UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

COGDELL SPENCER INC.

(Exact name of registrant as specified in its charter)

Maryland		20-3126457
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4401 Barclay Downs Drive, Suite 300
Charlotte, 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 þ     No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). o Yes     þ No

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 17,562,322 shares of common stock, par value $.01 per share, outstanding as of November 6, 2008.

 

 

TABLE OF CONTENTS

					Page
PART I		FINANCIAL INFORMATION			2
Item 1		Financial Statements			2
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3		Quantitative and Qualitative Disclosures about Market Risk			38
Item 4		Controls and Procedures			38
PART II		Other Information			39
Item 1		Legal Proceedings			39
Item 1A		Risk Factors			39
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3		Defaults Upon Senior Securities			39
Item 4		Submission of Matters to a Vote of Security Holders			39
Item 5		Other Information			39
Item 6		Exhibits			39
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COGDELL SPENCER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)

		September 30,				December 31,
		2008				2007
Assets
Real estate properties:
Land		$	30,673			$	30,673
Buildings and improvements			498,822				455,606
Less: Accumulated depreciation			(63,154	)			(44,596	)
Net operating real estate properties			466,341				441,683
Construction in progress			10,672				13,380
Net real estate properties			477,013				455,063
Cash and cash equivalents			10,637				3,555
Restricted cash			18,388				1,803
Tenant and accounts receivable, net of allowance of $154 in 2008 and $19 in 2007			42,924				2,249
Goodwill and intangible assets, net of accumulated amortization of $32,776 in 2008 and $18,728 in 2007			308,423				31,589
Other assets			27,689				11,978
Total assets		$	885,074			$	506,237
Liabilities and stockholders’ equity
Mortgage notes payable		$	234,497			$	237,504
Revolving credit facility			90,000				79,200
Term loan			100,000				—
Accounts payable			23,185				5,817
Billings in excess of costs and estimated earnings on uncompleted contracts			27,616				—
Deferred income taxes			40,302				217
Payable to Erdman shareholders			24,003				—
Other liabilities			47,751				21,243
Total liabilities			587,354				343,981
Commitments and contingencies
Minority interests in real estate partnerships			6,205				2,434
Minority interests in operating partnership			89,885				44,787
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, 17,563 and 11,948 shares issued and outstanding in 2008 and 2007, respectively			176				119
Additional paid-in capital			273,635				166,901
Accumulated other comprehensive income (loss)			235				(1,234	)
Accumulated deficit			(72,416	)			(50,751	)
Total stockholders’ equity			201,630				115,035
Total liabilities and stockholders’ equity		$	885,074			$	506,237

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Revenues:
Rental revenue		$	19,631			$	16,399			$	57,622			$	45,344
Design-Build contract revenue and other sales			72,914				—				174,870				—
Property management and other fees			852				874				2,524				2,644
Development management and other income			622				25				751				276
Total revenues			94,019				17,298				235,767				48,264
Expenses:
Property operating and management			8,370				6,797				23,403				18,766
Costs related to design-build contract revenue and other sales			59,578				—				146,907				—
Selling, general, and administrative			7,599				1,532				20,396				5,296
Depreciation and amortization			11,871				7,273				33,275				20,664
Total expenses			87,418				15,602				223,981				44,726
Income from operations before other income (expense), income tax expense (benefit), minority interests in real estate partnerships, and minority interests in operating partnership			6,601				1,696				11,786				3,538
Other income (expense):
Interest and other income, net			210				183				682				763
Interest expense			(6,743	)			(4,101	)			(18,695	)			(11,324	)
Equity in earnings (loss) of unconsolidated real estate partnerships			10				2				18				(2	)
Total other income (expense)			(6,523	)			(3,916	)			(17,995	)			(10,563	)
Income (loss) from operations before income tax expense (benefit), minority interests in real estate partnerships, and minority interests in operating partnership			78				(2,220	)			(6,209	)			(7,025	)
Income tax (expense) benefit			(883	)			19				(143	)			(151	)
Loss from operations before minority interests in real estate partnerships, and minority interests in operating partnership			(805	)			(2,201	)			(6,352	)			(7,176	)
Minority interests in real estate partnerships			(920	)			(16	)			(859	)			(55	)
Minority interests in operating partnership			639				615				2,480				2,226
Net loss		$	(1,086	)		$	(1,602	)		$	(4,731	)		$	(5,005	)
Net loss per share — basic and diluted		$	(0.07	)		$	(0.13	)		$	(0.31	)		$	(0.47	)
Weighted average common shares — basic and diluted			15,747				11,934				15,170				10,755

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)

														Accumulated
		Number of								Additional				Other
		Common				Common				Paid-in				Comprehensive				Accumulated
		Shares				Stock				Capital				Income (Loss)				Deficit				Total
Balance at December 31, 2007			11,948			$	119			$	166,901			$	(1,234	)		$	(50,751	)		$	115,035
Comprehensive loss:
Net loss			—				—				—				—				(4,731	)			(4,731	)
Unrealized gain on interest rate swaps			—				—				—				1,469				—				1,469
Comprehensive loss																							(3,262	)
Issuance of common stock, net of costs			5,609				57				91,288				—				—				91,345
Restricted stock grants			6				—				94				—				—				94
Amortization of restricted stock grants			—				—				47				—				—				47
Dividends to common stockholders			—				—				—				—				(16,934	)			(16,934	)
Adjustment to record change of interest in the operating partnership due to the issuance of operating partnership units in excess of book value			—				—				15,305				—				—				15,305
Balance at September 30, 2008			17,563			$	176			$	273,635			$	235			$	(72,416	)		$	201,630

