
and design-build and development earnings before interest, taxes, and
depreciation and amortization.




As
of June 30, 2009, the Company has no outstanding equity commitments to joint
ventures formed prior to June 30, 2009. The Cogdell Spencer Medical Partners LLC
acquisition joint venture with Northwestern Mutual has no properties under
contract as of June 30, 2009, and thus the Company has no equity commitment to
the joint venture as of June 30, 2009.




The
Company intends to have construction financing agreements in place before
construction begins on development projects. As of June 30, 2009, the Company
had $3.3 million of funding remaining on projects it is developing for itself
and the remaining costs will be funded from committed construction loans. The
Company had a remaining purchase commitment to a third party general contractor
totaling $15.1 million for one project, of which the Company will fund $1.2
million after June 30, 2009, and the remaining will be funded from a committed
construction loan. Development projects will be either wholly-owned, joint
ventured with physicians, or joint ventured with other third parties. As of June
30, 2009, the Company had no significant redevelopment projects planned for
2009.


36


On
June 12, 2009, the Company announced that its Board of Directors had declared a
quarterly dividend and distribution of $0.10 per share and OP Unit that was paid
in cash on July 22, 2009 to stockholders and holders of OP Units of record on
June 25, 2009. The dividend and distribution covered the second quarter of 2009
and totaled $5.0 million. The dividend and distribution were equivalent to an
annual rate of $0.40 per share and OP unit.




Through
the fourth quarter of 2008 the Company had funded dividends on its common stock
and distributions on OP units through a combination of funds from operations and
borrowings under its Credit Facility. The Company had used borrowings available
under its Credit Facility to fund dividend and distribution payments when the
timing of the Company’s cash flows available from operations was insufficient to
meet distribution requirements. However, the 2009 first and second quarter
dividends and distributions of $0.225 and $0.10, respectively, per common
share/OP unit was funded entirely out of funds from operations and the Company
expects to curtail borrowings to fund dividends and distributions for the
balance of the current calendar year. Subject to IRS guidelines, the Company is
permitted to pay a portion of its dividend in the form of common stock in lieu
of cash.




Long-Term Liquidity
Needs




The
Company’s principal long-term liquidity needs consist primarily of new property
development, property acquisitions, and principal payments under various
mortgages and other borrowings and non-recurring capital expenditures. The
Company does not expect that its net cash provided by operations will be
sufficient to meet all of these long-term liquidity needs. Instead, the Company
expects to finance new property developments and acquisitions through modest
cash equity capital contributed by the Company together with traditional secured
mortgage financing, as well as through cash equity investments by its tenants or
third parties. In addition, the Company expects to use OP units issued by the
Operating Partnership to acquire properties from existing owners seeking a tax
deferred transaction. The Company expects to fund any cash equity capital
required for developments, acquisitions, or real estate partnership investments
through a combination of cash and cash equivalents on hand and borrowings under
its Credit Facility.




Financial
markets continued to experience unusual volatility and uncertainty during the
second quarter of 2009. Financial systems throughout the world have become
illiquid with banks less willing to lend substantial amounts to other banks and
borrowers. Consequently, there is greater uncertainty regarding the Company’s
ability to access the credit market in order to attract financing or capital on
reasonable terms or on any terms. The Company may also issue unsecured debt in
the future. However, with the current deteriorating general economic conditions
and the current volatility of the debt and equity markets, there can be no
assurance as to the Company’s ability to raise new debt or equity. To the extent
that the Company were in future to address long-term liquidity needs through
dispositions of its properties, depending on which property were to be sold, the
Company may need to structure the sale or disposition as a tax deferred
transaction which would require the reinvestment of the proceeds from such
transaction in another property, or the proceeds that would be available to the
Company from such sales may be reduced by amounts that the Company may owe under
the tax protection agreements entered into in connection with the Company’s
formation transactions and certain property acquisitions. In addition, the
Company’s ability to sell certain of its assets could be adversely affected by
the general illiquidity of real estate assets and certain additional factors
particular to the Company’s portfolio such as the specialized nature of its
target property type, property use restrictions and the need to obtain consents
or waivers of rights of first refusal or rights of first offers from ground
lessors in the case of sales of its properties that are subject to ground
leases.




The
Company intends to repay indebtedness incurred under its Credit Facility from
time to time, for acquisitions or otherwise, out of cash flow from operations
and from the proceeds, to the extent possible and desirable, of additional debt
or equity issuances. In the future, the Company may seek to increase the amount
of the Credit Facility, negotiate additional credit facilities or issue
corporate debt instruments. However, with the current volatility in the debt
markets, there can be no assurance as to the Company’s ability to raise new
debt. Any indebtedness incurred or issued by the Company may be secured or
unsecured, short-, medium- or long-term, fixed or variable interest rate and may
be subject to other terms and conditions the Company deems
acceptable.


