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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

¨	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 0-25739

WELLS REAL ESTATE INVESTMENT TRUST, INC.

(Exact name of registrant as specified in its charter)


Maryland		58-2328421
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6200 The Corners Parkway

Norcross, Georgia 30092

(Address of principal executive offices)

(Zip Code)

(770) 449-7800

(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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 ¨		Accelerated filer ¨		Non-Accelerated filer x

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

Number of shares outstanding of the registrant’s

only class of common stock, as of July 31, 2006: 459,318,837 shares

FORM 10-Q

WELLS REAL ESTATE INVESTMENT TRUST, INC.

TABLE OF CONTENTS


			Page No.
PART I. Financial Statements

	Item 1.	Consolidated Financial Statements	4

		Consolidated Balance Sheets — June 30, 2006 (unaudited) and December 31, 2005	5

		Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2006 (unaudited) and 2005 (unaudited)	6

		Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2005 and the Six Months Ended June 30, 2006 (unaudited)	7

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 (unaudited) and 2005 (unaudited)	8

		Condensed Notes to Consolidated Financial Statements (unaudited)	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	30

PART II. Other Information

	Item 1.	Legal Proceedings	30

	Item 1A.	Risk Factors	30

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

	Item 3.	Defaults Upon Senior Securities	31

	Item 4.	Submission of Matters to a Vote of Security Holders	31

	Item 5.	Other Information	31

	Item 6.	Exhibits	32

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Wells Real Estate Investment Trust, Inc. (“Wells REIT”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Wells REIT’s Annual Report on Form 10-K for the year ended December 31, 2005 for a discussion of some of the risks and uncertainties, although not all risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements.

PART I. FINANCIAL STATEMENTS

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

The information furnished in the accompanying consolidated balance sheets and related consolidated statements of income, stockholders’ equity, and cash flows reflects all adjustments, that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.

The accompanying financial statements should be read in conjunction with the notes to Wells REIT’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Wells REIT’s Annual Report on Form 10-K for the year ended December 31, 2005. Wells REIT’s results of operations for the three months and six months ended June 30, 2006 are not necessarily indicative of the operating results expected for the full year.

WELLS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share amounts)


	(Unaudited) June 30, 2006			December 31, 2005
Assets:
Real estate assets, at cost:
Land	$	628,636		$	618,267
Buildings and improvements, less accumulated depreciation of $349,151 and $303,824 as of June 30, 2006 and December 31, 2005, respectively		3,102,728			3,088,126
Intangible lease assets, less accumulated amortization of $120,730 and $104,299 as of June 30, 2006 and December 31, 2005, respectively		227,687			235,410
Construction in progress		26,834			20,734
Assets held for sale, net		29,807			30,517

Total real estate assets		4,015,692			3,993,054

Investments in unconsolidated joint ventures		57,663			58,817
Cash and cash equivalents		44,404			48,973
Tenant receivables, net of allowance for doubtful accounts of $994 and $689 as of June 30, 2006 and December 31, 2005, respectively		102,858			97,679
Due from unconsolidated joint ventures		1,034			931
Due from affiliate		160			215
Prepaid expenses and other assets		20,278			22,124
Deferred financing costs, less accumulated amortization of $6,017 and $5,099 as of June 30, 2006 and December 31, 2005, respectively		9,963			10,233
Deferred lease costs, less accumulated amortization of $63,924 and $51,787 as of June 30, 2006 and December 31, 2005, respectively		169,086			165,227
Other assets held for sale, net		1,451			1,312

Total assets	$	4,422,589		$	4,398,565

Liabilities:
Lines of credit and notes payable	$	1,220,582		$	1,036,312
Accounts payable, accrued expenses, and accrued capital expenditures		71,748			68,057
Due to affiliates		675			4,167
Deferred income		18,853			22,301
Intangible lease liabilities, less accumulated amortization of $35,031 and $34,431 as of June 30, 2006 and December 31, 2005, respectively		100,156			106,158

Total liabilities		1,412,014			1,236,995

Commitments and Contingencies		—			—

Minority Interest		5,733			5,408

Redeemable Common Stock		92,971			167,015

Stockholders’ Equity:
Common stock, $.01 par value; 900,000,000 shares authorized; 460,656,194 shares issued and outstanding at June 30, 2006; and 469,423,177 shares issued and outstanding at December 31, 2005		4,606			4,694
Additional paid-in capital		3,315,721			3,391,998
Cumulative distributions in excess of earnings		(315,485	)		(240,530	)
Redeemable common stock		(92,971	)		(167,015	)

Total stockholders’ equity		2,911,871			2,989,147

Total liabilities, minority interest, redeemable common stock, and stockholders’ equity	$	4,422,589		$	4,398,565

See accompanying notes.

WELLS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


	(Unaudited) Three Months Ended June 30,						(Unaudited) Six Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Rental income	$	110,699		$	109,150		$	220,444		$	218,869
Tenant reimbursements		31,662			31,856			63,395			63,627
Lease termination income		1,329			3,470			1,345			4,308

		143,690			144,476			285,184			286,804
Expenses:
Property operating costs		48,224			44,956			95,648			89,754
Asset and property management fees:
Related party		6,537			5,457			11,870			11,174
Other		1,331			1,343			2,742			2,798
Depreciation		22,778			21,950			45,599			43,633
Amortization		17,160			16,080			34,454			32,150
Lease termination expense		1,423			1,128			1,425			1,172
General and administrative		5,277			5,104			8,680			8,904
Casualty and impairment losses on real estate assets		100			16,093			100			16,093

		102,830			112,111			200,518			205,678

Real estate operating income		40,860			32,365			84,666			81,126

Other income (expense):
Interest expense		(15,335	)		(12,398	)		(29,539	)		(23,071	)
Interest and other income		470			4,061			981			4,520
Equity in income of unconsolidated joint ventures		581			12,420			1,161			13,816

		(14,284	)		4,083			(27,397	)		(4,735	)

Income from continuing operations before minority interest		26,576			36,448			57,269			76,391

Minority interest in earnings of consolidated entities		(170	)		(144	)		(333	)		(288	)

Income from continuing operations		26,406			36,304			56,936			76,103

Discontinued operations:
Operating income		804			2,466			1,621			13,387
Gain on sale of real estate assets		1,184			177,382			1,184			177,386

Income from discontinued operations		1,988			179,848			2,805			190,773

Net income	$	28,394		$	216,152		$	59,741		$	266,876

Per share information — basic and diluted:
Income from continuing operations	$	0.06		$	0.08		$	0.12		$	0.16
Income from discontinued operations	$	0.00		$	0.39		$	0.01		$	0.41

Net income available to common stockholders	$	0.06		$	0.47		$	0.13		$	0.57

Weighted-average common shares outstanding — basic and diluted		461,064			464,067			462,519			468,934

See accompanying notes.

WELLS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2005

AND FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)

(in thousands, except per share amounts)


	Common Stock					Additional Paid-In			Cumulative Distributions in Excess			Redeemable Common			Other Comprehensive			Total Stockholders’
	Shares		Amount			Capital			of Earnings			Stock			Income			Equity
Balance, December 31, 2004	473,486		$	4,735		$	4,203,918		$	(283,184	)	$	(225,955	)	$	86		$	3,699,600
Issuance of common stock	18,834			188			165,331			—			—			—			165,519
Redemptions of common stock	(22,897	)		(229	)		(217,866	)		—			—			—			(218,095	)
Redeemable common stock	—			—			—			—			58,940						58,940
Special distribution ($1.62 per share)	—			—			(748,526	)		—			—			—			(748,526	)
Dividends ($0.61 per share)	—			—			—			(286,481	)		—			—			(286,481	)
Commissions and discounts on stock sales	—			—			(10,488	)		—			—			—			(10,488	)
Other offering costs	—			—			(371	)		—			—			—			(371	)
Components of comprehensive income:
Net income	—			—			—			329,135			—			—			329,135
Change in value of interest rate swap	—			—			—			—			—			(86	)		(86	)

Comprehensive income																			329,049

Balance, December 31, 2005	469,423			4,694			3,391,998			(240,530	)		(167,015	)		—			2,989,147

Issuance of common stock	9,083			91			76,021			—			—			—			76,112
Redemptions of common stock	(17,850	)		(179	)		(149,400	)		—			—			—			(149,579	)
Redeemable common stock	—			—			—			—			74,044			—			74,044
Dividends ($0.29 per share)	—			—			—			(134,696	)		—			—			(134,696	)
Commissions and discounts on stock sales	—			—			(2,867	)		—			—			—			(2,867	)
Other offering costs	—			—			(31	)		—			—			—			(31	)
Net income	—			—			—			59,741			—			—			59,741

Balance, June 30, 2006	460,656		$	4,606		$	3,315,721		$	(315,485	)	$	(92,971	)	$	—		$	2,911,871

See accompanying notes.