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

		For the Nine Months Ended
		September 30,				September 30,
		2008				2007
Operating activities:
Net loss		$	(4,731	)		$	(5,005	)
Adjustments to reconcile net loss to cash provided by operating activities:
Minority interests			(1,621	)			(2,171	)
Depreciation and amortization			33,275				20,664
Amortization of acquired above market leases and acquired below market leases, net			(533	)			(529	)
Straight line rental revenue			(422	)			(237	)
Amortization of deferred financing costs and debt premium			878				186
Deferred income taxes			(468	)			—
Equity-based compensation			1,110				158
Equity in loss (earnings) of unconsolidated real estate partnerships			(18	)			2
Changes in operating assets and liabilities:
Tenant and accounts receivable and other assets			13,650				(852	)
Accounts payable and other liabilities			(7,042	)			5,330
Billings in excess of costs and estimated earnings on uncompleted contracts			(9,518	)			—
Net cash provided by operating activities			24,560				17,546
Investing activities:
Business acquisition, net of cash acquired			(130,264	)			—
Investment in real estate properties, net of cash assumed			(38,633	)			(91,868	)
Purchase of minority interests in operating partnership			(754	)			(3,807	)
Proceeds from sales-type capital lease			230				229
Purchase of corporate equipment			(1,068	)			(502	)
Distributions received from unconsolidated real estate partnerships			5				4
Increase in restricted cash			(16,585	)			(329	)
Net cash used in investing activities			(187,069	)			(96,273	)
Financing activities:
Proceeds from mortgage notes payable			8,087				65,941
Repayments of mortgage notes payable			(13,733	)			(16,714	)
Proceeds from revolving credit facility			110,500				49,300
Repayments to revolving credit facility			(99,700	)			(80,687	)
Proceeds from term loan			100,000				—
Net proceeds from sale of common stock			91,344				78,443
Dividends and distributions			(22,831	)			(15,919	)
Equity contributions by partners in consolidated real estate partnerships			517				1,304
Distributions to minority interests in real estate partnership			(963	)			(117	)
Payment of deferred financing costs			(3,630	)			(669	)
Net cash provided by financing activities			169,591				80,882
Increase in cash and cash equivalents			7,082				2,155
Balance at beginning of period			3,555				1,029
Balance at end of period		$	10,637			$	3,184
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest		$	17,596			$	11,792
Cash paid for income taxes		$	3,039			$	307
Noncash investing and financing activities:
Operating Partnership Units issued or to be issued in connection with the acquisition of a business or real estate property			81,673				3,583
Debt assumed with purchase of property			2,733				—
Minority interest assumed with purchase of property			3,359				—
Investment in real estate costs contributed by partner in a consolidated real estate partnership			—				460
Accrued dividends and distributions			9,379				5,779

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business Description

     Cogdell Spencer Inc. (the “Company”), incorporated in Maryland in 2005, 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, development, redevelopment, 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 specialized real estate needs of the healthcare industry.

     On March 10, 2008, the Company and its operating partnership, Cogdell Spencer LP (the “Operating Partnership”), completed a merger transaction through which they acquired MEA Holdings, Inc. (“MEA”) which wholly owns Marshall Erdman & Associates, Inc. (now, Erdman, A Cogdell Spencer Company) (“Erdman”). Erdman is a market-leading provider of advance planning and design-build services for healthcare facilities throughout the United States of America. Erdman’s service offerings include advance planning, architecture, engineering, and construction. Combined, the Company is a fully integrated healthcare facilities solutions company providing services from conceptual planning to long-term ownership and property management.

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.”

Interim Financial Information

     The financial information for the three and nine months ended September 30, 2008 and 2007 is unaudited, but includes all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for such periods. Operating results for the three and nine months ended September 30, 2008 and 2007 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal years of 2008 or 2007 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, 2007.

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, and the initial valuations and underlying allocations of purchase price in connection with business and real estate property acquisitions. Actual results may differ from those estimates.

Revenue Recognition

     Rental Revenue and Property Management. Rental income related to non-cancelable operating leases is recognized as earned over the term, which is the period from the date the lessee has access and control over the leased space to the lease termination date, of the lease agreements on a straight-line basis. Rental income recognized on a straight-line basis for certain lease agreements results in recognized revenue greater than or less than amounts contractually due from tenants. In addition, the leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes. At times the Company will receive cash payments at the inception of the lease for tenant improvements and these amounts are amortized into rental revenue over the life of the lease. These amounts are included in “Other liabilities” in the consolidated balance sheets. The Company monitors the creditworthiness of its tenants on a regular basis and maintains an allowance for doubtful accounts.

     The Company receives fees for property management and related services provided to third parties which are reflected as management fee revenue. Management fees are generally based on a percentage of revenues for the month as defined in the related property management agreements. The Company 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 amounts billed to the third party owners are recognized as revenue in accordance with EITF 01-14, “Income Statement Characterization of Reimbursements Received for “Out of Pocket” Expenses Incurred.”

