UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




FORM
10-Q




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For
the quarterly period ended March 31, 2009




OR




o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from ____ to ____




Commission
file number 001-32649




COGDELL
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 300Charlotte,
      North Carolina
                
                28209(Address
      of principal executive offices)
                
                (Zip
      code)




(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: 19,488,061 shares of common stock, par value
$.01 per share, outstanding as of May 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
              
              18Item
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              32Item
      4
              Controls
      and Procedures
              
              32PART
      II
              Other
      InformationItem
      1
              Legal
      Proceedings
              
              33Item
      1A
              Risk
      Factors
              
              33Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              33Item
      3
              Defaults
      Upon Senior Securities
              
              33Item
      4
              Submission
      of Matters to a Vote of Security Holders
              
              33Item
      5
              Other
      Information
              
              33Item
      6
              Exhibits
              
              33




PART
I. FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




COGDELL
SPENCER INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except per share amounts)


(unaudited)


March
      31,
                      2009
                    
                    
                    December
      31,
                      2008AssetsReal
      estate properties:Land
                    
                    $
                    30,673
                    
                    
                    $
                    30,673Buildings
      and improvements
                    
                    
                    502,690
                    
                    
                    
                    501,259Less:
      Accumulated depreciation
                    
                    
                    (75,447
                    )
                    
                    
                    (69,285
                    )Net
      operating real estate properties
                    
                    
                    457,916
                    
                    
                    
                    462,647Construction
      in progress
                    
                    
                    21,881
                    
                    
                    
                    15,314Net
      real estate properties
                    
                    
                    479,797
                    
                    
                    
                    477,961Cash
      and cash equivalents
                    
                    
                    12,400
                    
                    
                    
                    34,668Restricted
      cash
                    
                    
                    12,686
                    
                    
                    
                    12,964Tenant
      and accounts receivable, net of allowance of $204 in 2009 and $194 in
      2008
                    
                    
                    34,701
                    
                    
                    
                    43,523Goodwill
                    
                    
                    108,683
                    
                    
                    
                    180,435Trade
      names and trademarks
                    
                    
                    41,240
                    
                    
                    
                    75,969Intangible
      assets, net of accumulated amortization of $41,837 in 2009 and $38,054 in
      2008
                    
                    
                    27,144
                    
                    
                    
                    45,363Other
      assets
                    
                    
                    31,484
                    
                    
                    
                    29,207Total
      assets
                    
                    $
                    748,135
                    
                    
                    $
                    900,090Liabilities
      and equityMortgage
      notes payable
                    
                    $
                    243,030
                    
                    
                    $
                    240,736Revolving
      credit facility
                    
                    
                    112,000
                    
                    
                    
                    124,500Term
      loan
                    
                    
                    100,000
                    
                    
                    
                    100,000Accounts
      payable
                    
                    
                    17,978
                    
                    
                    
                    22,090Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    19,123
                    
                    
                    
                    17,025Deferred
      income taxes
                    
                    
                    14,510
                    
                    
                    
                    34,176Payable
      to prior Erdman shareholders
                    
                    
                    18,002
                    
                    
                    
                    18,002Other
      liabilities
                    
                    
                    48,481
                    
                    
                    
                    60,567Total
      liabilities
                    
                    
                    573,124
                    
                    
                    
                    617,096Commitments
      and contingenciesEquity: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, 19,488 and 17,699
      shares issued and outstanding in 2009 and 2008,
    respectively
                    
                    
                    195
                    
                    
                    
                    177Additional
      paid-in capital
                    
                    
                    292,971
                    
                    
                    
                    275,380Accumulated
      other comprehensive loss
                    
                    
                    (5,806
                    )
                    
                    
                    (5,106
                    )Accumulated
      deficit
                    
                    
                    (152,042
                    )
                    
                    
                    (77,438
                    )Total
      Cogdell Spencer Inc. stockholders’ equity
                    
                    
                    135,318
                    
                    
                    
                    193,013Noncontrolling
      interests:Real
      estate partnerships
                    
                    
                    4,658
                    
                    
                    
                    4,657Operating
      partnership
                    
                    
                    35,035
                    
                    
                    
                    85,324Total
      noncontrolling interests
                    
                    
                    39,693
                    
                    
                    
                    89,981Total
      equity
                    
                    
                    175,011
                    
                    
                    
                    282,994Total
      liabilities and equity
                    
                    $
                    748,135
                    
                    
                    $
                    900,090
  See notes
to consolidated financial statements.


1




COGDELL
SPENCER INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)


(unaudited)


For
      the Three Months EndedMarch
      31,
                    2009
                  
                  
                  March
      31,
                    2008Revenues:Rental
      revenue
                  
                  $
                  19,665
                  
                  
                  $
                  18,691Design-Build
      contract revenue and other sales
                  
                  
                  46,390
                  
                  
                  
                  23,936Property
      management and other fees
                  
                  
                  850
                  
                  
                  
                  841Development
      management and other income
                  
                  
                  2,799
                  
                  
                  
                  19Total
      revenues
                  
                  
                  69,704
                  
                  
                  
                  43,487Expenses:Property
      operating and management
                  
                  
                  7,927
                  
                  
                  
                  7,199Design-Build
      contracts and development management
                  
                  
                  40,165
                  
                  
                  
                  21,043Selling,
      general, and administrative
                  
                  
                  6,667
                  
                  
                  
                  4,306Depreciation
      and amortization
                  
                  
                  10,111
                  
                  
                  
                  9,025Impairment
      charges
                  
                  
                  120,920
                  
                  
                  
                  —Total
      expenses
                  
                  
                  185,790
                  
                  
                  
                  41,573Income
      (loss) from operations before other income (expense) and income tax
      benefit
                  
                  
                  (116,086
                  )
                  
                  
                  1,914Other
      income (expense):Interest
      and other income
                  
                  
                  155
                  
                  
                  
                  255Interest
      expense
                  
                  
                  (6,025
                  )
                  
                  
                  (5,096
                  )Equity
      in earnings of unconsolidated real estate partnerships
                  
                  
                  6
                  
                  
                  
                  3Total
      other income (expense)
                  
                  
                  (5,864
                  )
                  
                  
                  (4,838
                  )Loss
      from operations before income tax benefit
                  
                  
                  (121,950
                  )
                  
                  
                  (2,924
                  )Income
      tax benefit
                  
                  
                  19,626
                  
                  
                  
                  358Net
      loss
                  
                  
                  (102,324
                  )
                  
                  
                  (2,566
                  )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                  
                  
                  (92
                  )
                  
                  
                  13Operating
      partnership
                  
                  
                  32,198
                  
                  
                  
                  752Net
      loss attributable to Cogdell Spencer Inc.
                  
                  $
                  (70,218
                  )
                  
                  $
                  (1,801
                  )Net
      loss per share attributable to Cogdell Spencer Inc. - basic and
      diluted
                  
                  $
                  (3.90
                  )
                  
                  $
                  (0.13
                  )Weighted
      average common shares - basic and diluted
                  
                  
                  17,995
                  
                  
                  
                  14,364




See notes
to 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)
                        
                        
                        (102,324
                        )
                        
                        
                        (102,324
                        )
                        
                        
                        (70,218
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (32,198
                        )
                        
                        
                        92Unrealized
      gain (loss) on interest rate swaps, net of tax
                        
                        
                        (164
                        )
                        
                        
                        (164
                        )
                        
                        
                        —
                        
                        
                        
                        (236
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (108
                        )
                        
                        
                        180Comprehensive
      loss
                        
                        
                        (102,488
                        )
                        
                        $
                        (102,488
                        )Conversion
      of operating partnership units to common stock
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        464
                        
                        
                        
                        18
                        
                        
                        
                        17,496
                        
                        
                        
                        (17,050
                        )
                        
                        
                        —Restricted
      stock and LTIP unit grants
                        
                        
                        817
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        79
                        
                        
                        
                        738
                        
                        
                        
                        —Amortization
      of restricted stock grants
                        
                        
                        25
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        16
                        
                        
                        
                        9
                        
                        
                        
                        —Dividends
      and distributions
                        
                        
                        (6,337
                        )
                        
                        
                        
                        
                        
                        
                        (4,386
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,680
                        )
                        
                        
                        (271
                        )Balance
      at March 31, 2009
                        
                        $
                        175,011
                        
                        
                        
                        
                        
                        
                        $
                        (152,042
                        )
                        
                        $
                        (5,806
                        )
                        