WELLS REAL ESTATE INVESTMENT TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	(Unaudited) Six months ended June 30,
	2006			2005
Cash Flows from Operating Activities:
Net income	$	59,741		$	266,876
Operating distributions received from unconsolidated joint ventures		2,439			4,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		46,321			46,313
Other amortization		33,792			33,531
Lease termination expense		1,425			1,172
Casualty and impairment losses on real estate assets		100			16,093
Amortization of deferred financing costs and fair market value adjustments on notes payable		615			572
Equity in income of unconsolidated joint ventures		(1,161	)		(13,816	)
Minority interest in earnings of consolidated entities		333			288
Gain on sale of real estate assets		(1,184	)		(177,386	)
Changes in assets and liabilities:
Increase in tenant receivables, net		(6,411	)		(2,109	)
Decrease in due from affiliate		55			5
Increase in prepaid expenses and other assets		(7,451	)		(10,967	)
Increase (decrease) in accounts payable, accrued expenses, and accrued capital expenditures		2,017			(20,788	)
(Decrease) increase in due to affiliates		(2,335	)		1,025
Decrease in deferred income		(3,448	)		(13,824	)

Net cash provided by operating activities		124,848			131,009
Cash Flows from Investing Activities:
Investment in real estate and earnest money		(93,949	)		(23,190	)
Proceeds from master leases		730			—
Net sale proceeds received from unconsolidated joint ventures		—			44,440
Net sale proceeds for wholly owned properties		3,605			712,247
Investments in unconsolidated joint ventures		(227	)		(117	)
Acquisition and advisory fees paid		(2,485	)		(2,995	)
Deferred lease costs paid		(10,047	)		(2,769	)

Net cash (used in) provided by investing activities		(102,373	)		727,616
Cash Flows from Financing Activities:
Deferred financing costs paid		(648	)		(812	)
Proceeds from lines of credit and notes payable		374,648			294,668
Repayments of lines of credit and notes payable		(190,075	)		(147,441	)
Issuance of common stock		75,469			83,133
Redemptions of common stock		(148,005	)		(162,107	)
Dividends paid		(134,703	)		(150,747	)
Special distribution		—			(748,526	)
Commissions on stock sales		(3,699	)		(4,177	)
Other offering costs paid		(31	)		(299	)

Net cash used in financing activities		(27,044	)		(836,308	)

Net (decrease) increase in cash and cash equivalents		(4,569	)		22,317
Cash and cash equivalents, beginning of period		48,973			39,669

Cash and cash equivalents, end of period	$	44,404		$	61,986

See accompanying notes.

WELLS REAL ESTATE INVESTMENT TRUST, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

(unaudited)

1. Organization

Wells Real Estate Investment Trust, Inc. (“Wells REIT”) is a Maryland corporation that qualifies as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the acquisition and ownership of commercial real estate properties throughout the United States, including properties that are under construction, newly constructed, or have operating histories. Wells REIT was incorporated in 1997 and commenced operations on June 5, 1998. Wells REIT conducts business primarily through Wells Operating Partnership, L.P. (“Wells OP”), a Delaware limited partnership. Wells REIT is the sole general partner and possesses full legal control and authority over the operations of Wells OP. Wells Capital, Inc. (“Wells Capital”) is the sole limited partner of Wells OP. Wells OP owns properties directly, through wholly-owned subsidiaries, through certain joint ventures with real estate limited partnerships sponsored by Wells Capital, and through certain joint ventures with parties not affiliated with Wells REIT or Wells Capital. References to Wells REIT herein shall include all subsidiaries of Wells REIT, including consolidated joint ventures, Wells OP, and Wells OP’s subsidiaries. See Note 6 for additional information related to Wells Capital.

As of June 30, 2006, Wells REIT owned interests in 84 properties, either directly or through joint ventures, comprising approximately 21.0 million square feet of commercial office and industrial space located in 23 states and the District of Columbia. As of June 30, 2006, these properties were approximately 95% leased.

Since its inception, Wells REIT has completed four public offerings of common stock at $10 per share. Combined with the dividend reinvestment program, such offerings have provided approximately $5.2 billion in total net offering proceeds. From these proceeds, Wells REIT has paid costs related to the offerings of (1) approximately $171.1 million in acquisition and advisory fees and acquisition expenses; (2) approximately $477.3 million in commissions on stock sales and related dealer-manager fees; and (3) approximately $62.7 million in organization and other offering costs. In addition, Wells REIT used approximately $542.9 million to redeem shares pursuant to its share redemption program and to repurchase shares resulting from a legal settlement. The remaining offering proceeds of approximately $3.9 billion were primarily used to fund the purchase of real estate assets. Wells REIT’s fourth public offering closed on July 25, 2004, and Wells REIT does not currently anticipate offering additional shares to the public. In addition, on June 14, 2005, Wells REIT distributed approximately $748.5 million of net sales proceeds to stockholders as a return of invested capital.

Wells REIT registered an additional 100 million shares of common stock with the Securities and Exchange Commission (the “SEC”) for issuances pursuant to its dividend reinvestment plan under a Registration Statement filed on Form S-3 (Commission File No. 333-114212), which became effective on April 5, 2004.

Wells REIT’s stock is not listed on a national exchange. However, Wells REIT’s Articles of Incorporation require Wells REIT to begin the process of liquidating its investments and distributing the resulting proceeds to the stockholders if its shares are not listed on a national exchange by January 30, 2008. Wells REIT’s Articles of Incorporation can only be amended by a proxy vote of Wells REIT’s stockholders.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of Wells REIT have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the

results for such periods. Results for these interim periods are not necessarily indicative of full-year’s results. Wells REIT’s consolidated financial statements include the accounts of Wells REIT, Wells OP, and certain entities in which Wells REIT or Wells OP has a controlling financial interest. For further information, refer to the financial statements and footnotes included in Wells REIT’s Annual Report on Form 10-K for the year ended December 31, 2005.

Revenue Recognition

All leases on real estate assets held by Wells REIT are classified as operating leases, and the related base rental income is generally recognized on a straight-line basis over the terms of the respective leases. Tenant reimbursements are recognized as revenue in the period that the related operating cost is incurred and are billed to tenants pursuant to the terms of the respective leases. Rental income and tenant reimbursements collected in advance are recorded as deferred income in the accompanying consolidated balance sheets. Lease termination income is recognized once the tenant has lost the right to lease the space and Wells REIT has satisfied all obligations under the related lease or lease termination agreement.

In conjunction with a property acquired during the first quarter 2006, Wells REIT entered into a master lease agreement with the seller under which the seller is obligated to pay rent pertaining to certain spaces with near-term rent abatements. This master lease was established in order to mitigate the potential negative effects of lost rental income and expense reimbursements related to these spaces. Wells REIT records payments received under master lease agreements as a reduction of the basis of the underlying property rather than rental income. Wells REIT received master lease proceeds of approximately $0.7 million during the six months ended June 30, 2006. As of June 30, 2006 and December 31, 2005, approximately $0.3 million and $0, respectively, of master lease proceeds were held in escrow accounts that are included in prepaid expenses and other assets in the accompanying consolidated balance sheets.

Income Taxes

Wells REIT has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as such beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Wells REIT must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its adjusted REIT taxable income, as defined by the Code, to its stockholders. As a REIT, Wells REIT generally is not subject to income tax on income it distributes to stockholders. Wells REIT is subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in the accompanying consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period financial statement presentation.