     Design-Build Contract Revenues and Development Management. Design-Build contract revenue is recognized under the percentage-of-completion method of accounting in accordance with American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenues are determined by measuring the percentage of costs incurred to date to estimated total costs for each design-build contract based on current estimates of costs to complete. Contract costs include all labor and benefits, materials, subcontracts, and an allocation of indirect costs related to contract performance such as architectural, engineering, and construction management. Indirect costs are allocated to projects based upon labor hours charged. 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. Change orders are recognized when they are approved by the client.

     Costs and estimated earnings in excess of billings on uncompleted design-build projects (“underbillings”) are included in “Other assets” in the consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted design-build projects (“overbillings”) are included in liabilities in the consolidated balance sheets. Customers are billed on a monthly basis at the end of each month. As a result, typically the Company generates billings in excess of costs and estimated earnings on design-build projects.

     Revenue from project analysis and design agreements is accounted for on the completed contract method. Costs in excess of billings and billings in excess of costs on project analysis and design agreements are included with design-build projects over and underbillings in the consolidated balance sheets. Revenue from development agreements is recognized as earned per the agreements and costs are expensed as incurred.

     Gains on Disposition of Real Estate. The Company recognizes sales of real estate properties upon closing and meeting the criteria for a sale under Financial Accounting Standards Board Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”). Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale. This includes the buyer’s initial and continuing investments being adequate to demonstrate a commitment to pay for the property and the Company not having substantial

continuing involvement whereby the usual risks and rewards of ownership would not be transferred to the buyer. Profit may be deferred in whole or part until the sales meet the requirements of profit recognition on sales of real estate under SFAS 66.

     Other income. Other income on the Company’s statement of operations generally includes income incidental to the operations of the Company and is recognized when earned. Interest and other income includes the amortization of unearned income related to a sales-type capital lease.

Income Taxes

     The Company elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary taxable income be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organization and operational requirements and distributions equal or exceed taxable income. For all periods subsequent to the REIT election, the Company has met the organization and operational requirements and distributions exceeded net taxable income. Accordingly, no provision has been made for federal and state income taxes, except as follows.

     The Company, together with Cogdell Spencer Advisors, LLC (“CSA, LLC”), wholly-owned by the Operating Partnership, have jointly elected for CSA, LLC to be treated as a taxable REIT subsidiary (a “TRS”). Consera Healthcare Real Estate, LLC has been reorganized and is now a wholly-owned subsidiary of CSA, LLC. The Company, together with MEA, wholly-owned by the Operating Partnership and the parent company of Erdman, have also jointly elected for MEA to be treated as a TRS (“Erdman TRS”). As TRSs, the operations of CSA, LLC and MEA are generally subject to corporate income taxes.

     The Company’s TRSs account for their income taxes based on the requirements of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The calculation of the TRSs’ tax provision may require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause their recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The TRSs periodically assess the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, or federal statutory tax audits or estimates and judgments used.

     Effective January 1, 2007, the Company and the TRSs began applying the provisions of the FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” for measuring and recognizing tax benefits associated with uncertain tax positions. Penalties and interest, if incurred, would be recorded as a component of income tax expense. There were no penalties or interest recorded during the three and nine months ended September 30, 2008 and 2007. The Company and the TRSs have no unrecognized tax benefits. For 2004 (Erdman), 2005, 2006, and 2007, U.S. federal and state tax returns are open for examination.

Warranties

     Erdman provides standard industry warranties, which generally are for one year after completion of a project. Buildings are guaranteed against defects in workmanship for one year after completion. The typical warranty requires that Erdman replace or repair the defective item. Erdman records an estimate for future warranty related costs based on actual historical warranty claims. This estimated liability is included in “Other liabilities” in the consolidated balance sheets. Based on analysis of warranty costs, the warranty provisions are adjusted as necessary. While warranty costs have historically been within its calculated expectations, it is possible that future warranty costs could exceed expectations.

     The changes in the carrying amounts of the total warranty liabilities for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

		For the Three Months Ended								For the Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Balance at the beginning of period		$	2,000			$	—			$	—			$	—
Erdman acquisition			—				—				2,000				—
Accruals			1,666				—				2,330				—
Settlements			(1,666	)			—				(2,330	)			—
Balance at the end of period		$	2,000			$	—			$	2,000			$	—

Deferred Financing Costs

     Deferred financing costs include fees and costs incurred in conjunction with long-term financings and are amortized over the terms of the related debt using the straight-line method, which approximates the effective interest method. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to earnings. Deferred financing costs were $4.3 million, net of accumulated amortization of $1.6 million as of September 30, 2008 and $1.6 million, net of accumulated amortization of $0.7 million, as of December 31, 2007.

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 7,372 and 13,275 shares of unvested restricted stock outstanding at September 30, 2008 and 2007, respectively, that 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.

     One customer accounted for over 10% of accounts receivable at September 30, 2008. No customers or tenants accounted for more than 10% of revenue for the three and nine months ended September 30, 2008 and 2007.

Reclassifications

     As a result of the merger with Erdman, management has revised certain presentations in the condensed consolidated balance sheets and the condensed consolidated statements of operations to reflect the appropriate line items for the operations of the integrated business. These revisions include new line items for design-build operations, combining presentation of management fees and other reimbursements, and separately presenting income tax provision in the condensed consolidated statements of operations as well as separating out tenant and accounts receivable from other assets, accounts payable from accounts payable and other liabilities, and the combination of some immaterial line items into new lines for other assets and other liabilities in the condensed consolidated balance sheets. The reclassifications did not affect previously reported stockholders’ equity or net loss.