                        $
                        195
                        
                        
                        $
                        292,971
                        
                        
                        $
                        35,035
                        
                        
                        $
                        4,658
  See notes
to 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
                        
                        
                        (2,566
                        )
                        
                        
                        (2,566
                        )
                        
                        
                        (1,801
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (752
                        )
                        
                        
                        (13
                        )Unrealized
      loss on interest rate swaps, net of tax
                        
                        
                        (1,772
                        )
                        
                        
                        (1,772
                        )
                        
                        
                        —
                        
                        
                        
                        (1,145
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (568
                        )
                        
                        
                        (59
                        )Comprehensive
      loss
                        
                        
                        (4,338
                        )
                        
                        $
                        (4,338
                        )Issuance
      of common stock and operating partnership units, net of
    costs
                        
                        
                        107,839
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        35
                        
                        
                        
                        53,698
                        
                        
                        
                        54,106
                        
                        
                        
                        —Investment
      in real estate costs contributed by partner in a consolidated real estate
      partnership
                        
                        
                        135
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        135Redemptions
      of operating partnership units
                        
                        
                        (120
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        (120
                        )
                        
                        
                        —Restricted
      stock and LTIP unit grants
                        
                        
                        728
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        94
                        
                        
                        
                        634
                        
                        
                        
                        —Amortization
      of restricted stock grants
                        
                        
                        25
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        16
                        
                        
                        
                        9
                        
                        
                        
                        —Dividends
      and distributions
                        
                        
                        (8,584
                        )
                        
                        
                        
                        
                        
                        
                        (5,397
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (3,133
                        )
                        
                        
                        (54
                        )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
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        14,502
                        
                        
                        
                        —
                        
                        
                        
                        —Balance
      at March 31, 2008
                        
                        $
                        272,443
                        
                        
                        
                        
                        
                        
                        $
                        (57,949
                        )
                        
                        $
                        (2,029
                        )
                        
                        $
                        154
                        
                        
                        $
                        235,211
                        
                        
                        $
                        94,613
                        
                        
                        $
                        2,443
  4




COGDELL
SPENCER INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (unaudited)
 For
      the Three Months EndedMarch
      31,
                      2009
                    
                    
                    March
      31,
                      2008Operating
      activities:Net
      loss
                    
                    $
                    (102,324
                    )
                    
                    $
                    (2,566
                    )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    10,111
                    
                    
                    
                    9,060Amortization
      of acquired above market leases and acquired below market leases,
      net
                    
                    
                    (131
                    )
                    
                    
                    (188
                    )Straight
      line rental revenue
                    
                    
                    (118
                    )
                    
                    
                    (113
                    )Amortization
      of deferred finance costs and debt premium
                    
                    
                    423
                    
                    
                    
                    135Deferred
      income taxes
                    
                    
                    (19,666
                    )
                    
                    
                    (562
                    )Equity-based
      compensation
                    
                    
                    842
                    
                    
                    
                    754Equity
      in earnings of unconsolidated real estate partnerships
                    
                    
                    (6
                    )
                    
                    
                    (3
                    )Impairment
      of intangible assets
                    
                    
                    120,920
                    
                    
                    
                    —Changes
      in operating assets and liabilities:Tenant
      and accounts receivable and other assets
                    
                    
                    7,119
                    
                    
                    
                    1,185Accounts
      payable and other liabilities
                    
                    
                    (17,123
                    )
                    
                    
                    (12,159
                    )Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    2,098
                    
                    
                    
                    1,741Net
      cash provided by (used in) operating activities
                    
                    
                    2,145
                    
                    
                    
                    (2,716
                    )Investing
      activities:Business
      acquisitions, net of cash acquired
                    
                    
                    —
                    
                    
                    
                    (124,086
                    )Investment
      in real estate properties
                    
                    
                    (7,048
                    )
                    
                    
                    (23,255
                    )Purchase
      of noncontrolling interests in operating partnership
                    
                    
                    —
                    
                    
                    
                    (174
                    )Proceeds
      from sales-type capital lease
                    
                    
                    76
                    
                    
                    
                    77Purchase
      of corporate property, plant and equipment
                    
                    
                    (1,020
                    )
                    
                    
                    (47
                    )Distributions
      received from unconsolidated real estate partnerships
                    
                    
                    5
                    
                    
                    
                    5Decrease
      (increase) in restricted cash
                    
                    
                    278
                    
                    
                    
                    (21,071
                    )Net
      cash used in investing activities
                    
                    
                    (7,709
                    )
                    
                    
                    (168,551
                    )Financing
      activities:Proceeds
      from mortgage notes payable
                    
                    
                    3,309
                    
                    
                    
                    —Repayments
      of mortgage notes payable
                    
                    
                    (997
                    )
                    
                    
                    (717
                    )Proceeds
      from revolving credit facility
                    
                    
                    —
                    
                    
                    
                    90,500Repayments
      to revolving credit facility
                    
                    
                    (12,500
                    )
                    
                    
                    (53,700
                    )Proceeds
      from term loan
                    
                    
                    —
                    
                    
                    
                    100,000Net
      proceeds from sale of common stock
                    
                    
                    —
                    
                    
                    
                    53,733Dividends
      and distributions
                    
                    
                    (6,022
                    )
                    
                    
                    (5,737
                    )Equity
      contribution from noncontrolling interest in real estate
      partnerships
                    
                    
                    —
                    
                    
                    
                    135Distributions
      to noncontrolling interests in real estate partnerships
                    
                    
                    (271
                    )
                    
                    
                    (54
                    )Payment
      of deferred financing costs
                    
                    
                    (223
                    )
                    
                    
                    (2,867
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    (16,704
                    )
                    
                    
                    181,293Increase
      (decrease) in cash and cash equivalents
                    
                    
                    (22,268
                    )
                    
                    
                    10,026Balance
      at beginning of period
                    
                    
                    34,668
                    
                    
                    
                    3,555Balance
      at end of period
                    
                    $
                    12,400
                    
                    
                    $
                    13,581Supplemental
      disclosure of cash flow information:Cash
      paid for interest, net of capitalized interest
                    
                    $
                    5,503
                    
                    
                    $
                    4,874Cash
      paid for income taxes
                    
                    $
                    1
                    
                    
                    $
                    —Supplemental
      cash flow information - noncash investing and financing
      activities:Operating
      Partnership Units converted into common stock
                    
                    $
                    17,514
                    
                    
                    $
                    —Investment
      in real estate properties included in accounts payable and other
      liabilities
                    
                    
                    898
                    
                    
                    
                    714Accrued
      dividends and distributions
                    
                    
                    6,088
                    
                    
                    
                    8,551Operating
      Partnership Units issued or to be issued in connection with the
      acquisition of a business or real estate property
                    
                    
                    —
                    
                    
                    