Recent Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the relevant criteria and approach for the recognition, derecognition and measurement of uncertain tax positions. FIN 48 will be effective for Wells REIT beginning January 1, 2007. Wells REIT is currently in the process of assessing the provisions of FIN 48, however, management does not expect the adoption of this interpretation to have a material impact on Wells REIT’s consolidated financial statements.

3. Dispositions of Real Estate Assets

IRS Daycare Building

On April 11, 2006, Wells REIT sold the IRS Daycare Building for a gross sale price of approximately $3.8 million, exclusive of closing costs, to an unaffiliated third party. As a result of this sale, Wells REIT recognized a gain of approximately $1.2 million, which is subject to change as additional information becomes available in subsequent periods.

Northrop Grumman (formerly known as “TRW Denver”) Building

As of June 30, 2006, Wells REIT was party to a contract to sell the Northrop Grumman Building to an unaffiliated third party for a net sale price of approximately $45.1 million, exclusive of closing costs. Accordingly, the assets related to the Northrop Grumman Building are classified as held for sale for all periods presented. The details, comprised of assets held for sale, are provided below (in thousands):


	June 30, 2006		December 31, 2005
Real estate assets held for sale, net:
Land	$	1,397	$	1,397
Building and improvements, less accumulated depreciation of $6,292 and $5,582, as of June 30, 2006 and December 31, 2005, respectively		28,410		29,120

Total real estate assets held for sale, net	$	29,807	$	30,517


	June 30, 2006		December 31, 2005
Other assets held for sale, net:
Tenant receivables	$	758	$	580
Deferred lease costs, less accumulated amortization of $110 and $71, as of June 30, 2006 and December 31, 2005, respectively		693		732

Total other assets held for sale, net	$	1,451	$	1,312

On July 6, 2006, Wells REIT closed this transaction and recognized a gain of approximately $13.4 million, which is subject to change as additional information becomes available in subsequent periods.

Discontinued Operations

The results of operations for the IRS Daycare Building, the Northrop Grumman Building, and 23 wholly owned properties included in the April 2005 27-property sale are classified as discontinued operations in the accompanying consolidated statements of income. The details comprising income from discontinued operations are provided below (in thousands):


	Three Months Ended					Six Months Ended
	June 30, 2006		June 30, 2005			June 30, 2006		June 30, 2005
Revenues:
Rental income	$	1,157	$	3,039		$	2,424	$	18,936
Tenant reimbursements		137		553			239		2,867

		1,294		3,592			2,663		21,803
Expenses:
Property operating costs		199		879			254		3,601
Asset and property management fees
Related party		—		51			—		382
Other		1		6			3		142
Depreciation		255		392			722		2,681
Amortization		19		233			39		1,888
General and administrative		16		41			24		199

		490		1,602			1,042		8,893

Real estate operating income		804		1,990			1,621		12,910

Other income (expense):
Interest expense		—		(151	)		—		(1,281	)
Interest and other income		—		627			—		1,758
Gain on sale of real estate assets		1,184		177,382			1,184		177,386

		1,184		177,858			1,184		177,863

Income from discontinued operations	$	1,988	$	179,848		$	2,805	$	190,773

4. Lines of Credit and Notes Payable

As of June 30, 2006 and December 31, 2005, Wells REIT had lines of credit and notes payable outstanding as follows (in thousands):


	June 30, 2006		December 31, 2005
Secured Pooled Facility	$	350,000	$	350,000
Aon Center Chicago Mortgage Notes		225,000		200,000
$125.0 Million Fixed-Rate Loan		125,000		—
Leo Burnett Building Mortgage Note		120,000		120,000
WDC Mortgage Note		115,167		115,167
$105.0 Million Fixed-Rate Loan		105,000		105,000
$85.0 Million Secured Line of Credit		56,500		—
$45.0 Million Fixed-Rate Loan		45,000		45,000
3100 Clarendon Boulevard Building Mortgage Note		34,806		35,110
One Brattle Square Building Mortgage Note		28,156		28,827
1075 West Entrance Building Mortgage Note		15,818		16,108
$50.0 Million Secured Line of Credit		135		—
Merck Construction Loan		—		21,100

	$	1,220,582	$	1,036,312

During the three months ended June 30, 2006, Wells REIT engaged in the following significant activity with respect to its lines of credit and notes payable:

Effective June 16, 2006, Wells REIT extended the maturity date of its $50.0 Million Secured Line of Credit to June 2008. The $50.0 Million Secured Line of Credit represents a revolving credit facility secured by the Cingular Atlanta Building. All other material terms of the facility, other than the maturity date and the interest rate, remain unchanged from the existing agreement. Under the terms of the facility, Wells REIT may borrow the lesser of (1) an amount equal to 75% of the aggregate appraised value of lender approved borrowing base properties or (2) $50.0 million, reduced by amounts under outstanding unused letters of credit. As of June 30, 2006, Wells REIT was able to borrow up to $49.6 million. Interest on the $50.0 Million Secured Line of Credit accrues at a per annum rate of LIBOR plus 1.50% (6.85% at June 30, 2006). This facility contains covenants that, among other things, restrict Wells REIT’s ratio of debt-to-total assets to 50%.

During the three months ended June 30, 2006, Wells REIT had net borrowings of approximately $29.6 million under its lines of credit. Wells REIT made interest payments, including amounts capitalized, of approximately $43.1 million and $34.4 million for the six months ended June 30, 2006 and 2005, respectively.

5. Supplemental Disclosures of Noncash Investing and Financing Activities

Outlined below are significant noncash investing and financing activities for the six months ended June 30, 2006 and 2005 (in thousands):


	Six months ended June 30, (in thousands)
	2006		2005
Investment in real estate funded with other assets	$	5,000	$	—

Acquisition and advisory fees applied to investments	$	1,328	$	1,587

Accrued capital expenditures and deferred lease costs	$	8,071	$	3,291

Write-off of fully amortized intangible lease assets	$	9,694	$	—

Write-off of fully amortized deferred lease costs	$	1,298	$	—

Write-off of fully amortized intangible lease liabilities	$	6,107	$	—

Discounts applied to issuance of common stock	$	643	$	3,931

Discounts reduced as a result of redemptions of common stock	$	1,475	$	3,360

Accrued redemptions of common stock	$	99	$	40,296

Redeemable common stock	$	92,971	$	103,317

6. Related-Party Transactions

Asset Advisory Agreement

Effective January 1, 2005, Wells REIT entered into the Asset Management Advisory Agreement (the “Asset Advisory Agreement”) with Wells Management Company, Inc. (“Wells Management”). Under the terms of the Asset Advisory Agreement, Wells REIT is obligated to pay asset advisory fees to Wells Management for, among other things:

•

serving as Wells REIT’s investment and financial advisor;

•

managing the day-to-day operations of Wells REIT;

•

formulating and implementing strategies to administer, promote, manage, operate, maintain, improve, finance and refinance, market, lease, and dispose of properties; and

•

providing certain accounting, SEC compliance, and other administrative services for Wells REIT.

The fee for these services is payable monthly in an amount equal to one-twelfth of 0.5% of the fair market value of all properties owned by Wells REIT plus its interest in properties held through joint ventures. This fee is reduced by (i) tenant reimbursed property management fees paid to Wells Management, and (ii) in the event that Wells Management retains an independent third-party property manager to manage one or more properties currently being managed by Wells Management, the amount of property management fees paid to such third-party property managers. At the option of Wells Management, up to 10% of such monthly fee may be paid in shares of common stock of Wells REIT. For the three months ended June 30, 2006 and 2005, Wells REIT incurred approximately $6.5 million and $5.5 million of such fees, respectively, of which $0 and approximately $0.1 million are included in income from discontinued operations, and the remainder is recorded as asset and property management fees — related party. For the six months ended June 30, 2006 and 2005, Wells REIT incurred approximately $11.9 million and $11.6 million of such fees, respectively, of which $0 and approximately $0.4 million are included in income from discontinued operations, and the remainder is recorded as asset and property management fees — related party.