Recent Accounting Pronouncements

     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 Company has not adopted SFAS 161 and is in the process of evaluating the impact SFAS 161 may have on its consolidated financial statements.

     In April 2008, the FASB issued Financial Statement Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP No. EITF 03-6-1”). FSP No. EITF 03-6-1 states that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and should be included in basic and diluted earnings per share calculations. FSP No. EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The Company is evaluating the impact FSP No. EITF 03-6-1 may have on its consolidated financial statements.

     In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The Company is evaluating the impact FSP No. FAS 142-3 may have on its consolidated financial statements.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 will be effective 60 days after the approval of the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board (“PCAOB’s”) amendments to AU Section 411. The Company does not expect SFAS 162 to have an impact on its consolidated financial statements.

3. Business and Property Acquisitions

Merger with Erdman

     On March 10, 2008, the Company and the Operating Partnership completed a merger transaction through which they acquired MEA. The transaction was effected pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 23, 2008, as amended, by and among the Company, the Operating Partnership, Goldenboy Acquisition Corp. (a wholly-owned subsidiary of the Operating Partnership), MEA, Erdman, Marshall Erdman Development, LLC, and David Pelisek, David J. Lubar and Scott A. Ransom, in their capacities as the Seller Representatives.

     The consideration payable in the merger transaction and in the contribution transactions described below consists of cash and limited partnership interests issued by the Operating Partnership (the “OP Units”). The Operating Partnership entered into contribution agreements with 40 of MEA’s stockholders (the “Contributors”) pursuant to which the Contributors agreed to “roll over” an aggregate of 1,265,392 shares of MEA (representing in the aggregate approximately 41% of MEA’s outstanding shares on a fully diluted basis) by exchanging those shares for OP Units. The exchange of those shares for OP Units was completed immediately before the completion of the merger provided for in the Merger Agreement (the “Merger”). In the Merger, all the shares of MEA (other than the shares acquired by the Operating Partnership) were converted into the right to receive an amount of cash to be calculated in accordance with the provisions of the Merger Agreement.

     The cash consideration per share of MEA common shares payable in the Merger (the “Cash Consideration”) was calculated pursuant to a formula based on an “enterprise value” for 100% of MEA of $247.0 million, subject to certain adjustments. In connection with the Merger, in addition to the cash consideration of approximately $159.6 million paid in the aggregate to the holders of MEA common shares, pursuant to certain contribution agreements entered into in connection with the Merger, the Operating Partnership issued OP Units to the Contributors. The number of OP Units per MEA common share was based on the same value per MEA common share payable in cash under the Merger Agreement, or $17.01 per OP Unit. The OP Units issued in the transaction were of two types —

“regular units” and “alternative units.” A total of 4,331,336 OP Units were issued upon the closing of the transaction, of which 3,063,908 were regular units and 1,267,429 were alternative units. In June 2008, a total of 208,496 OP Units, of which all were alternative units, were issued as part of a post-closing claim release. Up to 595,705 additional OP Units, comprised of alternative units, may be issued based on the level of post-closing indemnity claims. The alternative units are substantially the same as the regular units, except that the regular units have an exchange feature whereby they are exchangeable, after a one-year lock-up period, on a one-for-one basis, for shares of the Company’s common stock, while the alternative units were not exchangeable for shares of the Company’s common stock until the exchange feature included as a feature of the alternative units was approved by the Company’s stockholders. On May 29, 2008, the Company’s stockholders approved the exchange feature whereby the alternative units will be exchangeable, after a one-year lock-up period, on a one-for-one basis, for shares of the Company’s common stock.

     The Merger Agreement provides that certain adjustments to the aggregate Cash Consideration paid will be made following the delivery of the final closing statement to the Seller Representative. A portion of the aggregate Cash Consideration has been deposited in an escrow account pending such adjustments. In the event that additional cash payments were owed to the former holders of MEA shares, the escrow agent shall pay to the former holders of MEA shares that were not exchanged for OP Units the pro rata cash amount owed to each such holder and the Operating Partnership will issue to the Contributors additional OP Units in the same amount per share, based on $17.01 per OP Unit. The Merger Agreement also provides that a portion of the aggregate Cash Consideration to be paid to the former holders of shares of MEA will be held in escrow as security for certain indemnification obligations owed by such holders to the Operating Partnership and Goldenboy Acquisition Corp. under the Merger Agreement. Releases from this escrow will be treated in the same way.

     In connection with the Merger, one of the former MEA shareholders, Lubar Capital LLC (“Lubar”), received the right to nominate one individual for election to the Company’s Board of Directors. Accordingly, the Company’s Board of Directors increased the size of the Board of Directors and elected David J. Lubar as a director on January 22, 2008. Lubar will continue to retain its right to nominate one individual for so long as Lubar and its affiliates continue to maintain at least 75% of their aggregate initial ownership measured in number of equity securities of the Company and its affiliates.

     The aggregate consideration paid for the Merger was as follows (in thousands):

Fair value of OP Units issued and to be issued		$	81,347
Cash consideration, net of cash acquired			145,018
Total purchase price, net of cash acquired		$	226,365

     Of the total purchase price, $202.4 million has been paid and the remaining $24.0 million is being held in escrow and is expected to be released to the sellers in November 2008 and June 2009. Of the $24.0 million being held in escrow, $9.4 million is expected to be paid in OP Units, which represents 595,705 OP Units. The Company has recorded a liability of $9.4 million in “Payable to MEA Shareholders” related to the expected issuance of these OP Units and the company has recorded a liability of the $14.6 million in “Payable to MEA Shareholders” related to the expected cash to be paid.