                    81,347
  See notes
to 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 consolidated financial statements include the Company’s
accounts, its wholly-owned subsidiaries, as well as the Operating Partnership
and its subsidiaries. The 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 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.”
 Liquidity
  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 MEA Holdings, Inc., the parent company of Erdman
Company, (together, “Erdman”), a subsidiary of the Company.  In the first
quarter 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.  Should Erdman’s clients
continue to delay their project starts into the third quarter of 2009, it is
probable that the Company would not be able to meet one or more of the financial
covenants applicable to Erdman under the $100.0 million senior secured term
facility (the “Term Loan”).  Due to the uncertainty of Erdman’s future
operating results, the Company proposed to the Term Loan lenders, and the Term
Loan lenders have now executed a term sheet, which expires June 26, 2009, that
allows the Company to repay $50.0 million of the outstanding Term Loan principal
balance and upon such repayment to amend the Term Loan, as follows:
 ·
                the minimum adjusted consolidated EBITDA covenant will
      be
eliminated,
 ·
                the maximum adjusted consolidated
      senior indebtedness to adjusted consolidated EBITDA will be modified to
      3.50 to 1.00 through March 2011 and 3.00 to 1.00 from April 2011 to final
      maturity,
 ·
                the interest rate will increase from LIBOR plus 3.50% to
      LIBOR plus 4.50%,
  and
 ·
                a payment of a market based
      modification fee.
  Should the Company decide to move forward with the $50.0 million Term Loan
repayment, it will seek to fund such repayment through available cash and cash
equivalents, sale of assets, future public and/or private offerings of common or
preferred equity or debt, reducing costs and expenditures, joint venture
financing, or a combination of these sources.  There can be no
assurances that the Company will be successful in raising any required
funding.  If the Company is unsuccessful in amending the terms of the
Term Loan and violates its financial covenants, this could result in a default
under the Term Loan and a default under the secured revolving credit facility
(“Credit Facility”).  This could cause the Company’s lenders to
accelerate payment of the loans and may have a material adverse effect on the
Company’s business, financial condition, and results of
operations.
 Interim
Financial Information
  The
financial information for the three months ended March 31, 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 months ended March
31, 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 consolidated financial statements are
contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
 6
  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.
  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.
  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.
  Per
Share Data
  Basic
and diluted earnings per share are computed based upon the weighted average
number of shares outstanding during the respective period. There were 4,050 and
10,324 shares of unvested restricted stock outstanding at March 31, 2009 and
2008, respectively, which were not included in the computation of diluted
earnings per share because the effects of their inclusion would be
anti-dilutive.
  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 March 31, 2009,
the Company had bank cash balances of $15.9 million in excess of FDIC insured
limits.
  One
customer accounted for more than 10% of tenant and accounts receivable at March
31, 2009 and 2008. One customer or tenant accounted for more than 10% of revenue
for the three months ended March 31, 2009, and no customers or tenants accounted
for more than 10% of revenue for the three months ended March 31,
2008.
 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. stockholder equity to noncontrolling interests as of December 31,
2008. Also, net loss for the three months ended March 31, 2008 has increased by
$0.8 million for the reclassification of loss allocated to noncontrolling
interests; however, net loss attributable to Cogdell Spencer Inc., loss per
common share – basic and diluted were 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.
 3.
                Investments
      in Real Estate Partnerships
  As
of March 31, 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 March 31, 2009, and 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 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 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 1.1% owned by the
      Company.
  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 40.0% owned
      by the Company;
  8
  ●
                                Cogdell
      General Health Campus MOB, LP, a Pennsylvania limited partnership, founded
      in 2006, owns one medical office building, and 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 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 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 consolidated entities, these revenues and fees are eliminated in
consolidation.
  The
consolidated entities are included in the Company’s 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’s 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 limited liability companies and limited
partnerships for the periods indicated. The summary of financial information set
forth below reflects the financial position and operations of the unconsolidated
real estate partnerships in their entirety, not just the Company’s interest in
the entities (in thousands):
 March
      31,
                                      2009
                                    
                                    
                                    December
      31,
                                      2008Financial
      position:Total
      assets
                                    
                                    $
                                    56,110
                                    
                                    
                                    $
                                    56,262Total
      liabilities
                                    
                                    
                                    49,631
                                    
                                    
                                    
                                    49,831Members’
      equity
                                    
                                    
                                    6,479
                                    
                                    
                                    
                                    6,431
  For
      the Three Months EndedMarch
      31, 2009
                                              
                                              
                                              March
      31, 2008Results
      of operations:Total
      revenues
                                              
                                              $
                                              3,068
                                              
                                              
                                              $
                                              3,068Operating
      and general and administrative expenses
                                              
                                              
                                              1,376
                                              
                                              
                                              
                                              1,417Net
      income
                                              
                                              
                                              235
                                              
                                              
                                              
                                              225
  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.
 9
  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. FFO is 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 excludes 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.
  The
following tables represent the segment information for the three months ended
March 31, 2009 and 2008 (in thousands):
 Three
      months ended March 31, 2009:
                    
                    Property
                      Operations
                    
                    
                    Design-Build
                      and
                      Development
                    
                    
                    Unallocated
                      and
      Other
                    
                    
                    TotalRevenues:Rental
      revenue
                    
                    $
                    19,665
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    19,665Design-Build
      contract revenue and other sales
                    
                    
                    —
                    
                    
                    
                    46,390
                    
                    
                    
                    —
                    
                    
                    
                    46,390Property
      management and other fees
                    
                    
                    850
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    850Development
      management and other income
                    
                    
                    —
                    
                    
                    
                    2,799
                    
                    
                    
                    —
                    
                    
                    
                    2,799Total
      revenues
                    
                    
                    20,515
                    
                    
                    
                    49,189
                    
                    
                    
                    —
                    
                    
                    
                    69,704Certain
      operating expenses:Property
      operating and management
                    
                    
                    7,927
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    7,927Design-Build
      contracts and development management
                    
                    
                    —
                    
                    
                    
                    40,165
                    
                    
                    
                    —
                    
                    
                    
                    40,165Selling,
      general, and administrative
                    
                    
                    —
                    
                    
                    
                    4,514
                    
                    
                    
                    —
                    
                    
                    
                    4,514Impairment
      charges
                    
                    
                    —
                    
                    
                    
                    120,920
                    
                    
                    
                    —
                    
                    
                    
                    120,920Total
      certain operating expenses
                    
                    
                    7,927
                    
                    
                    
                    165,599
                    
                    
                    
                    —
                    
                    
                    
                    173,52612,588
                    
                    
                    
                    (116,410
                    )
                    
                    
                    —
                    
                    
                    
                    (103,822
                    )Interest
      and other income
                    
                    
                    141
                    
                    
                    
                    1
                    
                    
                    
                    13
                    
                    
                    
                    155Corporate
      general and administrative expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,153
                    )
                    
                    
                    (2,153
                    )Interest
      expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,025
                    )
                    
                    
                    (6,025
                    )Benefit
      from income taxes applicable to funds from operations
    modified
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    18,642
                    
                    
                    
                    18,642Non-real
      estate related depreciation and amortization
                    
                    
                    —
                    
                    
                    
                    (193
                    )
                    
                    
                    (54
                    )
                    
                    
                    (247
                    )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    9
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    (245
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (245
                    )Funds
      from operations modified (FFOM)
                    
                    
                    12,493
                    
                    
                    
                    (116,602
                    )
                    
                    
                    10,423
                    
                    
                    
                    (93,686
                    )Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                    
                    
                    (42
                    )
                    
                    
                    (2,482
                    )
                    
                    
                    984
                    
                    
                    
                    (1,540
                    )Funds
      from operations (FFO)
                    
                    
                    12,451
                    
                    
                    
                    (119,084
                    )
                    
                    
                    11,407
                    
                    
                    
                    (95,226
                    )Real
      estate related depreciation and amortization
                    
                    
                    (7,343
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,343
                    )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    245
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    245Net
      income (loss)
                    
                    
                    5,353
                    
                    
                    
                    (119,084
                    )
                    
                    
                    11,407
                    
                    
                    
                    (102,324
                    )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                    
                    
                    (92
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (92
                    )Operating
      partnership
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    32,198
                    
                    
                    
                    32,198Net
      income (loss) attributable to Cogdell Spencer Inc.
                    
                    $
                    5,261
                    
                    
                    $
                    (119,084
                    )
                    
                    $
                    43,605
                    
                    
                    $
                    (70,218
                    )Total
      assets
                    
                    $
                    653,839
                    
                    
                    $
                    93,351
                    
                    
                    $
                    945
                    
                    
                    $
                    748,135
 10




Three
      months ended March 31, 2008:
                    
                    Property
                      Operations
                    
                    
                    Design-Build
                      and
                      Development
                    
                    
                    Unallocated
                      and
      Other
                    
                    
                    TotalRevenues:Rental
      revenue
                    
                    $
                    18,691
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    18,691Design-Build
      contract revenue and other sales
                    
                    
                    —
                    
                    
                    
                    23,936
                    
                    
                    
                    —
                    
                    
                    
                    23,936Property
      management and other fees
                    
                    
                    841
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    841Development
      management and other income
                    
                    
                    —
                    
                    
                    
                    19
                    
                    
                    
                    —
                    
                    
                    
                    19Total
      revenues
                    
                    
                    19,532
                    
                    
                    
                    23,955
                    
                    
                    
                    —
                    
                    
                    
                    43,487Certain
      operating expenses:Property
      operating and management
                    
                    
                    7,199
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    7,199Desin-Build
      conracts and development management
                    
                    
                    —
                    
                    
                    
                    21,043
                    
                    
                    
                    —
                    
                    
                    
                    21,043Selling,
      general, and administrative
                    
                    
                    —
                    
                    
                    
                    1,881
                    
                    
                    
                    —
                    
                    
                    
                    1,881Total
      certain operating expenses
                    
                    
                    7,199
                    
                    
                    
                    22,924
                    
                    
                    
                    —
                    
                    
                    
                    30,12312,333
                    
                    
                    