Additionally, per the Asset Advisory Agreement, Wells Management is entitled to earn the following disposition and incentive fees, which are similar in nature to previous agreements:

•

For any property sold by Wells REIT, a disposition fee of the lesser of 50% of a competitive real estate commission or 3.0% of the sales price of the property, subordinated to the payment of distributions to stockholders equal to the sum of the stockholders’ invested capital plus an 8% return on invested capital;

•

Incentive fee of 10% of net sales proceeds remaining after stockholders have received distributions equal to the sum of the stockholders’ invested capital plus an 8% return on invested capital; or

•

Listing fee of 10% of the excess by which the market value of the stock plus distributions paid prior to listing exceeds the sum of 100% of the stockholders’ invested capital plus an 8% return on invested capital.

Wells REIT incurred no disposition, incentive, or listing fees during the six months ended June 30, 2006. However, on February 21, 2005, the board of directors of Wells REIT approved a subordinated disposition fee of 0.33% of the gross sale price of the properties sold as part of the 27-property sale in April 2005 to be paid to Wells Management as a result of the closing of this transaction. Since the conditions above have not been met at this time, this fee was not paid at the closing of the property sale but will be paid only in the event and at the time that the conditions are met.

The Asset Advisory Agreement has a one-year term and automatically renews unless either side gives notice of its intent not to renew. In addition, either party may terminate the Asset Advisory Agreement upon 60 days’ written notice. During the quarter ended June 30, 2006, Wells REIT’s board of directors and Wells Management agreed to renew the existing Asset Advisory Agreement for the remainder of calendar year 2006 with stipulations that: (i) the fair market value defined in the Asset Advisory Agreement is to be based on the most recent net asset valuation performed on Wells REIT’s properties, and (ii) for 2006, a credit of $1.2 million shall be applied against asset advisory fees.

Acquisition Advisory Agreement

Effective January 1, 2005, Wells REIT entered into the Acquisition Advisory Agreement with Wells Capital. Under the terms of the Acquisition Advisory Agreement, Wells REIT is obligated to pay a fee to Wells Capital for services relating to, among other things, capital-raising functions; the investigation, selection, and acquisition of properties; and certain transfer agent and stockholder communication functions. The fee payable to Wells Capital under the Acquisition Advisory Agreement is 3.5% of aggregate gross proceeds raised from the sale of shares of Wells REIT, exclusive of proceeds received from Wells REIT’s dividend reinvestment plan used to fund repurchases of shares of common stock pursuant to Wells REIT’s share redemption program. On November 15, 2005, the board of directors approved an amendment to the dividend reinvestment plan to, among other things, eliminate acquisition and advisory fees on shares sold under this plan beginning in September 2006.

Acquisition and advisory fees and acquisition expenses are shown below for the periods presented (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Acquisition and advisory fees and reimbursement of acquisition expenses	$	0	$	0	$	1,328	$	1,587

Property Management Agreement

Effective January 1, 2005, Wells REIT entered into the Master Property Management, Leasing, and Construction Management Agreement (the “Property Management Agreement”) with Wells Management. Under the Property Management Agreement, Wells REIT has retained Wells Management to manage, coordinate the leasing of, and manage construction activities related to certain properties of Wells REIT. Any amounts currently paid under the Property Management Agreement for properties that were managed by Wells Management on December 31, 2004 under its prior Asset/Property Management Agreement (the “Existing Portfolio Properties”) have the economic effect of reducing amounts payable for asset advisory services as a credit to amounts due under the Asset Advisory Agreement with respect to such properties. Management and leasing fees payable to Wells Management for properties to be acquired in the future are required to be specified in an amendment to the Property Management Agreement, which must be approved by Wells REIT’s board of directors and will be payable in addition to fees payable pursuant to the Asset Advisory Agreement. Wells REIT anticipates that fees for the management and leasing of properties, other than Existing Portfolio Properties, will be generally consistent with the descriptions set forth below:

•

For properties for which Wells Management will provide property management services, it is anticipated that Wells REIT will pay Wells Management a market-based property management fee generally based on gross monthly income of the property.

•

For properties for which Wells Management provides leasing agent services, it is anticipated that Wells REIT will pay (i) a one-time initial lease-up fee in an amount not to exceed one-month’s rent for the initial rent-up of a newly constructed building; (ii) a market-based commission based on the net rent payable during the term of a new lease (not to exceed ten years); (iii) a market-based commission based on the net rent payable during the term of any renewal or extension of any tenant lease; and (iv) a market-based commission based on the net rent payable with respect to expansion space for the remaining portion of the initial lease term.

•

For properties for which Wells Management provides construction management services, it is anticipated that Wells REIT will pay (i) for planning and coordinating the construction of tenant-directed improvements, that portion of lease concessions for tenant-directed improvements as is specified in the lease or lease renewal, subject to a limit of 5% of such lease concessions; and (ii) for other construction management services, a construction management fee to be determined and agreed to in an appropriate contract amendment.

The Property Management Agreement has a one-year term and automatically renews unless either party gives notice of its intent not to renew. In addition, either party may terminate the Property Management Agreement upon 60 days’ written notice.

Salary and Operating Expense Reimbursements

Under the Asset Advisory Agreement, the Acquisition Advisory Agreement, and the Property Management Agreement, Wells REIT is required to reimburse each service provider for various costs and expenses incurred in connection with the performance of its duties under such agreements, including reasonable wages and salaries and other employee-related expenses such as taxes, insurance, and benefits of employees of the service provider who are directly engaged in providing services for or on behalf of Wells REIT. Under these agreements, reimbursements for such employee-related expenses may not exceed $8.2 million in the aggregate during any fiscal year. Wells REIT incurred approximately $1.9 million and $2.4 million in such reimbursements for the three months ended June 30, 2006 and 2005, respectively, and $3.8 million and $4.8 million for the six months ended June 30, 2006 and 2005, respectively. Of such total reimbursements, $0 and approximately $0.1 million is included in discontinued operations for the three months ended June 30, 2006 and 2005, respectively, and $0 and approximately $0.3 million is included in income from discontinued operations for the six months ended June 30, 2006 and 2005, respectively (See Note 3). Of the total employee-related expense reimbursements mentioned above, approximately $0.2 million and $0.3 million were reimbursable by tenants under the terms of their individual lease agreements for the three months ended June 30, 2006 and 2005, respectively, and approximately $0.4 million and $0.5 million were reimbursable by tenants for the six months ended June 30, 2006 and 2005, respectively. Additionally, Wells REIT incurred approximately $53,000 and $96,000 in non-salary administrative reimbursement fees for the three months ended June 30, 2006 and 2005, respectively, and $128,000 and $304,000 for the six months ended June 30, 2006 and 2005, respectively. The aforementioned reimbursements are included in general and administrative expenses in the accompanying consolidated statements of income.

Dealer-Manager Agreement

Wells REIT maintains a dealer-manager agreement with Wells Investment Securities, Inc. (“WIS”), whereby WIS performs dealer-manager services for offerings of Wells REIT shares pursuant to its dividend reinvestment plan. For these services, WIS earns selling commissions of 5% of gross offering proceeds raised pursuant to Wells REIT’s dividend reinvestment plan, of which in excess of 99% has been reallowed to participating broker dealers for the periods presented below. On November 15, 2005, the board of directors approved an amendment to the dividend reinvestment plan to, among other things, eliminate selling commissions on shares sold under this plan beginning in September 2006. The amount of commissions incurred and payable to WIS is shown below for the periods presented (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Commissions	$	1,850	$	1,851	$	3,700	$	4,064

Assignment of Related-Party Agreements

On December 21, 2005, Wells Capital and Wells Management assigned their respective rights to receive certain fees and reimbursements to Wells Advisory Services I, LLC (“WASI”), an entity affiliated with and controlled by Wells Management and Wells Capital. Effective February 15, 2006, Wells Management further assigned rights to receive certain fees and reimbursements under its Property Management Agreement with Wells REIT to WASI. Accordingly, Wells REIT pays acquisition and advisory fees, asset advisory fees, property management fees, and administrative reimbursements to WASI.