37




Contractual
Obligations




The
following table summarizes the Company’s contractual obligations as of June 30,
2009, including the maturities and scheduled principal repayments and the
commitments due in connection with the Company’s ground leases and operating
leases for the periods indicated (in thousands):


Remainder
      of
                2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              Thereafter
              
              
              TotalObligation:Long-term
      debt principal payments and maturities (1)
              
              $
              37,772
              
              
              $
              32,062
              
              
              $
              156,527
              
              
              $
              23,624
              
              
              $
              14,377
              
              
              $
              121,084
              
              
              $
              385,446Standby
      letters of credit (2)
              
              
              6,601
              
              
              
              1,436
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,037Interest
      payments (3)
              
              
              7,218
              
              
              
              13,031
              
              
              
              9,616
              
              
              
              7,838
              
              
              
              6,884
              
              
              
              17,623
              
              
              
              62,210Purchase
      commitments (4)
              
              
              6,981
              
              
              
              8,144
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              15,125Ground
      and air rights leases (5)
              
              
              157
              
              
              
              314
              
              
              
              314
              
              
              
              315
              
              
              
              315
              
              
              
              9,631
              
              
              
              11,046Operating
      leases (6)
              
              
              2,426
              
              
              
              4,408
              
              
              
              3,973
              
              
              
              3,670
              
              
              
              3,089
              
              
              
              24,702
              
              
              
              42,268Total
              
              $
              61,155
              
              
              $
              59,395
              
              
              $
              170,430
              
              
              $
              35,447
              
              
              $
              24,665
              
              
              $
              173,040
              
              
              $
              524,132







(1)
Includes notes payable under the Company’s Credit Facility.




(2) As
collateral for performance, the Company is contingently liable under standby
letters of credit, which also reduces the availability under the Credit
Facility.




(3)
Assumes one-month LIBOR of 0.31% and Prime Rate of 3.25%, which were the rates
as of June 30, 2009.




(4) These
purchase commitments are related to the Company’s development projects that are
currently under construction. The Company will fund $1.2 million and has a
committed construction loan that will fund the remaining
obligation.




(5)Substantially all of the ground and air rights leases effectively limit
our control over various aspects of the operation of the applicable property,
restrict our ability to transfer the property and allow the lessor the right of
first refusal to purchase the building and improvements. All of the ground
leases provide for the property to revert to the lessor for no consideration
upon the expiration or earlier termination of the ground or air rights
lease.




(6)
Payments under operating lease agreements relate to several of our properties’
equipment and office space leases. The future minimum lease commitments under
these leases are as indicated.




Off-Balance
Sheet Arrangements




The
Company may guarantee debt in connection with certain of its development
activities, including joint ventures, from time to time. As of June 30, 2009,
the Company did not have any such guarantees or other off-balance sheet
arrangements outstanding.




Real
Estate Taxes




The
Company’s leases generally require the tenants to be responsible for all real
estate taxes.




Inflation




The
Company’s leases at wholly-owned and consolidated partnership properties
generally provide for either indexed escalators, based on CPI or other measures,
or to a lesser extent fixed increases in base rents. The leases also contain
provisions under which the tenants reimburse the Company for a portion of
property operating expenses and real estate taxes. The Company’s property
management and related services provided to third parties typically provide for
fees based on a percentage of revenues for the month as defined in the related
property management agreements. The revenues collected from leases are generally
structured as described above, with year over year increases. The Company also
pays certain payroll and related costs related to the operations of third party
properties that are managed by the Company. Under terms of the related
management agreements, these costs are reimbursed by the third party property
owners. The Company believes that inflationary increases in expenses will be
offset, in part, by the contractual rent increases and tenant expense
reimbursements described above.




Seasonality




Erdman’s
business can be subject to seasonality due to weather conditions at construction
sites. In addition, construction starts and contract signings can be impacted by
the timing of budget cycles at healthcare systems and providers.




Recent
Accounting Pronouncements




For
additional information, see Note 2 to the accompanying consolidated financial
statements.


38




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




The
Company’s future income, cash flows and fair values relevant to financial
instruments are dependent upon prevalent market interest rates. Market risk
refers to the risk of loss from adverse changes in market prices and interest
rates. The Company uses some derivative financial instruments to manage, or
hedge, interest rate risks related to the Company’s borrowings. The Company does
not use derivatives for trading or speculative purposes and only enters into
contracts with major financial institutions based on their credit rating and
other factors.