     The Merger was accounted for under the purchase method in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”). The total purchase price will be allocated to assets acquired and liabilities assumed based upon their estimated fair values as determined by management. The estimated fair values are based on information currently available and on current assumptions as to future operations, and are subject to change upon the completion of acquisition accounting, including the finalization of asset valuations and working capital adjustment.

     The following table is a summary preliminary allocation of the total purchase price for the assets acquired and liabilities assumed of Erdman as of March 10, 2008 (in thousands). The purchase price allocation for the goodwill and intangible assets and certain other assets and liabilities are subject to completion of valuations.

Accounts receivable, including retainage receivables		$	52,637
Goodwill and intangible assets			287,592
Other assets			14,381
Accounts payable			(27,449	)
Billings in excess of costs and estimated earnings on uncompleted contracts			(37,134	)
Deferred income taxes			(39,989	)
Other liabilities			(23,673	)
Total purchase price, net of cash acquired		$	226,365

     Erdman’s service offerings and customer lists are complementary to the Company’s pre-Merger service offerings. As a result of the Merger, the Company became a fully integrated healthcare facilities real estate company. The accompanying statement of operations for the nine months ended September 30, 2008, includes seven months of Erdman’s operations.

Property Acquisitions

     Property acquisitions are accounted for in accordance with SFAS 141. The purchase price is allocated between net tangible and intangible assets based on their estimated fair values as determined by management using methods similar to those used by independent appraisers of income-producing property.

     In February 2008, the Company acquired a leasehold interest in floors six and seven of St. Mary’s North Medical Office Building, a seven-story multi-tenant medical office building located on the campus of St. Mary’s Hospital in Richmond, Virginia. The purchase price was $4.6 million less a $0.2 million credit from the seller for unpaid tenant improvement allowances.

     In February 2008, the Company acquired East Jefferson Medical Plaza located in Metairie, Louisiana for $19.8 million less a $0.7 million credit from the seller for unpaid tenant improvement allowances. The facility is 123,184 square feet and is located on the campus of East Jefferson General Hospital. With this acquisition, the Company now owns and manages 253,914 square feet of medical office and clinical space on or adjacent to the East Jefferson campus.

     In September 2008, the Company acquired a controlling interest in Genesis Property Holding, LLC (“Genesis”), located in Pensacola, Florida for $2.2 million. Genesis is in the early stages of constructing an approximately $22.4 million, 75,985 square foot medical office building and outpatient treatment center. The project is 100% pre-leased and scheduled for construction completion in December 2009. The Company expects to own 40% of the entity and the remaining 60% will be owned by physician-tenants of the building.

     The following table is an allocation of the purchase price of the property acquisitions during the nine months ended September 30, 2008 (in thousands):

Construction in progress		$	4,031
Building and improvements			20,259
Acquired ground or air rights leases			325
Acquired in place lease value and deferred leasing costs			2,948
Acquired above market leases			10
Mortgage notes payable			(2,722	)
Minority interest in real estate partnerships			(3,359	)
Total purchase price allocated, net of cash acquired		$	21,492

     The following summary of selected unaudited pro forma results of operations presents information as if the business and property acquisitions had occurred at the beginning of each period presented. The unaudited pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future (in thousands, except per share amounts):

		For the Three Months Ended								For the Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Revenue		$	94,019			$	96,208			$	286,581			$	284,995
Net income (loss)			856				(107	)			(1,942	)			(1,472	)
Net income (loss) per share — basic and diluted		$	0.05			$	(0.01	)		$	(0.13	)		$	(0.14	)

     The Company expects to recognize amortization expense from the acquired intangible assets of $13.2 million, $10.3 million, $4.9 million, $3.9 million, $3.0 million for the years ended December 31, 2008, 2009, 2010, 2011, and 2012, respectively, and $2.8 million thereafter. Goodwill is not amortized and is associated with the Design-Build and Development segment.

4. Investments in Real Estate Partnerships

     As of September 30, 2008, 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 September 30, 2008, 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;
	•		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 development fees, property management fees, leasing fees, and expense reimbursements from these real estate partnerships.

     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.

     The Company’s unconsolidated entities are accounted for under the equity method of accounting based on the Company’s ability to exercise significant influence. 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):

		As of				As of
		September 30,				December 31,
		2008				2007
Financial position:
Total assets		$	56,510			$	57,406
Total liabilities			50,379				50,725
Members’ equity			6,131				6,681

		For the Three Months Ended								For the Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Results of operations:
Total revenues		$	3,025			$	3,052			$	9,107			$	9,119
Operating and general and administrative expenses			1,555				1,320				4,263				3,853
Net income			(28	)			285				446				914

5. 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.

     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 minority interests in the Operating Partnership. FFOM adds back to FFO non-cash amortization of non-real estate related intangible assets associated with purchase accounting. The Company presents FFO and FFOM because the Company considers them as 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. FFO or FFOM should not be considered as alternatives to net income (loss) (computed in accordance with GAAP) as an indicator of the Company’s performance, nor are they indicative of funds available to fund the Company’s cash needs, including the Company’s ability to pay dividends or make distributions.

     In periods prior to 2008, the Company presented segment net operating income for property operations and real estate services, where the real estate services segment included property management services. Due to the Merger with Erdman, the presentation of discrete financial information was modified and Company management no longer uses those segment measures when making resource allocation decisions.