Due from Affiliate

Due from affiliate is comprised of the following items due from WASI or its affiliates as of June 30, 2006 and December 31, 2005 (in thousands):


	June 30, 2006		December 31, 2005
Property insurance reimbursements	$	156	$	155
Other		4		60

	$	160	$	215

Due to Affiliates

Due to affiliates is comprised of the following items due to WASI or its affiliates as of June 30, 2006 and December 31, 2005 (in thousands):


	June 30, 2006		December 31, 2005
Asset advisory fees	$	—	$	1,572
Acquisition and advisory fees		—		1,157
Salary reimbursements		512		1,156
Other operating expense reimbursements		163		282

	$	675	$	4,167

Economic Dependency

Wells REIT has engaged WASI and its affiliates, including Wells Capital, Wells Management and WIS, to provide certain services that are essential to Wells REIT, including asset management services, supervision of the management and leasing of properties owned by Wells REIT, asset acquisition and disposition services, the sale of shares of Wells REIT’s common stock pursuant to its dividend reinvestment plan, as well as other administrative responsibilities for Wells REIT including accounting services, stockholder communications, and investor relations. These agreements are terminable by either party on 60 days’ written notice. As a result of these relationships, Wells REIT is dependent upon WASI, Wells Capital, Wells Management, and WIS.

Wells Capital, Wells Management, and WIS are all owned and controlled by Wells Real Estate Funds, Inc. (“WREF”). The operations of Wells Capital, Wells Management, and WIS represent substantially all of the business of WREF. Accordingly, Wells REIT focuses on the financial condition of WREF when assessing the financial condition of Wells Capital, Wells Management, and WIS. In the event that WREF was to become unable to meet its obligations as they become due, Wells REIT might be required to find alternative service providers.

Future net income generated by WREF will be largely dependent upon the amount of fees earned by WASI, Wells Capital, Wells Management, and WIS based on, among other things, the level of investor proceeds raised from the sale of common stock of Wells Real Estate Investment Trust II, Inc. (“Wells REIT II”) and the volume of future acquisitions and dispositions of real estate assets by Wells-sponsored programs. As of June 30, 2006, Wells REIT believes that WREF is generating adequate cash flow from operations and has adequate liquidity available in the form of cash on hand and current receivables necessary to meet its current and future obligations as they become due.

7. Commitments and Contingencies

Commitments Under Existing Lease Agreements

Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells REIT to expend certain amounts of capital to expand an existing property, to construct on adjacent property, or to provide other expenditures for the benefit of the tenant. At June 30, 2006, no tenants have exercised any such material options that have not been fully satisfied.

Tennessee Excise Tax Contingency

On June 16, 2006, Wells OP received a notice of assessment from the Tennessee Department of Revenue related to excise taxes due for the calendar years ended December 31, 2002 through 2004. The Tennessee Department of Revenue allows partnerships owned by REITs, such as Wells OP, to deduct income or gains from their taxable income to the extent that such deducted income is included in the federal taxable income of the owner REIT. To be eligible for this deduction, the owner REIT must be subject to and file a franchise and excise tax return in the state of Tennessee. A REIT is subject to excise taxes if, among other things, it meets the requirement for “doing business in Tennessee”, as provided for in the Tennessee Code Annotation Section 67-4-2004(9)(A). The notice of assessment contends that Wells REIT did not meet this requirement from 2002 through 2004 and, as such, owes additional taxes and interest of approximately $1 million. Consistent with other REITs that received similar notices, Wells REIT believes that it met the requirement for “doing business in Tennessee” from 2002 through 2004 based on the provisions of the law and by virtue of its general partnership interest in Wells OP which has ownership in properties and interests in properties located in the state of Tennessee.

Negotiations and discussions with the Tennessee Department of Revenue related to the intent and interpretation of the “doing business in Tennessee” requirement under the franchise and excise laws are ongoing. Accordingly, Wells REIT is unable to estimate the amount of excise taxes that will be payable to the Tennessee Department of Revenue at this time. Wells REIT has concluded that the prospect of incurring these charges has not yet risen to a probable level of likelihood. As such, pursuant to FASB Statement No. 5, no reserves have been provided for in the accompanying consolidated financial statements. Effective July 1, 2006, the Tennessee Department of Revenue revoked the option for partnerships owned by REIT’s to deduct income or gains generated from properties located in the state of Tennessee, subject to certain limitations. As such, Wells REIT intends to provide reserves for future Tennessee excise taxes as appropriate.

Litigation

Wells REIT is from time to time a party to legal proceedings, which arise in the ordinary course of its business. Wells REIT is not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on results of operations or financial condition. Wells REIT is not aware of any legal proceedings contemplated by governmental authorities.

8. Subsequent Events

Reallocation of Shares Reserved for Redemption

On July 18, 2006, the board of directors of Wells REIT reduced the number of shares held by investors that are available for redemption upon death and required minimum distribution redemptions (“Death and RMD Redemptions”) for calendar year 2006 by such amount as may be necessary or required to enable Wells REIT to accommodate all ordinary redemptions made through the month of August 2006. However, the total number of shares held by investors that are available for all 2006 calendar year redemptions, ordinary or otherwise, remains unchanged. The board of directors of Wells REIT further made the determination that requests would not be fulfilled for ordinary redemptions for the remainder of calendar year 2006 after the completion of the August 2006 share redemptions. Therefore, all ordinary redemption requests received after August 31, 2006 will be deferred until the beginning of the next calendar year.

Property Under Contract

On August 4, 2006, Wells REIT entered into a purchase and sale agreement to purchase two office buildings containing approximately 386,000 aggregate rentable square feet located in Irving, Texas, for a gross purchase price of approximately $60.8 million, exclusive of closing costs. In connection with the execution of the agreement, Wells REIT paid a deposit of $0.6 million to an escrow agent, which will be applied to the purchase price at closing.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Forward-Looking Statements” preceding Part I, as well as the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Liquidity and Capital Resources

Overview

From January 1998 through July 2004, we raised significant funds through the sale of our common stock in four public offerings. Proceeds from these sales of common stock, net of offering costs and other expenses, were used primarily to fund the acquisition of real estate properties and certain capital expenditures identified at the time of acquisition. Our fourth and final public offering closed in July 2004. Accordingly, we do not anticipate receiving significant proceeds from the sale of our common stock in the future. While we expect to continue to receive proceeds from the sale of shares issued under our dividend reinvestment plan, we expect to use a significant portion of those proceeds to fund redemptions of our common stock under our share redemption program.

We expect that our primary source of future cash flows will be cash flows generated from the operations of our properties and additional distributions from our unconsolidated joint ventures. The amount of future dividends to be paid to our stockholders will be largely dependent upon the amount of cash generated from our operating activities, our expectations of future cash flows and our determination of near-term cash needs for capital improvements, tenant re-leasing, share redemptions, and debt repayments. Due to differences in the timing of cash receipts and cash payments for operations, we may periodically borrow funds on a short-term basis to meet our dividend payment schedule. We also anticipate that we may be able to generate additional cash flows through the selective and strategic sale of certain of our operating properties and, from time to time, may return net proceeds from the sale of such properties to our stockholders in the form of special distributions.

Short-Term Liquidity and Capital Resources

During the six months ended June 30, 2006, we generated approximately $124.8 million of cash flows from operating activities, primarily from receipts of rental income less payments for property operating costs, asset and property management fees, general and administrative expenses, and interest expense. From cash flows from operating activities and cash on hand, we paid dividends to stockholders of approximately $134.7 million during the six months ended June 30, 2006. During the six months ended June 30, 2006, we used proceeds from our line of credit and notes payable and the issuance of common stock under our dividend reinvestment plan to fund capital expenditures, including the acquisition of the 400 Bridgewater Building, and redemptions of our common stock of approximately $148.0 million, of which approximately $48.8 million related to shares that were tendered for redemption, but unredeemed, as of December 31, 2005 due to certain program restrictions.