                    1,031
                    
                    
                    
                    —
                    
                    
                    
                    13,364Interest
      and other income
                    
                    
                    161
                    
                    
                    
                    40
                    
                    
                    
                    54
                    
                    
                    
                    255Corporate
      general and administrative expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,425
                    )
                    
                    
                    (2,425
                    )Interest
      expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,096
                    )
                    
                    
                    (5,096
                    )Provision
      for income taxes applicable to funds from operations
    modified
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (64
                    )
                    
                    
                    (64
                    )Non-real
      estate related depreciation and amortization
                    
                    
                    —
                    
                    
                    
                    (115
                    )
                    
                    
                    (52
                    )
                    
                    
                    (167
                    )Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    6
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    (78
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (78
                    )Funds
      from operations modified (FFOM)
                    
                    
                    12,422
                    
                    
                    
                    956
                    
                    
                    
                    (7,583
                    )
                    
                    
                    5,795Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                    
                    
                    (42
                    )
                    
                    
                    (1,028
                    )
                    
                    
                    422
                    
                    
                    
                    (648
                    )Funds
      from operations (FFO)
                    
                    
                    12,380
                    
                    
                    
                    (72
                    )
                    
                    
                    (7,161
                    )
                    
                    
                    5,147Real
      estate related depreciation and amortization
                    
                    
                    (7,791
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,791
                    )Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                    
                    
                    78
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    78Net
      income (loss)
                    
                    
                    4,667
                    
                    
                    
                    (72
                    )
                    
                    
                    (7,161
                    )
                    
                    
                    (2,566
                    )Net
      loss (income) attributable to the noncontrolling interest
    in:Real
      estate partnerships
                    
                    
                    13
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    13Operating
      partnership
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    752
                    
                    
                    
                    752Net
      income (loss) attributable to Cogdell Spencer Inc.
                    
                    $
                    4,680
                    
                    
                    $
                    (72
                    )
                    
                    $
                    (6,409
                    )
                    
                    $
                    (1,801
                    )Total
      assets
                    
                    $
                    561,503
                    
                    
                    $
                    350,926
                    
                    
                    $
                    799
                    
                    
                    $
                    913,228
  5.
                  Contracts
  Revenue
and billings to date on uncompleted contracts, from their inception, as of March
31, 2009 and December 31, 2008, are as follows (in thousands):
 March
      31,
                  2009
                
                
                December
      31,
                  2008Costs
      and estimated earnings on uncompleted contracts
                
                $
                151,752
                
                
                $
                165,891Billings
      to date
                
                
                (163,614
                )
                
                
                (176,210
                )Net
      billings in excess of costs and estimated earnings
                
                $
                (11,862
                )
                
                $
                (10,319
                )
 11
  These
amounts are included in the consolidated balance sheet at March 31, 2009 and
December 31, 2008 as shown below (in thousands). At March 31, 2009 and December
31, 2008, the Company had retainage receivables of $8.7 million and $8.8
million, respectively, which are included in “Tenant and accounts receivable” in
the consolidated balance sheets. The Company estimates that $1.3 million of the
March 31, 2009 retainages receivable balance will be collected after one
year.
 March
      31,
                  2009
                
                
                December
      31,
                  2008Costs
      and estimated earnings in excess of billings (1)
                
                $
                7,261
                
                
                $
                6,706Billings
      in excess of costs and estimated earnings
                
                
                (19,123
                )
                
                
                (17,025
                )Net
      billings in excess of costs and estimated earnings
                
                $
                (11,862
                )
                
                $
                (10,319
                )
  (1)
Included in “Other assets” in the consolidated balance
sheets
 6.
                  Goodwill
      and Intangible Assets
  As
of March 31, 2009, the Company performed an interim impairment review of
goodwill and intangible assets related to the Design-Build and Development
business segment. The interim review was performed 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 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 for a discussion of the Company’s accounting policy regarding the fair
value of financial and non-financial assets.
  Based
on this review, during the first quarter of 2009, the Company recorded 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.
 12
  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.
  The
Company had goodwill of $108.7 million and $180.4 million at March 31, 2009 and
December 31, 2008, respectively, and non-amortizing trade names and trademarks
intangible assets of $41.2 million and $76.0 million at March 31, 2009 and
December 31, 2008, respectively. Amortizing intangible assets consisted of the
following for the periods shown (in thousands):
 March
      31,
                      2009
                    
                    
                    December
      31,
                      2008Acquired
      signed contracts, net of accumulated amortization of $11,855 and $11,389
      in 2009 and 2008, respectively.
                    
                    $
                    1,398
                    
                    
                    $
                    1,864Acquired
      proposals, net of accumulated amortization of $2,206 and $886 in 2009 and
      2008, respectively.
                    
                    
                    2,129
                    
                    
                    
                    5,282Acquired
      customer relationships, net of accumulated amortization of $1,339 and $644
      in 2009 and 2008, respectively.
                    
                    
                    1,789
                    
                    
                    
                    15,088Acquired
      above market leases, net of accumulated amortization of $799 and $748 in
      2009 and 2008, respectively.
                    
                    
                    760
                    
                    
                    
                    811Acquired
      in place lease value and deferred leasing costs, net of accumulated
      amortization of $24,749 and $23,573 in 2009 and 2008,
      respectively.
                    
                    
                    16,296
                    
                    
                    
                    17,472Acquired
      ground leases, net of accumulated amortization of $420 and $389 in 2009
      and 2008, respectively.
                    
                    
                    3,142
                    
                    
                    
                    3,173Acquired
      property management contracts, net of accumulated amortization of $467 and
      $425 in 2009 and 2008, respectively.
                    
                    
                    1,630
                    
                    
                    
                    1,673Total
      amortizing intangible assets, net
                    
                    $
                    27,144
                    
                    
                    $
                    45,363
  Amortization
expense related to intangibles for the three months ended March 31, 2009 and
2008 was $3.7 million and $2.7 million, respectively. The Company expects to
recognize amortization expense from the acquired intangible assets of $6.6
million, $3.3 million, $2.6 million, $1.4 million, and $1.1 million for the
years ended December 31, 2009, 2010, 2011, 2012, and 2013 respectively, and $4.7
million thereafter. Goodwill and trade names and trademarks are not amortized
and are associated with the Design-Build and Development business
segment.
  13
  7.
                  Mortgage
      Notes Payable and Borrowing
Agreements
 Construction
Financing
  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.
  Mortgage
Notes Payable
  In
May 2009, the Company refinanced the mortgage note payable for the Medical Arts
Center of Orangeburg. There was no change in the principal balance. The interest
rate is LIBOR plus 3.25% (3.75% as of March 31, 2009) with a 6.0% minimum
interest rate and the maturity date is May 2014.
  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 March 31, 2009 are as
follows (in thousands):
 For
      the period ending:2009
                    
                    $
                    49,8542010
                    
                    
                    31,7812011
                    
                    
                    238,0672012
                    
                    
                    23,1312013
                    
                    
                    13,855Thereafter
                    
                    
                    98,148454,836Unamortized
      premium
                    
                    
                    194$
                    455,030
  As
of March 31, 2009, the Company had approximately $49.9 million of principal and
maturity payments remaining due in 2009 related to mortgage note payables. Of
this $49.9 million, $30.0 million can be extended for one two-year period at the
Company’s conditional option. The Company believes it will be able to refinance
the 2009 balloon maturities as a result of the current loan to value ratios at
individual properties and preliminary discussions with lenders. Based on those
preliminary discussions, the stated interest rates (LIBOR plus spread or fixed)
are comparable to the Company’s weighted average fixed rate at March 31, 2009.
In addition, the Company has $42.4 million combined cash and cash equivalents
and Credit Facility availability as of March 31, 2009, which exceeds the 2009
principal and maturity payments due in 2009, excluding the $30.0 million
referred to above with the conditional extension option.
  At
March 31, 2009, the Company believes it was in compliance with all its loan
covenants. See “Liquidity and Capital Resources.”
 14
  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 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) exclusive of ineffectiveness amounts. No interest
rate swap agreements were believed to be ineffective as of March 31, 2009. The
following table summarizes the terms of the agreements and their fair values at
March 31, 2009 and December 31, 2008 (dollars in thousands):
 Notional
                              Amount
      as of
                              March
      31, 2009Effective
                              Date
                            
                            Expiration
                              Date
                            
                            March
      31, 2009
                            
                            December
      31, 2008Entity
                            
                            
                            Receive
      Rate
                            
                            Pay
      Rate
                            
                            
                            