     The following tables represent the segment information for the three months ended September 30, 2008 and 2007 (in thousands):

						Design-Build
		Property				and				Unallocated
		Operations				Development				and Other				Total
Three months ended September 30, 2008:
Revenues:
Rental revenue		$	19,631			$	—			$	—			$	19,631
Design-Build contract revenue and other sales			—				72,914				—				72,914
Property management and other fees			852				—				—				852
Development management and other income			—				622				—				622
Total revenues			20,483				73,536				—				94,019
Certain operating expenses:
Property operating and management			8,370				—				—				8,370
Costs related to design-build contract revenue and other sales			—				59,578				—				59,578
Selling, general, and administrative			—				4,865				—				4,865
Total certain operating expenses			8,370				64,443				—				72,813
			12,113				9,093				—				21,206
Other income (expense)			143				52				15				210
Corporate general and administrative expenses			—				—				(2,734	)			(2,734	)
Interest expense			—				—				(6,743	)			(6,743	)
Provision for income taxes applicable to funds from operations modified			—				—				(2,411	)			(2,411	)
Depreciation and amortization			—				(348	)			(57	)			(405	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization			13				—				—				13
Minority interests in real estate partnerships, before real estate related depreciation and amortization			(977	)			—				—				(977	)
Funds from operations modified (FFOM)			11,292				8,797				(11,930	)			8,159
Amortization of intangibles related to purchase accounting, net of income tax benefit			(42	)			(3,876	)			1,528				(2,390	)
Funds from operations (FFO)			11,250				4,921				(10,402	)			5,769
Real estate related depreciation and amortization			(7,494	)			—				—				(7,494	)
Minority interests in operating partnership			—				—				639				639
Net income (loss)		$	3,756			$	4,921			$	(9,763	)		$	(1,086	)
Total assets		$	575,244			$	308,878			$	952			$	885,074

						Design-Build
		Property				and				Unallocated
		Operations				Development				and Other				Total
Three months ended September 30, 2007:
Revenues:
Rental revenue		$	16,399			$	—			$	—			$	16,399
Design-Build contract revenue and other sales			—				—				—				—
Property management and other fees			874				—				—				874
Development management and other income			—				25				—				25
Total revenues			17,273				25				—				17,298
Certain operating expenses:
Property operating and management			6,797				—				—				6,797
Costs related to design-build contract revenue and other sales			—				—				—				—
Selling, general, and administrative			—				111				—				111
Total certain operating expenses			6,797				111				—				6,908
			10,476				(86	)			—				10,390
Other income (expense)			148				—				35				183
Corporate general and administrative expenses			—				—				(1,421	)			(1,421	)
Interest expense			—				—				(4,101	)			(4,101	)
Provision for income taxes applicable to funds from operations modified			—				—				2				2
Depreciation and amortization			—				—				(39	)			(39	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization			16				—				—				16
Minority interests in real estate partnerships, before real estate related depreciation and amortization			(41	)			—				—				(41	)
Funds from operations modified (FFOM)			10,599				(86	)			(5,524	)			4,989
Amortization of intangibles related to purchase accounting, net of income tax benefit			(42	)			—				16				(26	)
Funds from operations (FFO)			10,557				(86	)			(5,508	)			4,963
Real estate related depreciation and amortization			(7,180	)			—				—				(7,180	)
Minority interests in operating partnership			—				—				615				615
Net income (loss)		$	3,377			$	(86	)		$	(4,893	)		$	(1,602	)
Total assets		$	474,856			$	—			$	796			$	475,652

     The following tables represent the segment information for the nine months ended September 30, 2008 and 2007 (in thousands):

						Design-Build
		Property				and				Unallocated
		Operations				Development				and Other				Total
Nine months ended September 30, 2008:
Revenues:
Rental revenue		$	57,622			$	—			$	—			$	57,622
Design-Build contract revenue and other sales			—				174,870				—				174,870
Property management and other fees			2,524				—				—				2,524
Development management and other income			—				751				—				751
Total revenues			60,146				175,621				—				235,767
Certain operating expenses:
Property operating and management			23,403				—				—				23,403
Costs related to design-build contract revenue and other sales			—				146,907				—				146,907
Selling, general, and administrative			—				12,548				—				12,548
Total certain operating expenses			23,403				159,455				—				182,858
			36,743				16,166				—				52,909
Other income (expense)			456				137				89				682
Corporate general and administrative expenses			—				—				(7,848	)			(7,848	)
Interest expense			—				—				(18,695	)			(18,695	)
Provision for income taxes applicable to funds from operations modified			—				—				(3,719	)			(3,719	)
Depreciation and amortization			—				(772	)			(176	)			(948	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization			26				—				—				26
Minority interests in real estate partnerships, before real estate related depreciation and amortization			(1,128	)			—				—				(1,128	)
Funds from operations modified (FFOM)			36,097				15,531				(30,349	)			21,279
Amortization of intangibles related to purchase accounting, net of income tax benefit			(127	)			(9,043	)			3,576				(5,594	)
Funds from operations (FFO)			35,970				6,488				(26,773	)			15,685
Real estate related depreciation and amortization			(22,896	)			—				—				(22,896	)
Minority interests in operating partnership			—				—				2,480				2,480
Net income (loss)		$	13,074			$	6,488			$	(24,293	)		$	(4,731	)
Total assets		$	575,244			$	308,878			$	952			$	885,074