During the six months ended June 30, 2006, we used net cash flows from financing activities of approximately $27.0 million, primarily as a result of paying dividends of approximately $134.7 million and redeeming approximately $148.0 million of common stock, of which approximately $48.8 million related to shares that were tendered for redemption, but unredeemed, as of December 31, 2005 due to certain program restrictions, partially offset by taking out net new borrowings under our lines of credit and notes payable of $184.6 million. These net borrowings included proceeds from our new fixed-rate credit facilities of $150.0 million used to repay amounts outstanding on our lines of credit of approximately $128.9 million and to pay off the Merck Construction Loan of approximately $21.1 million. We also received proceeds of approximately $75.5 million through the issuance of common stock under our dividend reinvestment plan.

We believe that cash on hand and tenant receivables are sufficient to cover our working capital needs, including accounts payable and accrued expenses, accrued capital expenditures, and cash due to affiliates for an aggregate amount of approximately $72.4 million. We expect to use substantially all of our future operating cash flows to pay dividends to stockholders and to use cash on hand and third-party borrowings to fund capital expenditures.

Long-Term Liquidity and Capital Resources

We expect that our future sources of capital will be derived from net cash flows from property operations, proceeds from secured or unsecured financings from banks and other lenders, shares issued under our dividend reinvestment plan, net of share redemptions, and the selective and strategic sale of properties.

We anticipate that our primary future long-term liquidity requirements will include, but not be limited to, making scheduled debt service payments, and funding renovations, expansions, and other significant capital improvements for our properties. Specifically, over the next five years, we currently estimate funding capital expenditures necessary for the properties currently in our portfolio of approximately $374.5 million, including tenant improvements, leasing commissions, and building improvements.

We currently expect to use substantially all future net cash flows generated from operations to pay dividends and, therefore, expect to fund future capital expenditures for the properties currently in our portfolio primarily with proceeds from third-party borrowings. Proceeds raised from the sale of shares under our dividend reinvestment plan, in excess of amounts used to fund share redemptions or from the sale of selected properties, may also be utilized for capital improvements or expansion at our properties, or to fund or partially fund new property acquisitions.

While we do not believe that future cash flows provided by operations will be lower due to lower returns on properties, future dividends paid at current levels are not guaranteed. Our cash flows from operations depends significantly on market rents and the ability of our tenants to make rental payments. We believe that the diversity of our tenant base and the concentration in our portfolio of highly creditworthy tenants help to mitigate the risk of our tenants defaulting on their leases. However, general economic downturns, or downturns in one or more of our core markets, could adversely impact the ability of our tenants to make their lease payments and our ability to re-lease space on favorable terms when leases expire. In the event of either situation, our cash flows, and consequently our ability to meet capital needs, could adversely affect our ability to pay dividends in the future. As of July 31, 2006, we have approximately $123.1 million of current borrowing capacity under our existing credit facilities.

Contractual Commitments and Contingencies

As of June 30, 2006, our contractual obligations are as follows (in thousands):


			Payments Due During the Years Ending December 31,
	Total		Remainder of 2006		2007-2008		2009-2010		Thereafter
Outstanding debt obligations ⁽¹⁾	$	1,220,582	$	1,293	$	209,898	$	2,783	$	1,006,608
Operating lease obligations		65,207		282		1,127		1,193		62,605

Total	$	1,285,789	$	1,575	$	211,025	$	3,976	$	1,069,213

⁽¹⁾

Amounts include principal payments only. We made interest payments of $43.1 million during the six months ended June 30, 2006 and expect to pay interest in future periods on outstanding debt obligations based on the rates and terms disclosed herein and in our Annual Report on Form 10-K for the year ended December 31, 2005.

Results of Operations

Overview

As of June 30, 2006, we owned interests in 84 real estate properties that were approximately 95% leased. The operations of properties that have been sold are classified as discontinued operations in the accompanying consolidated statements of income for each of the periods presented (see Note 3 to the accompanying consolidated financial statements). Our results from real estate operating income have not changed significantly for each period presented, primarily as a result of the stable nature of our portfolio. Rental revenues are generally based on long-term leases that do not allow for significant increases in rental income and do not expire in the near term. Additionally, while we do not expect a significant increase in operating expenses at our properties, to the extent that operating expenses do increase, the majority of our in-place leases have clauses that require the tenants to bear the majority of the burden of such increases. Absent significant changes in our financing structure or the size of our portfolio, we expect income from real estate operations to be comparable in future periods, as compared to the six months ended June 30, 2006.

Comparison of the three months ended June 30, 2005 versus the three months ended June 30, 2006

Continuing Operations

Rental income increased from $109.2 million for the three months ended June 30, 2005 to $110.7 million for the three months ended June 30, 2006. Substantially all of this increase relates to properties acquired or developed subsequent to March 31, 2005. Tenant reimbursements remained relatively stable at $31.9 million for the three months ended June 30, 2005, as compared to $31.7 million for the three months ended June 30, 2006. Changes to tenant reimbursements relate primarily to certain tenant vacancies, partially offset by reimbursement for tenant-requested services at our properties.

Lease termination income decreased from approximately $3.5 million for the three months ended June 30, 2005 to approximately $1.3 million for the three months ended June 30, 2006. Income for the three months ended June 30, 2005 relates primarily to the termination of the Novartis lease at the Novartis Atlanta Building. The income for the three months ended June 30, 2006 relates mainly to consideration received for the reduction of leased space at the Agilent Atlanta property. Lease termination income for the three months ended June 30, 2006 is not expected to be comparable to future periods, as such income will be dependent upon the execution of lease termination and/or modification agreements that are deemed to be in the best interest of the portfolio over the long-term.

Property operating expenses increased from $44.9 million for the three months ended June 30, 2005 to $48.2 million for the three months ended June 30, 2006. This increase relates primarily to increases in certain tenant reimbursable expenses including utilities, property taxes, and tenant-requested services, and additional costs related to properties acquired or developed subsequent to March 31, 2005. Tenant reimbursement income did not fluctuate commensurate with the increase in property operating costs, primarily due to limitations and/or conditions under which such costs are reimbursable pursuant to the affected leases. Property operating costs represented approximately 32% and 34% of total rental income and tenant reimbursements for the three months ended June 30, 2005 and 2006, respectively.

Asset and property management fees increased from $6.8 million for the three months ended June 30, 2005 to $7.9 million for the three months ended June 30, 2006. This increase is primarily attributable to a change in the basis on which asset management fees are calculated, partially offset by an annualized reduction of $1.2 million for 2006 that was negotiated in connection with the renewal of our Asset Advisory Agreement in the second quarter of 2006 (see Note 6 to the accompanying consolidated financial statements). Asset management fees have been calculated for 2006 based on a fixed percentage of the fair market value, as defined, of Wells REIT’s properties according to a net asset valuation performed as of September 30, 2005. The aggregate net asset values of Wells REIT’s properties as of September 30, 2005 exceed the aggregate original purchase prices of such assets on which the calculation of asset management fees were based prior to 2006. Asset and property management fees as a percentage of total rental income and tenant reimbursements were approximately 5% for the three months ended June 30, 2005 and approximately 6% for the three months ended June 30, 2006.

Lease termination expense increased from approximately $1.1 million for the three months ended June 30, 2005 to approximately $1.4 million for the three months ended June 30, 2006, which represents the write-off of lease-related assets and liabilities associated with the terminations described in the lease termination income section above. We do not expect these charges will be comparable to future periods, as this expense will be dependent upon the execution of any such future agreements.

Depreciation expense increased from $22.0 million for the three months ended June 30, 2005 to $22.8 million for the three months ended June 30, 2006. Substantially all of this increase relates to properties acquired or developed subsequent to March 31, 2005. Depreciation expense represented approximately 16% of rental income and tenant reimbursements for the three months ended June 30, 2005 and 2006.

Amortization expense increased from $16.1 million for the three months ended June 30, 2005 to $17.2 million for the three months ended June 30, 2006. Substantially all of this increase relates to acquiring properties subsequent to March 31, 2005 and recognizing a full period of amortization of costs associated with 2005 re-leasing activities for our other properties. Amortization expense increased at a higher rate than depreciation expense because the amortization period is generally the individual lease term, which is typically shorter than the useful lives over which real estate assets are depreciated.