                            Asset
                            
                            Liability
                            
                            Asset
                            
                            LiabilityWest
      Tennessee Investors, LLC
                            
                            $
                            14,770
                            
                            1
      Month LIBOR
                            
                            3.69
                            %
                            9/1/2010
                            
                            3/1/2019
                            
                            $
                            —
                            
                            $
                            609
                            
                            $
                            —
                            
                            $
                            —Genesis
      Property Holdings, LLC
                            
                            
                            16,797
                            
                            1
      Month LIBOR
                            
                            4.71
                            %
                            4/1/2010
                            
                            10/1/2018
                            
                            
                            —
                            
                            
                            2,069
                            
                            
                            —
                            
                            
                            2,365Cogdell
      Health Campus MOB, LP
                            
                            
                            10,729
                            
                            1
      Month LIBOR
                            
                            4.03
                            %
                            3/14/2008
                            
                            3/2/2015
                            
                            
                            —
                            
                            
                            1,049
                            
                            
                            —
                            
                            
                            1,064River
      Hills Medical Associates, LLC
                            
                            
                            3,912
                            
                            1
      Month LIBOR
                            
                            1.78
                            %
                            1/15/2009
                            
                            1/31/2012
                            
                            
                            —
                            
                            
                            45
                            
                            
                            —
                            
                            
                            25East
      Jefferson Medical Plaza
                            
                            
                            11,600
                            
                            1
      Month LIBOR
                            
                            1.80
                            %
                            1/15/2009
                            
                            12/23/2011
                            
                            
                            —
                            
                            
                            149
                            
                            
                            —
                            
                            
                            81Beaufort
      Medical Plaza, LLC
                            
                            
                            4,858
                            
                            1
      Month LIBOR
                            
                            3.80
                            %
                            8/18/2008
                            
                            8/18/2011
                            
                            
                            —
                            
                            
                            293
                            
                            
                            —
                            
                            
                            296St.
      Francis Community MOB, LLC
                            
                            
                            7,007
                            
                            1
      Month LIBOR
                            
                            3.32
                            %
                            10/15/2008
                            
                            6/15/2011
                            
                            
                            —
                            
                            
                            335
                            
                            
                            —
                            
                            
                            331St.
      Francis Medical Plaza, LLC
                            
                            
                            7,526
                            
                            1
      Month LIBOR
                            
                            3.32
                            %
                            10/15/2008
                            
                            6/15/2011
                            
                            
                            —
                            
                            
                            360
                            
                            
                            —
                            
                            
                            356Cogdell
      Spencer LP
                            
                            
                            30,000
                            
                            1
      Month LIBOR
                            
                            3.11
                            %
                            10/15/2008
                            
                            3/10/2011
                            
                            
                            —
                            
                            
                            1,229
                            
                            
                            —
                            
                            
                            1,218MEA
      Holdings, LLC
                            
                            
                            100,000
                            
                            1
      Month LIBOR
                            
                            2.82
                            %
                            4/1/2008
                            
                            3/1/2011
                            
                            
                            —
                            
                            
                            3,609
                            
                            
                            —
                            
                            
                            3,458Indianapolis
      MOB LLC
                            
                            
                            30,000
                            
                            1
      Month LIBOR
                            
                            4.95
                            %
                            11/2/2006
                            
                            10/31/2009
                            
                            
                            —
                            
                            
                            862
                            
                            
                            —
                            
                            
                            1,106Roper
      MOB, LLC
                            
                            
                            9,095
                            
                            1
      Month LIBOR
                            
                            4.95
                            %
                            11/2/2006
                            
                            7/10/2009
                            
                            
                            —
                            
                            
                            135
                            
                            
                            —
                            
                            
                            221$
                            —
                            
                            $
                            10,744
                            
                            $
                            —
                            
                            $
                            10,521
  The
following table presents information about the Company’s liabilities measured at
fair value on a recurring basis as of March 31, 2009, and indicates the fair
value hierarchy, as defined under SFAS 157 referenced in Note 2, of the
valuation techniques utilized by the Company to determine such fair value (in
thousands):
 Fair Value Measurements as
      of
                                              March
      31, 2009Total
                                            
                                            
                                            Level
      1
                                            
                                            
                                            Level
      2
                                            
                                            
                                            Level
      3Liabilities
      -Derivative
      financial instruments
                                            
                                            $
                                            10,744
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            10,744
                                            
                                            
                                            $
                                            —
  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.
 9.
                Equity
  Cogdell Spencer
Inc. Stockholders’ Equity
  The
following is a summary of changes of Cogdell Spencer Inc. common stock for the
three months ended March 31, 2009 and 2008 (in thousands):
  For the Three Months
      EndedMarch 31,
    2009
                    
                    March 31,
    2008Common stock balance at
      beginning of period
                    
                    
                    17,699
                    
                    
                    
                    11,948Issuance of common
      stock
                    
                    
                    -
                    
                    
                    
                    3,449Conversion of OP units to
      common stock
                    
                    
                    1,776
                    
                    
                    
                    -Restricted stock
      grants
                    
                    
                    13
                    
                    
                    
                    6Common stock balance at end
      of period
                    
                    
                    19,488
                    
                    
                    
                    15,403
  15




The
following is net loss attributable to Cogdell Spencer Inc. and transfer from
noncontrolling interests for the three months ended March 31, 2009 and 2008 (in
thousands):




2009
                    
                    
                    2008Net loss attributable to Cogdell
      Spencer Inc.
                    
                    $
                    (70,218
                    )
                    
                    $
                    (1,801
                    )Increase in Cogdell Spencer Inc.
      additional paid-in capital for the conversion of OP units into common
      stock
                    
                    
                    17,496
                    
                    
                    
                    -Change from net loss attributable
      to Cogdell Spencer Inc. and transfers from noncontrolling
      interests
                    
                    $
                    (52,722
                    )
                    
                    $
                    (1,801
                    )






Noncontrolling
Interests in Operating Partnership


As
of March 31, 2009, there were 27.0 million OP Units outstanding, of which 19.5
million, or 72.2%, were owned by the Company and 7.5 million, or 27.8%, were
owned by other partners, including certain directors, officers and other members
of senior management. As of March 31, 2009, the fair market value of the OP
Units not owned by the Company was $38.7 million, based on a market value of
$5.10 per unit, which was the closing stock price of the Company’s shares on
March 31, 2009. Cash distributions paid during the three months ended March 31,
2009 were $2.1 million.
  Dividends
and Distributions
  On
March 18, 2009, the Company announced that the Board of Directors had declared a
quarterly distribution of $0.225 per share or OP Unit that was paid on April 21,
2009 to stockholders and holders of OP Units of record on March 31, 2009. The
distribution covered the first quarter of 2009 and $6.1 million is included in
“Other liabilities” in the March 31, 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”), 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 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. The
LTIP units were valued at $9.31 per unit, which was the Company’s closing stock
price on the grant date. The Company recorded compensation expense of less than
$0.1 million for the three months ended March 31, 2009.
  In
February 2009, each non-employee member of the Company’s Board of Directors was
granted shares of 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 March 31, 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.
 16
 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 three
months ended March 31, 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
  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 three
month period ended March 31, 2009 and 2008, respectively, are reflected in
“Selling, general, and administrative” expenses in the 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 months ended March 31, 2008,
the Company recognized $1.6 million of revenue, had accounts receivable of $2.2
million and billings in excess of costs and estimated earnings on uncompleted
contracts of $3.3 related to both projects. For the three months ended March 31,
2009, the Company recognized $3.0 million of revenue, had accounts receivable of
$0.6 million and no billings in excess of costs and estimated earnings on
uncompleted contracts related to the second remaining medical facility still
under construction.
 17
  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.
 18
  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 economic
environment and the volatility in the credit markets, Erdman is experiencing
delays in client project starts and cancellations. As a result, the Company
expects its design-build revenue in 2009 to be less than 2008 revenue. As a
result, the Company implemented a cost reduction program in December
2008.
  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 can influence future revenues,
interest, and other costs, and could result in future impairment of goodwill or
other intangible assets.
  As
of March 31, 2009, the Company performed an interim impairment review of
goodwill and intangible assets. The interim review was performed 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 delays and cancellations of customer projects. Based on this
review, during the first quarter of 2009, the Company recorded 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).
  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.
  As
of March 31, 2009, the Company’s portfolio consisted of 116 medical office
buildings and healthcare related facilities, serving 23 hospital systems in 13
states. The Company’s aggregate portfolio at March 31, 2009, was comprised of 62
consolidated wholly-owned and joint venture properties, 3 unconsolidated joint
venture properties, and 51 managed medical office buildings. At March 31, 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.
 19
  At
March 31, 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 2.3 million net
rentable square feet from properties owned by third parties and managed by the
Company. As of March 31, 2009, the Company’s 61 in-service, consolidated
wholly-owned and joint venture properties were approximately 91.5% occupied,
with a weighted average remaining lease term of approximately 4.4
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 accompanying 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.
  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.
 20
  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 when circumstances, such as
adverse market conditions, indicate 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 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.
  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.
 21
  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. As discussed above, 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.
  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 and Erdman have 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. However, the joint venture with
Northwestern Mutual, Cogdell Spencer Medical Partners LLC, is an unconsolidated
entity.
  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.
 22
  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 three months ended March 31, 2009, a significant
proportion of the Company’s loss from operations is due to the ($120.9 million)
non-cash impairment charge discussed previously in the “Overview”
section.
  The
Company acquired Erdman in March 2008 and results for the three months ended
March 31, 2008, reflect one month of operating activity related to the Erdman
subsidiary, reflecting operations from the acquisition date to March 31, 2008.
For the three months ended March 31, 2009, there are three 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.
  Property
Summary
  The
following is an activity summary of the Company’s property portfolio (excluding
unconsolidated partnership properties) for the three months ended March 31, 2009
and 2008 and the year ended December 31, 2008:
 Three
      Months Ended
                                                              