						Design-Build
		Property				and				Unallocated
		Operations				Development				and Other				Total
Nine months ended September 30, 2007:
Revenues:
Rental revenue		$	45,344			$	—			$	—			$	45,344
Design-Build contract revenue and other sales			—				—				—				—
Property management and other fees			2,644				—				—				2,644
Development management and other income			—				276				—				276
Total revenues			47,988				276				—				48,264
Certain operating expenses:
Property operating and management			18,766				—				—				18,766
Costs related to design-build contract revenue and other sales			—				—				—				—
Selling, general, and administrative			—				377				—				377
Total certain operating expenses			18,766				377				—				19,143
			29,222				(101	)			—				29,121
Other income (expense)			428				237				98				763
Corporate general and administrative expenses			—				—				(4,919	)			(4,919	)
Interest expense			—				—				(11,324	)			(11,324	)
Provision for income taxes applicable to funds from operations modified			—				—				(200	)			(200	)
Depreciation and amortization			—				—				(100	)			(100	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization			28				—				—				28
Minority interests in real estate partnerships, before real estate related depreciation and amortization			(128	)			—				—				(128	)
Funds from operations modified (FFOM)			29,550				136				(16,445	)			13,241
Amortization of intangibles related to purchase accounting, net of income tax benefit			(127	)			—				50				(77	)
Funds from operations (FFO)			29,423				136				(16,395	)			13,164
Real estate related depreciation and amortization			(20,395	)			—				—				(20,395	)
Minority interests in operating partnership			—				—				2,226				2,226
Net income (loss)		$	9,028			$	136			$	(14,169	)		$	(5,005	)
Total assets		$	474,856			$	—			$	796			$	475,652

6. Contracts

     Revenue and billings to date on uncompleted contracts, from their inception, as of September 30, 2008 and December 31, 2007 (in thousands):

		September 30,				December 31,
		2008				2007
Costs and estimated earnings on uncompleted contracts		$	257,402			$	—
Billings to date			(280,473	)			—
Net billings in excess of costs and estimated earnings		$	(23,071	)		$	—

     These amounts are included in the consolidated balance sheet at September 30, 2008 and December 31, 2007 as shown below (in thousands). At September 30, 2008, the Company had retainage receivables of $10.2 million, which are included in “Tenant and accounts receivable” in the consolidated balance sheets. Amounts for billed retainages and receivables to be collected in excess of one year are not significant for the periods presented.

		September 30,				December 31,
		2008				2007
Costs and estimated earnings in excess of billings (1)		$	4,545			$	—
Billings in excess of costs and estimated earnings			(27,616	)			—
Net billings in excess of costs and estimated earnings		$	(23,071	)		$	—

7. Goodwill and Intangible Assets

     Goodwill and intangible assets consisted of the following at September 30, 2008 and December 31, 2007 (in thousands):

		September 30,				December 31,
		2008				2007
Goodwill		$	5,335			$	5,335
Intangible assets related to the Erdman acquisition, net of accumulated amortization of $9,043 in 2008			278,556				—
Acquired above market leases, net of accumulated amortization of $693 in 2008 and $516 in 2007			866				1,033
Acquired in place lease value and deferred leasing costs, net of accumulated amortization of $22,300 in 2008 and $17,739 in 2007			18,745				20,359
Acquired ground leases, net of accumulated amortization of $357 in 2008 and $217 in 2007			3,206				3,021
Acquired property management contracts, net of accumulated amortization of $383 in 2008 and $256 in 2007			1,715				1,841
Total goodwill and intangible assets, net		$	308,423			$	31,589

8. Mortgage Notes Payable and Borrowing Agreements

Revolving Credit Facility

     On March 10, 2008, the Company amended and restated its existing revolving credit facility, dated November 1, 2005, among the Company, the Operating Partnership, Bank of America, N.A., Citicorp North America, Inc., Branch Banking and Trust Company, Banc of America Securities LLC, Citigroup Global Markets Inc. and other lenders (the “Credit Facility”). Banc of America Securities LLC is acting as sole lead arranger and sole book manager of the Credit Facility. KeyBank National Association is acting as syndication agent. Branch Banking and Trust Company and Wachovia Bank, N.A. are acting as co-documentation agents. Bank of America, N.A., KeyBank National Association, Branch Banking and Trust Company, Wachovia Bank, National Association, M&I Marshall and Ilsley Bank, and Citicorp North America, Inc. are lenders (the “Lenders”) thereunder. The Credit Facility is secured by certain of the Company’s properties and is guaranteed by the Company and certain of its subsidiaries. The Credit Facility matures on March 10, 2011, subject to 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 (as described below). The Credit Facility is cross defaulted against the Term Loan. The Company is subject to customary covenants 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 NYSE, (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). The interest rate on loans under the Credit Facility equals, at the Company’s election, either (1) LIBOR (3.93% as of September 30, 2008) plus a margin of between 95 to 140 basis points based on the Company’s leverage ratio or (2) the higher of the federal funds rate plus 50 basis points or Bank of America, N.A.’s prime rate (5.00% as of September 30, 2008).

     As of September 30, 2008, there was $51.9 million available under the Credit Facility. There was $90.0 million outstanding at September 30, 2008 and $8.1 million of availability was restricted related to outstanding letters of credit.