General and administrative expense remained stable at $5.1 million for the three months ended June 30, 2005 and $5.3 million for the three months ended June 30, 2006. General and administrative expense represents approximately 4% of total rental and tenant reimbursement income for the three months ended June 30, 2005 and 2006.

During the three months ended June 30, 2005, we recognized an impairment loss of approximately $16.1 million as a result of reducing the intended holding period for the IRS Long Island Building. The decision to reduce the holding period was prompted by the loss of a prospective replacement tenant during the quarter ended June 30, 2005 for approximately all of the space which became available in July 2005, and the assessment of the leasing assumptions for this building, including market rents and the related costs and down-time necessary to complete the re-leasing. During the three months ended June 30, 2006, we recognized a casualty loss of approximately $0.1 million, which represents the unrecoverable costs associated with fire damage at the 4250 North Fairfax Arlington Building.

Interest expense increased from $12.4 million for the three months ended June 30, 2005 to $15.3 million for the three months ended June 30, 2006 due to higher average amounts of borrowings outstanding and higher weighted-average interest rates during the second quarter of 2006, as compared to the second quarter of 2005. Absent additional borrowings or other changes to our financing structure, we expect that a significant portion of our future interest expense will be comparable to current amounts, as the majority of borrowings are under long-term, fixed-rate debt facilities. As of June 30, 2006, only $56.6 million, or 5%, of our outstanding debt, includes variable-rate lines of credit, which have exposure to rising interest rates.

Interest and other income decreased from $4.1 million for the three months ended June 30, 2005 to $0.5 million for the three months ended June 30, 2006. The amount of interest income in each period represents interest earned on the cash generated from operations and the sale of real estate assets. Cash on hand was significantly greater during the three months ended June 30, 2005, as compared to the three months ended June 30, 2006, due to holding net proceeds generated from the 27-property portfolio sale on April 13, 2005, which were distributed to stockholders on June 14, 2005. The level of interest income in future periods will primarily be dependent upon the amount of operating cash on hand and is not expected to be consistent with the amount earned during the three months ended June 30, 2005.

Equity in income of unconsolidated joint ventures decreased from $12.4 million for the three months ended June 30, 2005 to $0.6 million for the three months ended June 30, 2006. This decrease is primarily attributable to gains recognized on the sale of four unconsolidated joint ventures as a result of the 27-property portfolio sale during the three months ended June 30, 2005. Absent future dispositions or unexpected changes in the operations of the underlying properties, we expect future equity in income of unconsolidated joint ventures to be comparable to equity in income of unconsolidated joint ventures recognized for the three months ended June 30, 2006.

Income from continuing operations per share was $0.08 and $0.06 for the three months ended June 30, 2005 and 2006, respectively. The decrease is primarily attributable to the gain recognized on the sale of properties owned through unconsolidated joint ventures included in the April 2005 portfolio sale, the increase in interest expense described above, and the decrease in interest income described above, partially offset by the impairment loss recognized on the IRS Long Island Building in 2005. Absent significant changes to our tenant base, credit quality, financing structure, or weighted-average common shares outstanding, we do not expect net income from continuing operations to fluctuate significantly in the near-term.

Discontinued Operations

We have classified the operations of properties held for sale and sold as discontinued operations for all periods presented. Income from discontinued operations was approximately $179.8 million and $2.0 million for the three months ended June 30, 2005 and 2006, respectively. These amounts consist entirely of operations from the 23 wholly owned properties included in the 27-property sale that closed in April 2005, the IRS Daycare Building that sold in April 2006, as well as the Northrop Grumman Building, which was classified as held for sale as of June 30, 2006 (see Note 3 to the accompanying consolidated financial statements). We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and completion of future property dispositions.

Comparison of the six months ended June 30, 2005 versus the six months ended June 30, 2006

Continuing Operations

Rental income increased from $218.9 million for the six months ended June 30, 2005 to $220.4 million for the six months ended June 30, 2006. Substantially all of this increase relates to properties acquired or developed subsequent to December 31, 2004. Tenant reimbursements remained relatively stable at $63.6 million for the six months ended June 30, 2005, as compared to $63.4 million for the six months ended June 30, 2006. The change in tenant reimbursements relates primarily to certain tenant vacancies, partially offset by reimbursement for tenant-requested services at certain of our properties.

Lease termination income decreased from approximately $4.3 million for the six months ended June 30, 2005, to approximately $1.3 million for the six months ended June 30, 2006. Income for the six months ended June 30, 2005 relates primarily to the termination of the Novartis lease at the Novartis Atlanta Building and to the termination of the Motorola, Inc. lease at the River Corporate Center Building. Lease termination income for the six months ended June 30, 2006 is not expected to be comparable to future periods, as such income will be dependent upon the execution of lease termination and/or modification agreements that are deemed to be in the best interest of the portfolio over the long-term.

Property operating expenses increased from $89.8 million for the six months ended June 30, 2005 to $95.6 million for the six months ended June 30, 2006. This increase relates primarily to increases in certain tenant reimbursable expenses including utilities, property taxes, and tenant-requested services, and additional costs related to properties acquired or developed subsequent to December 31, 2004. Tenant reimbursement income did not fluctuate commensurate with the increase in property operating costs, primarily due to limitations and/or conditions under which such costs are reimbursable pursuant to the affected leases. Property operating costs represented approximately 32% and 34% of total rental income and tenant reimbursements for the six months ended June 30, 2005 and 2006, respectively.

Asset and property management fees increased from $14.0 million for the three months ended June 30, 2005 to $14.6 million for the six months ended June 30, 2006. This increase is primarily attributable to a change in the basis on which asset management fees are calculated, partially offset by an annualized reduction of $1.2 million for 2006 that was negotiated in connection with the renewal of the Asset Advisory Agreement with Wells Management in the second quarter of 2006 (see Note 6 to the accompanying consolidated financial statements). Asset management fees have been calculated for 2006 based on a fixed percentage of the fair market value, as defined, of our properties according to a net asset valuation performed as of September 30, 2005. The aggregate net asset values of our properties as of September 30, 2005 exceed the aggregate original purchase prices of such assets on which the calculation of asset management fees were based prior to 2006. Asset and property management fees as a percentage of total rental and tenant reimbursement income were approximately 5% for the six months ended June 30, 2005 and 2006.

Lease termination expense increased from approximately $1.2 million for the six months ended June 30, 2005 to approximately $1.4 million for the six months ended June 30, 2006, which represents the write-off of lease-related assets and liabilities associated with the terminations described in the lease termination income section above. We do not expect these charges will be comparable to future periods, as this expense will be dependent upon the execution of any such future agreements.

Depreciation expense increased from $43.6 million for the six months ended June 30, 2005 to $45.6 million for the six months ended June 30, 2006. Substantially all of this increase relates to properties acquired or developed subsequent to December 31, 2004. Depreciation expense represented approximately 15% and 16% of rental income and tenant reimbursements for the six months ended June 30, 2005 and 2006, respectively.

Amortization expense increased from $32.2 million for the six months ended June 30, 2005 to $34.5 million for the six months ended June 30, 2006. Substantially all of this increase relates to acquiring properties subsequent to December 31, 2004 and recognizing a full period of amortization of costs associated with 2005 re-leasing activities for our other properties. Amortization expense increased at a higher rate than depreciation expense because the amortization period is generally the individual lease term, which is typically shorter than the useful lives over which real estate assets are depreciated.

General and administrative expense remained stable at $8.9 million for the six months ended June 30, 2005 and $8.7 million for the six months ended June 30, 2006. General and administrative expense represents approximately 3% of total rental and tenant reimbursement income for the six months ended June 30, 2005 and 2006.

During the six months ended June 30, 2005, we recognized an impairment loss of approximately $16.1 million as a result of reducing the intended holding period for the IRS Long Island Building. The decision to reduce the holding period was prompted by the loss of a prospective replacement tenant during the year ended June 30, 2005 for approximately all of the space which became available in July 2005, and the assessment of the leasing assumptions for this building, including market rents and the related costs and down-time necessary to complete the re-leasing. During the six months ended June 30, 2006, we recognized a casualty loss of approximately $0.1 million, which represents the unrecoverable costs associated with fire damage at the 4250 North Fairfax Arlington Building.