As
of June 30, 2009, the Company had $385.4 million of consolidated debt
outstanding (excluding any discounts or premiums related to assumed debt). Of
the Company’s total consolidated debt, $38.5 million, or 10.0%, was variable
rate debt that is not subject to variable to fixed rate interest rate swap
agreements. Of the Company’s total indebtedness, $346.9 million, or 90.0%, was
subject to fixed interest rates, including variable rate debt that is subject to
variable to fixed rate swap agreements. The weighted average interest rate for
fixed rate debt was 5.73% as of June 30, 2009.




If
LIBOR were to increase by 100 basis points based on June 30, 2009 one-month
LIBOR of 0.31%, the increase in interest expense on the Company’s June 30, 2009
variable rate debt would decrease future annual earnings and cash flows by
approximately $0.4 million. Interest rate risk amounts were determined by
considering the impact of hypothetical interest rates on the Company’s financial
instruments. These analyses do not consider the effect of any change in overall
economic activity that could occur in that environment. Further, in the event of
a change of that magnitude, the Company may take actions to further mitigate the
Company’s exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, these analyses
assume no changes in the Company’s financial structure.




ITEM 4. CONTROLS AND
PROCEDURES




The
Company’s Chief Executive Officer and Chief Financial Officer, based on their
evaluation of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded
that as June 30, 20009, the Company’s disclosure controls and procedures were
effective to give reasonable assurances to the timely collection, evaluation and
disclosure of information relating to the Company that would potentially be
subject to disclosure under the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.




During
the six months ended June 30, 2009, there was no change in the Company’s
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




Notwithstanding
the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute assurance that it will detect or uncover
failures within the Company to disclose material information otherwise required
to be set forth in our periodic reports.




PART
II. OTHER INFORMATION




ITEM 1. LEGAL
PROCEEDINGS




The
Company is not involved in any material litigation nor, to the Company’s
knowledge, is any material litigation pending or threatened against us, other
than routine litigation arising out of the ordinary course of business or which
is expected to be covered by insurance and not expected to harm the Company’s
business, financial condition or results of operations.




ITEM 1A. RISK
FACTORS




See
the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
There have been no significant changes to the Company’s risk factors during the
three months ended June 30, 2009.




ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS




None.




Issuer
Purchases of Equity Securities




None.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.


39




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS




On
May 5, 2009, the Company held its annual meeting of stockholders (the “2009
Annual Meeting”). The stockholders voted on the following matters: (i) the
election of nine nominees to serve as directors of the Company until the
Company’s 2010 annual meeting of stockholders and (ii) the ratification of the
selection of external auditors with regard to the current fiscal year. The
results of the voting are shown below:


(i)
      Election of Directors
                    
                    Votes
      Cast For
                    
                    
                    Votes
      Cast Against
                    
                    
                    Votes
      Withheld
                      or
      AbstainedJames
      W. Cogdell
                    
                    
                    15,405,675
                    
                    
                    
                    —
                    
                    
                    
                    107,379Frank
      C. Spencer
                    
                    
                    15,437,193
                    
                    
                    
                    —
                    
                    
                    
                    75,861John
      R. Georgius
                    
                    
                    11,696,919
                    
                    
                    
                    —
                    
                    
                    
                    3,816,135Richard
      B. Jennings
                    
                    
                    11,694,777
                    
                    
                    
                    —
                    
                    
                    
                    3,818,277Christopher
      E. Lee
                    
                    
                    11,697,124
                    
                    
                    
                    —
                    
                    
                    
                    3,815,930David
      J. Lubar
                    
                    
                    15,436,996
                    
                    
                    
                    —
                    
                    
                    
                    76,058Richard
      C. Neugent
                    
                    
                    15,437,301
                    
                    
                    
                    —
                    
                    
                    
                    75,753Scott
      A. Ransom
                    
                    
                    15,436,996
                    
                    
                    
                    —
                    
                    
                    
                    76,058Randolph
      D. Smoak
                    
                    
                    11,694,562
                    
                    
                    
                    —
                    
                    
                    
                    3,818,492(ii)
      Ratification of selection of external auditors
                    
                    
                    15,505,696
                    
                    
                    
                    6,008
                    
                    
                    
                    3,850




ITEM
5. OTHER INFORMATION




None.




ITEM
6. EXHIBITS


31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
      of 2002.31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
      of 2002.32.1
              Certification
      of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C.
      Section 1350 as adapted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.


40




SIGNATURES




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


COGDELL
      SPENCER INC.RegistrantDate:
      August 10, 2009
              
              /s/Frank
      C. SpencerFrank
      C. SpencerPresident
      and Chief Executive OfficerDate:
      August 10, 2009
              
              /s/Charles
      M. HandyCharles
      M. HandySenior
      Vice President and Chief Financial
Officer