Term Loan

     The Company, through its Erdman TRS, has $100.0 million outstanding under a $100.0 million senior secured term facility (the “Term Loan”) to finance the cash portion of the Merger. Keybanc Capital Markets is acting as sole lead arranger and sole book manager of the Term Loan. Bank of America, N.A. is acting as syndication agent. Branch Banking and Trust Company and Wachovia Bank, N.A. are acting as co-documentation agents. KeyBank National Association, Bank of America, N.A., Branch Banking and Trust Company, Wachovia Bank, National Association, M&I Marshall and Ilsley Bank, and Citicorp North America, Inc. are lenders thereunder. The Term Loan is secured by the stock and certain accounts receivables 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 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 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. In addition, there are financial covenants relating only to Erdman. The interest rate on loans under the Term Loan equals, at the

Company’s election, either (1) LIBOR (3.93% as of September 30, 2008) plus a margin of between 300 to 350 basis points based on certain Erdman performance ratios or (2) (i) the higher of the federal funds rate plus 50 basis points or KeyBank National Association’s prime rate (ii) plus a margin of between 300 to 350 basis points based on certain Erdman performance ratios (5.00% as of September 30, 2008).

Mortgage Notes Payable

     Mebane Medical Investors, LLC, a consolidated real estate partnership, has construction financing related to the Mebane Medical Office Building project. The credit facility provides financing of up to $13.0 million with an interest rate equal to LIBOR plus 1.3% (5.23% as of September 30, 2008). The mortgage note payable will mature in May 2010 and provides for interest-only payments through May 2009 and principal payments based on a 30-year amortization from June 2009 through the maturity date in May 2010. This facility has two one-year extension options. As of September 30, 2008, there was a total of $12.1 million drawn on the facility.

     In July 2008, the Company refinanced the mortgage note payable for Rocky Mount MOB, LLC, a consolidated real estate partnership. Terms of the note payable require monthly payments of approximately $35,000 through March 2012, at which time the remaining principal is due. The note payable has a fixed interest rate of 6.03%. The principal balance was increased by $1.3 million to $5.4 million.

     Genesis Property Holding, LLC, a consolidated real estate partnership, has construction financing related to the Pensacola, Florida, medical office building and cancer center project. The financing provides for an amount up to $16.8 million and for a total term of ten years, inclusive of an 18-month construction period. The loan calls for payments of interest-only during the construction period at a rate of one-month LIBOR plus 1.50%. After the construction period, the loan converts to an amortizing loan with monthly payments based on a 25-year amortization schedule. The Company has entered into a forward starting interest rate swap agreement that effectively fixes the interest rate at 6.21% after the construction period through maturity. The loan matures September 2018.

     In September 2008, the Company paid off the remaining principal balance of $8.6 million on the mortgage note payable for Medical Investors I, LLC.

Scheduled Maturities

     Scheduled maturities of the mortgage notes payable and borrowing agreements as of September 30, 2008, are as follows (in thousands):

For the period ending:
2008		$	13,466
2009			47,560
2010			31,109
2011			212,386
2012			11,145
Thereafter			108,596
			424,262
Unamortized premium			235
		$	424,497

9. 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, are reported in accumulated other comprehensive income (loss) exclusive of ineffectiveness amounts.

     The following table summarizes the terms of the agreements and their fair values at September 30, 2008 and December 31, 2007 (dollars in thousands):

																						September 30, 2008								December 31, 2007
		Notional
		Amount as of
		September 30,												Effective				Expiration
Entity		2008				Receive Rate				Pay Rate				Date				Date				Asset				Liability				Asset				Liability
Beaufort Medical Plaza, LLC (1)		$	4,932			1 Month LIBOR					5.65	%			8/18/2008				8/18/2011			$	—			$	34			$	—			$	—
Beaufort Medical Plaza, LLC			4,855			1 Month LIBOR					5.01	%			10/25/2006				7/25/2008				—				—				—				23
Cogdell Health Campus MOB, LP			11,025			1 Month LIBOR					4.03	%			3/14/2008				3/2/2015				61				—				—				—
Indianapolis MOB LLC			30,000			1 Month LIBOR					4.95	%			11/6/2006				10/31/2009				—				622				—				689
River Hills Medical Associates, LLC			2,896			1 Month LIBOR					4.97	%			10/16/2006				12/15/2008				—				13				—				29
Roper MOB, LLC			9,277			1 Month LIBOR					4.95	%			10/10/2006				7/10/2009				—				135				—				173
St. Francis Community MOB, LLC (2)			—				N/A				N/A				N/A				N/A				—				—				—				25
St. Francis Medical Plaza, LLC (2)			—				N/A				N/A				N/A				N/A				—				—				—				27
Genesis Property Holdings, LLC			16,797			1 Month LIBOR					4.71	%			4/1/2010				10/1/2018				—				68				—				—
MEA Holdings, Inc.			100,000			1 Month LIBOR					2.82	%			4/1/2008				3/1/2011				1,446				—				—				—
Cogdell Spencer LP (3)			30,000			1 Month LIBOR					3.11	%			10/15/2008				3/10/2011				230				—				—				—
Cogdell Spencer LP			3,000			1 Month LIBOR					5.06	%			8/14/2007				10/31/2008				—				8				—				27
Cogdell Spencer LP			27,000			1 Month LIBOR					5.06	%			8/20/2007				10/31/2008				—				50				—				242
																						$	1,737			$	930			$	—			$	1,235