                                                              
                                                              Year
      Ended
                                                                December
      31, 2008March
      31, 2009
                                                              
                                                              
                                                              March
      31, 2008Properties
      at beginning of the period
                                                              
                                                              
                                                              62
                                                              
                                                              
                                                              
                                                              59
                                                              
                                                              
                                                              
                                                              59Acquisitions
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              2Developments
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              1Properties
      at end of the period
                                                              
                                                              
                                                              62
                                                              
                                                              
                                                              
                                                              61
                                                              
                                                              
                                                              
                                                              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. The Company had one property in lease-up at March 31, 2009 and one
property in lease-up at March 31, 2008.
 23




Comparison
of the three months ended March 31, 2009 and 2008
  Funds
from Operations Modified (“FFOM”)
  FFOM,
excluding the after-tax impairment charge of $101.7 million, increased $2.3
million, or 39.1%, for the first quarter of 2009 as compared to the first
quarter of 2008. The following is a summary of FFOM for the three months ended
March 31, 2009 and 2008 (in thousands):
 2009
                      
                      
                      2008FFOM
      attributable to:Property
      operations
                      
                      $
                      12,493
                      
                      
                      $
                      12,422Design-Build
      and development, excluding impairment charge
                      
                      
                      4,318
                      
                      
                      
                      956Unallocated
      and other, excluding tax benefit of impairment charge
                      
                      
                      (8,751
                      )
                      
                      
                      (7,583
                      )FFOM,
      excluding impairment charge, net of income tax benefit
                      
                      
                      8,060
                      
                      
                      
                      5,795Impairment
      charge, net of income tax benefit
                      
                      
                      (101,746
                      )
                      
                      
                      —FFOM
                      
                      $
                      (93,686
                      )
                      
                      $
                      5,795
  See
Note 4 to the accompanying consolidated financial statements 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 months ended March 31, 2009 and 2008 (in thousands):
 2009
                        
                        
                        2008Net
      loss
                        
                        $
                        (102,324
                        )
                        
                        $
                        (2,566
                        )Add:Real
      estate related depreciation and amortization:Wholly-owned
      and consolidated properties
                        
                        
                        7,340
                        
                        
                        
                        7,788Unconsolidated
      real estate partnerships
                        
                        
                        3
                        
                        
                        
                        3Less:Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                        
                        
                        (245
                        )
                        
                        
                        (78
                        )FFO
                        
                        
                        (95,226
                        )
                        
                        
                        5,147Amortization
      of intangibles related to purchase accounting, net of income tax
      benefit
                        
                        
                        1,540
                        
                        
                        
                        648FFOM
                        
                        $
                        (93,686
                        )
                        
                        
                        5,795
  FFOM
attributable to Property Operations
  FFOM
attributable to property operations increased $0.1 million, or 0.6%, for the
first quarter of 2009 as compared to the first quarter of 2008. The following is
a summary of FFOM attributable to property operations for the three months ended
March 31, 2009 and 2008 (in thousands):
 2009
                      
                      
                      2008Rental
      revenue
                      
                      $
                      19,665
                      
                      
                      $
                      18,691Property
      management and other fee revenue
                      
                      
                      850
                      
                      
                      
                      841Property
      operating and management expenses
                      
                      
                      (7,927
                      )
                      
                      
                      (7,199
                      )Other
      income (expense)
                      
                      
                      141
                      
                      
                      
                      161Earnings
      from unconsolidated real estate partnerships, before real estate related
      depreciation and amortization
                      
                      
                      9
                      
                      
                      
                      6Noncontrolling
      interests in real estate partnerships, before real estate related
      depreciation and amortization
                      
                      
                      (245
                      )
                      
                      
                      (78
                      )FFOM
                      
                      $
                      12,493
                      
                      
                      $
                      12,422
  24
  Rental
revenue increased $1.0 million, or 5.2%, for the first quarter of 2009 as
compared to the first quarter of 2008. The increase is primarily due to two
property acquisitions and one completed development property, rental rate
increases due to CPI and reimbursable expenses, all offset by a decline in
occupancy from 93.7% at March 31, 2008 to 91.5% at March 31, 2009.
  Property
operating and management expenses increased $0.7 million, or 10.1%, for the
first quarter of 2009 as compared to the first quarter of 2008. The increase is
primarily due to two property acquisitions and one completed development
property, and increases in real estate property taxes and utilities, which are
generally reimbursable from the tenants.
  Noncontrolling
interests in real estate partnerships, before real estate depreciation and
amortization increased primarily due to the one completed development property,
which is 64.9% owned by noncontrolling interests.
  FFOM
attributable to Design-Build and Development
  FFOM,
excluding impairment charge, attributable to Design-Build and Development
increased $3.4 million, or 351.8%, for the first quarter of 2009 as compared to
the first quarter of 2008. The Company acquired Erdman in March 2008 and results
for the three months ended March 31, 2008, reflect one month of operating
activity related to the Erdman subsidiary, reflecting operations from the
acquisition date to March 31, 2008. Results for the three months ended March 31,
2009, reflect three months of operating activity. The following is a summary of
FFOM attributable to Design-Build and Development for the three months ended
March 31, 2009 and 2008 (in thousands):
 2009
                      
                      
                      2008Design-Build
      contract revenue and other sales
                      
                      $
                      46,390
                      
                      
                      $
                      23,936Development
      management and other income
                      
                      
                      2,799
                      
                      
                      
                      19Design-Build
      contracts and development management expenses
                      
                      
                      (40,165
                      )
                      
                      
                      (21,043
                      )Selling,
      general, and administrative expenses
                      
                      
                      (4,514
                      )
                      
                      
                      (1,881
                      )Other
      income (expense)
                      
                      
                      1
                      
                      
                      
                      40Depreciation
      and amortization
                      
                      
                      (193
                      )
                      
                      
                      (115
                      )FFOM,
      excluding impairment charge
                      
                      
                      4,318
                      
                      
                      
                      956Impairment
      charge
                      
                      
                      (120,920
                      )
                      
                      
                      —FFOM
                      
                      $
                      (116,602
                      )
                      
                      $
                      956
  Design-Build
contract revenue and other sales increased $22.4 million, or 93.8%, for the
first quarter of 2009 as compared to the first quarter of 2008. The increase is
primarily due to three months of revenue in 2009 compared to one month in 2008,
offset by a decrease in the number of active revenue generating construction
projects from 43 at March 31, 2008 to 22 at March 31, 2009.
  Development
management and other income increased $2.8 million for the first quarter of 2009
as compared to the first quarter of 2008. The increase is due to two active
third party development engagements during 2009 compared to zero engagements in
2008. One of the development engagements, which accounted for $2.0 million of
the increase, relates 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 for all
reimbursable projects costs and for development services performed by the
Company.
 25
 Design-Build
contract and development management expenses increased $19.1 million, or 90.9%,
for the first quarter of 2009 as compared to the first quarter of 2008. The
increase is primarily due to three months of revenue in 2009 compared to one
month in 2008 and costs associated with the St. Luke’s development project
described above. These increases were offset by a decrease in the number of
active revenue generating construction projects from 43 at March 31, 2008 to 22
at March 31, 2009 and lower subcontractor costs.
  Selling,
general, and administrative expenses increased $2.6 million, or 140.0%, for the
first quarter of 2009 as compared to the first quarter of 2008. The increase is
primarily due to three months of expenses in 2009 compared to one month in 2008,
offset by the elimination of incentive compensation and the elimination of
certain staff positions.
 Operating
margin (defined as FFOM, excluding impairment charge, as a percent of
design-build contract revenues, development management, and other income and
sales) was 8.7% for the first quarter of 2009 compared to 4.0% for the first
quarter of 2008. The increase in operating margin is primarily due to
development revenue operating margins being higher than design-build contract
revenue operating margins, elimination of incentive compensation, elimination of
certain staff positions, and reduced subcontractor costs.
  Selling,
general, and administrative
  Selling,
general, and administrative expenses increased $2.4 million, or 54.8%, for the
first quarter of 2009 as compared to the first quarter of 2008. Excluding the
increase attributed to the Design-Build and Development segment, which is
discussed above, selling, general, and administrative decreased $0.2
million.
  Depreciation
and amortization
  Depreciation
and amortization expenses increased $1.1 million, or 12.0%, for the first
quarter of 2009 as compared to the first quarter of 2008. The increase is
primarily due to three months of intangible amortization in 2009 associated with
the Erdman acquisition compared to one month in 2008 offset by lower
amortization of acquired in place lease value as the value associated with
properties acquired in 2005 becomes fully amortized.
  Impairment
charge
  As
of March 31, 2009, the Company performed an interim impairment review of
goodwill and intangible assets. The interim review was performed 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 reporting unit
resulting from delays and cancellations of client building projects. Based on
this review, during the first quarter of 2009, the Company recorded a pre-tax,
non-cash impairment charge of ($120.9 million). There was no such charge in the
first quarter of 2008.
  Interest
expense
  Interest
expenses increased $0.9 million, or 18.2%, for the first quarter of 2009 as
compared to the first quarter of 2008. The increase is primarily due to three
months of interest expenses associated with the Erdman acquisition $100.0
million term debt compared to one month in 2008, offset by lower interest
expense on variable rate debt due to lower variable interest rates in the first
quarter of 2009 compared to the first quarter of 2008.
  Income
tax benefit
  The
income tax benefit increased $19.3 million for the first quarter of 2009 as
compared to the first quarter of 2008. The increase is primarily due to a
non-cash income tax benefit associated with the goodwill and intangible asset
impairment charge discussed above.
  Net
loss attributable to the noncontrolling interest in Operating
Partnership
  The
net loss attributable to the noncontrolling interest in Operating Partnership
increased $31.4 million, or 4,181.6%, for the first quarter of 2009 as compared
to the first quarter of 2008. The increase is primarily due to the increase in
net loss. The noncontrolling interest in Operating Partnership as a percent of
total ownership did not change significantly from the first quarter of 2009
compared to the first quarter of 2008.
 26
 Cash
Flows
  Comparison
of the three months ended March 31, 2009 and 2008
  Cash
provided by operating activities increased $4.9 million for the first quarter of
2009 as compared to the first quarter of 2008 and is summarized below for the
three months ended March 31, 2009 and 2008 (in thousands):
 2009
                              
                              
                              2008Net
      loss plus non-cash adjustments
                              
                              $
                              10,051
                              
                              
                              $
                              6,517Changes
      in operating assets and liabilities
                              
                              
                              (7,906
                              )
                              
                              
                              (9,233
                              )Net
      cash provided by (used in) operating activities
                              
                              $
                              2,145
                              
                              
                              $
                              (2,716
                              )
 The
net loss plus non-cash adjustments increased $3.5 million, or 54.2%, for the
first quarter of 2009 as compared to the first quarter of 2008. The increase is
primarily due to the increased FFOM attributable to Design-Build and Development
as discussed above. The changes in operating assets and liabilities decreased
$1.3 million, or 14.4%, for the first quarter of 2009 as compared to the first
quarter of 2008. The decrease is primarily due to the following: 1) a decrease
in Design-Build and Development accounts receivable, which increases cash
provided by (used in) operations, 2) a decrease in Design-Build and Development
accounts payable, which decreases cash provided by (used in) operations, and 3)
severance costs paid in the first quarter of 2009 compared to no such payments
in 2008, which decreases cash provided by (used in) operations.
  Cash
used in investing activities decreased $160.8 million for the first quarter of
2009 as compared to the first quarter of 2008. The decrease is primarily due to
the cash paid for the Erdman transaction in 2008 and for two property
acquisition in 2008 compared to zero acquisitions in 2009. 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 and the lease expires in 2009. Investment in real estate
properties consisted of the following for the three months ended March 31, 2009
and 2008 (in thousands):
 2009
                  
                  
                  2008Development,
      redevelopment, and acquisitions
                  
                  $
                  6,321
                  
                  
                  $
                  21,786Second
      generation tenant improvements
                  
                  
                  671
                  
                  
                  
                  832Recurring
      property capital expenditures
                  
                  
                  56
                  
                  
                  
                  637Investment
      in real estate properties
                  
                  $
                  7,048
                  
                  
                  $
                  23,255
  Cash
provided by financing activities decreased $198.0 million for the first quarter
of 2009 as compared to the first quarter of 2008. The decrease is primarily due
to debt and equity proceeds received in 2008 to finance the Erdman transaction
and property acquisitions where as the only proceeds from 2009 related to
construction loan funding. During the first quarter of 2009, the Company repaid
$12.5 million to the Credit Facility from available cash and cash
equivalents.
  Construction
in Progress
  Construction
in progress consisted of the following as March 31, 2009 (dollars in
thousands):
 Property
                                                                  
                                                                  Location
                                                                  
                                                                  Estimated
                                                                    Completion
      Date
                                                                  
                                                                  
                                                                  Net
      Rentable
                                                                    Square
      Feet
                                                                  
                                                                  
                                                                  Investment
                                                                    to
      Date
                                                                  
                                                                  
                                                                  Estimated
                                                                    Total
                                                                    InvestmentThe
      Woodlands Center
                                                                  
                                                                  Pensacola,
      FL
                                                                  
                                                                  4Q
      2009
                                                                  
                                                                  
                                                                  
                                                                  76,000
                                                                  
                                                                  
                                                                  $
                                                                  12,958
                                                                  
                                                                  
                                                                  $
                                                                  24,769Medical
      Center Physicians Tower
                                                                  
                                                                  Jackson,
      TN
                                                                  
                                                                  1Q
      2010
                                                                  
                                                                  
                                                                  
                                                                  107,000
                                                                  
                                                                  
                                                                  
                                                                  2,892
                                                                  
                                                                  
                                                                  
                                                                  21,100Alamance
      Regional Cancer Center
                                                                  
                                                                  Mebane,
      NC
                                                                  
                                                                  3Q
      2009
                                                                  
                                                                  
                                                                  
                                                                  8,500
                                                                  
                                                                  
                                                                  
                                                                  684
                                                                  
                                                                  
                                                                  
                                                                  1,750Land
      and pre-construction developments
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  5,347
                                                                  
                                                                  
                                                                  
                                                                  —191,500
                                                                  
                                                                  
                                                                  $
                                                                  21,881
                                                                  
                                                                  
                                                                  $
                                                                  47,619
  Liquidity
and Capital Resources
  As of
March 31, 2009, the Company had approximately $12.4 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.
 27
  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 (0.50% as of March 31, 2009)
plus a margin of between 95 to 140 basis points based on the Company’s total
leverage ratio 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 March 31, 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 March 31, 2009, there was $30.0 million available under the Credit
Facility.  There was $112.0 million outstanding at March 31, 2009 and
$8.0 million of availability was restricted related to outstanding letters of
credit.
  The Company, through Erdman, has $100.0 million outstanding under a $100.0
million Term Loan.  The Term Loan is secured by the stock and certain
accounts receivable of Erdman and is guaranteed by the Company.  The
Term Loan matures on March 10, 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 also has the following financial covenants
relating only to Erdman:
 Financial
      Covenant
                          
                          As
      of and for the 12 Months
                            Ended
      March 31, 2009Minimum
      adjusted consolidated EBITDA of $22.5 million
                          
                          $28.0
      millionMinimum
      adjusted consolidated EBITDA to consolidated fixed charges (2.00 to
      1.00)
                          
                          4.29
      to 1.00Maximum
      consolidated senior indebtedness to adjusted consolidated EBITDA (4.25 to
      1.00as
      of March 31, 2009, decreases to 3.75 to 1.00 on July 1,
    2009)
                          
                          3.57
      to 1.00Maximum
      consolidated indebtedness to adjusted consolidated EBITDA (5.50 to
      1.00)
                          
                          3.57
      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 March 31, 2009, the Company believes that it is in compliance with all of its
debt covenants.
 28
  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 March 31, 2009, the Company believes that it is in
compliance with all of its debt covenants.
 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 ofErdman.In the first quarter of 2009,Erdmanexperienceddelays in client project
startsand some contract cancellations, and Erdman
could face additional delays and cancellations over the next several
quarters.  Should Erdman’s clients continue to delay their
project starts into the third quarter of 2009, it is probable that the Company
would notbe able to meet one or more of the
financial covenants applicable to Erdman under the Term
Loan.Due to the
uncertainty of Erdman’s future operating results,the Companyproposed to the Term Loan lenders, and
the Term Loan lenders have now executed a termsheet, which expires June 26,
2009,that allows the
Companyto repay $50.0
million of the outstanding Term Loan principal balance andupon such repayment to amend
theTerm Loan,as follows:
 ·
                the minimum adjusted consolidated EBITDA
      covenantwill be
      eliminated,
 ·
                the maximum adjusted consolidated
      senior indebtedness to adjusted consolidated EBITDA will be modified to
      3.50 to 1.00 through March 2011 and 3.00 to 1.00 from April 2011 to final
      maturity,
 ·
                the interest rate will increase
      from LIBORplus3.50% toLIBOR plus4.50%,
  and
 ·
                a payment of a market based
      modification fee.
 
 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 ofMarch 31, 2009, the Company had approximately
$49.9million of principal and maturity
paymentsremainingdue in 2009 related to mortgage note
payables.  Of this $49.9million, $30.0 million can be extended
forone two-yearperiod at the
Company’sconditionaloption.  The Company believes
it will be ableeithertoextendthe 2009 balloon maturitiesor refinance the remaining loansas a result of the current
loan to value ratios at individual properties and preliminary discussions with
lenders.Based
on those preliminary discussions, the stated interest rates (LIBOR plus spread
or fixed) are comparable to
the Company’s weighted average fixed rate at March
31, 2009.In
addition, the Company hasapproximately$42.4million combined cash and cash
equivalents and Credit Facility availability as ofMarch 31, 2009, which exceeds the 2009 principal and
maturity payments due in
2009, excluding the $30.0
million referred to above with the conditional extension option.
  Should the Company decide to move
forward with the $50.0 million Term Loan repayment, as discussed above, it will
seek to fund such repayment throughavailable cash and cash equivalents,
sale of assets, future public and/or private offerings of common or preferred
equity or debt, reducing costs and expenditures, joint venture financing, or a
combination of these sources.There can be no
assurances that the Company
will be successful in raising any required funding.  If the Company is
unsuccessful in amending the terms of the Term Loan and violates its financial
covenants, this could result in a default under the Term Loan and a default
under theCredit Facility.  This could
cause the Company’s lenders to accelerate payment of the
loans and may have a material adverse effect on the Company’s business, financial condition, and
results of operations.
 As ofMarch 31, 2009, the Company has no
outstanding equity
commitments to joint ventures formed prior to March 31, 2009.  The Cogdell Spencer Medical
Partners LLC acquisition joint venturewith Northwestern Mutualhas no properties under contract as ofMarch 31, 2009,andthus the Company has no equitycommitment to the
jointventure as of March
31, 2009.
  29
 The Company intends to have construction financing agreements in place before
construction begins on development projects.  Development projects
will be either wholly-owned, joint ventured with physicians, or joint ventured with other third
parties.As of March 31, 2009,the Company had no significant redevelopment projects planned for
2009.
  On March 18, 2009, the Company announced
that the Board of Directors had declared a quarterly dividend of
$0.225 per share and OP
Unit that was paid in cash onApril 21, 2009 tostockholders and holders of
OP Units of record on March 31, 2009.  The dividend covered the
first quarter of 2009 and totaled $6.3 million.  The dividend
and distribution were equivalent to an annual rate of $0.90 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 is
insufficient to meet distribution requirements.  However, the 2009
first quarter dividend and distribution of $0.225 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 pay its dividends 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,andprincipal payments under various
mortgages and other credit facilities 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-termliquidity needs.Instead, the Company expects to finance
new property developmentsand acquisitionsthrough modest cash equity capital
contributed by the Company together withtraditional 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 Companyexpects to fund any cash equity capital
required for developments, acquisitions, or real estate partnership investments
through a combination of cash and cash equivalents and borrowings under its
Credit Facility.
 Financial
markets continue to experience unusual volatility and uncertainty into 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 theCompany 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.Inaddition, 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.
 30
 Contractual
Obligations
  The
following table summarizes the Company’s contractual obligations as of March 31,
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)
                    
                    $
                    49,854
                    
                    
                    $
                    31,781
                    
                    
                    $
                    238,067
                    
                    
                    $
                    23,131
                    
                    
                    $
                    13,855
                    
                    
                    $
                    98,148
                    
                    
                    $
                    454,836Standby
      letters of credit (2)
                    
                    
                    8,037
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8,037Interest
      payments (3)
                    
                    
                    16,603
                    
                    
                    
                    14,655
                    
                    
                    
                    8,727
                    
                    
                    
                    6,418
                    
                    
                    
                    5,494
                    
                    
                    
                    13,866
                    
                    
                    
                    65,763Purchase
      commitments (4)
                    
                    
                    25,265
                    
                    
                    
                    8,162
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    33,427Ground
      and air rights leases (5)
                    
                    
                    236
                    
                    
                    
                    314
                    
                    
                    
                    314
                    
                    
                    
                    315
                    
                    
                    
                    315
                    
                    
                    
                    9,631
                    
                    
                    
                    11,125Operating
      leases (6)
                    
                    
                    3,837
                    
                    
                    
                    4,330
                    
                    
                    
                    3,867
                    
                    
                    
                    3,757
                    
                    
                    
                    2,968
                    
                    
                    
                    24,527
                    
                    
                    
                    43,286Total
                    
                    $
                    103,832
                    
                    
                    $
                    59,242
                    
                    
                    $
                    250,975
                    
                    
                    $
                    33,621
                    
                    
                    $
                    22,632
                    
                    
                    $
                    146,172
                    
                    
                    $
                    616,474
  
 (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 0.50% and Prime Rate of 3.25%, which were the rates
as of March 31, 2009.
  (4) These
purchase commitments are related to the Company’s development projects that are
currently under construction.
  (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 March 31, 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.
 31
 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.
  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 March 31, 2009, the Company had $455.0 million of consolidated debt
outstanding (excluding any discounts or premiums related to assumed debt). Of
the Company’s total consolidated debt, $117.3 million, or 25.8%, was variable
rate debt that is not subject to variable to fixed rate interest rate swap
agreements. Of the Company’s total indebtedness, $337.6 million, or 74.2%, 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 4.91% as of March 31, 2009.
 If
LIBOR were to increase by 100 basis points based on March 31, 2009 one-month
LIBOR of 0.50%, the increase in interest expense on the Company’s March 31, 2009
variable rate debt would decrease future annual earnings and cash flows by
approximately $1.2 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 of the end of the period covered by this report, 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 three months ended March 31, 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.
 32
 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 March 31, 2009.
  ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
  The
Company issued 1,776,222 shares of common stock upon redemption of 1,776,222 OP
Units during the three months ended March 31, 2009. The issuances of the shares
of common stock were exempt from registration under the Securities Act pursuant
to the exemption contemplated by Section 4(d) thereof for transactions not
involving a public offering.
  Issuer
Purchases of Equity Securities
  None.
  ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  None.
  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.
  33
  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:
      May 11, 2009
                  /s/Frank
      C. SpencerFrank
      C. SpencerPresident
      and Chief Executive OfficerDate:
      May 11, 2009
                  /s/Charles
      M. HandyCharles
      M. HandySenior
      Vice President and Chief Financial Officer
   34