Interest expense increased from $23.1 million for the six months ended June 30, 2005 to $29.5 million for the six months ended June 30, 2006 due to higher average amounts of borrowings outstanding and higher weighted-average interest rates during the six months ended June 30, 2006, as compared to the six months ended June 30, 2005. Absent additional borrowings or other changes to our financing structure, we expect that a significant portion of our future interest expense will be comparable to current amounts, as the majority of borrowings are under long-term, fixed-rate debt facilities. As of June 30, 2006, only $56.6 million, or 5%, of our outstanding debt, includes variable-rate lines of credit, which have exposure to rising interest rates.

Interest and other income decreased from $4.5 million for the six months ended June 30, 2005 to $1.0 million for the six months ended June 30, 2006. The amount of interest income in each period represents interest earned on the cash generated from operations and the sale of real estate assets. Cash on hand was significantly greater during the six months ended June 30, 2005, as compared to the six months ended June 30, 2006, due to holding net proceeds generated from the 27-property portfolio sale on April 13, 2005, which were distributed to stockholders on June 14, 2005. The level of interest income in future periods will primarily be dependent upon the amount of operating cash on hand and is not expected to be consistent with the amount earned during the six months ended June 30, 2005.

Equity in income of unconsolidated joint ventures decreased from $13.8 million for the six months ended June 30, 2005 to $1.2 million for the six months ended June 30, 2006. This decrease is primarily attributable to gains recognized on the sale of four unconsolidated joint ventures as a result of the 27-property portfolio sale during the six months ended June 30, 2005. Absent future dispositions or unexpected changes in the operations of the underlying properties, we expect future equity in income of unconsolidated joint ventures to be comparable to equity in income of unconsolidated joint ventures recognized for the six months ended June 30, 2006.

Income from continuing operations per share was $0.16 and $0.12 for the six months ended June 30, 2005 and 2006, respectively. The decrease is primarily attributable to the gain recognized on the sale of properties owned through unconsolidated joint ventures included in the April 2005 portfolio sale, the increase in interest expense, and the decrease in interest income described above, partially offset by the impairment loss recognized on the IRS Long Island Building in 2005. Absent significant changes to our tenant base, credit quality, financing structure, or weighted-average common shares outstanding, we do not expect net income from continuing operations to fluctuate significantly in the near-term.

Discontinued Operations

We have classified the operations of properties held for sale and sold as discontinued operations for all periods presented. Income from discontinued operations was approximately $190.8 million and $2.8 million for the six months ended June 30, 2005 and 2006, respectively. These amounts consist entirely of operations from the 23 wholly owned properties included in the 27-property sale that closed in April 2005, the IRS Daycare Building that sold in April 2006, as well as the Northrop Grumman Building, which was classified as held for sale as of June 30, 2006 (see Note 3 to the accompanying consolidated financial statements). We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and completion of future property dispositions.

Funds From Operations

Funds from operations (“FFO”) is a non-GAAP financial measure and should not be viewed as an alternative measurement of our operating performance to net income. We believe that FFO is a beneficial indicator of the performance of an equity REIT. Specifically, FFO calculations exclude factors such as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets. As such factors can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates, FFO may provide a valuable comparison of operating performance between periods and with other REITs. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. We calculate FFO in accordance with the current National Association of Real Estate Investment Trust (“NAREIT”) definition. However, other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do.

As presented below, FFO is adjusted to exclude the impact of certain noncash items, such as depreciation, amortization, and gains on the sale of real estate assets. However, FFO is not adjusted to exclude the impact of impairment losses. Reconciliations of net income to FFO are presented below (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Net income	$	28,394		$	216,152		$	59,741		$	266,876
Add:
Depreciation of real assets		23,033			22,342			46,321			46,314
Depreciation and amortization — unconsolidated partnerships		646			652			1,254			1,473
Amortization of lease-related costs		17,517			17,010			34,831			34,735
Subtract:
Gain on sale of properties — wholly owned		(1,184	)		(177,382	)		(1,184	)		(177,386	)
Gain on sale of properties — unconsolidated partnerships		—			(11,765	)		—			(11,952	)

FFO	$	68,406		$	67,009		$	140,963		$	160,060

Weighted-average shares outstanding		461,064			464,067			462,519			468,934

Set forth below is additional information related to certain cash and noncash items included in or excluded from net income above, which may be helpful in assessing our operating results. In addition, cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capitalized interest, tenant improvements, building improvements, and deferred lease costs. Please see the accompanying consolidated statements of cash flows for detail of our operating, investing, and financing cash activities.

Noncash Items Included in Net Income:

•

In accordance with the NAREIT definition, nonrecurring charges that are not classified as extraordinary items, such as impairment losses, are included in the calculation of FFO. As such, the impairment loss on real estate assets of approximately $16.1 million, recognized in the second quarter of 2005 related to the IRS Building, is included in net income as well as FFO for the respective periods above. Impairment losses are noncash expenses, and accordingly, do not impact cash flows available for operating activities;

•

In accordance with GAAP, we recognized straight-line rental revenues of approximately $3.3 million and $5.1 million during the three months ended June 30, 2006 and 2005, respectively, and $6.5 million and $10.0 million for the six months ended June 30, 2006 and 2005, respectively.

•

The amortization of deferred financing costs totaled approximately $0.5 million and $0.4 million for the three months ended June 30, 2006 and 2005, respectively, and $0.9 million and $0.9 million for the six months ended June 30, 2006 and 2005, respectively; and

•

The amortization of above-market and below-market in-place leases recorded as a net increase in revenues in the accompanying consolidated statements of income totaled approximately $0.1 million and $0.2 million for the three months ended June 30, 2006 and 2005, respectively, and $0.9 million and $0.5 million for the six months ended June 30, 2006 and 2005, respectively.

Cash Item Excluded from Net Income:

•

Master lease payments under various lease arrangements are not reflected in our net income. Such payments of $0.7 million and $0 for the three and six month periods ended June 30, 2006, and 2005, respectively, relate to previous acquisitions. Master lease proceeds are recorded as an adjustment to the basis of real estate assets during the period acquired and, accordingly, are not included in net income or FFO. We consider master lease proceeds when determining cash available for dividends to our stockholders.

Election as a REIT

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and have operated as such beginning with our taxable year ended December 31, 1998. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted REIT taxable income, computed without regard to the dividends-paid deduction and by excluding net capital gains attributable to our stockholders, as defined by the Code. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income and/or penalties, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to continue to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying consolidated financial statements, as we made distributions in excess of taxable income for the periods presented. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying consolidated financial statements.

Inflation

We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of the leases, the leases may not readjust their reimbursement rates frequently enough to fully cover inflation.

Application of Critical Accounting Policies

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

Investment in Real Estate Assets

We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:


Buildings		40 years
Building improvements		5-25 years
Land improvements		20-25 years
Tenant improvements		Shorter of economic life or lease term
Intangible lease assets		Lease term

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, it is our policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, and value of tenant relationships, based in each case on their estimated fair values.

The fair values of the tangible assets of an acquired property (which includes land and buildings) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and building based on our determination of the relative fair value of these assets. We determine the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by us in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance, and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. We also estimate the cost to execute similar leases including leasing commissions, legal, and other related costs.

The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease. The above-market and below-market lease values are capitalized as intangible lease assets and liabilities and amortized as an adjustment of rental income over the remaining terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. These direct costs are included in deferred lease costs in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These lease intangibles are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

Estimates of the fair values of the tangible and intangible assets require us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property is held for investment. The use of inappropriate estimates would result in an incorrect assessment of our purchase price allocations, which could impact the amount of our reported net income.

Valuation of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets, both operating properties and properties under construction, in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present which indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be

recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we adjust the real estate and related intangible assets to the fair value and recognize an impairment loss.

Projections of expected future cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related intangible assets and our net income. We have determined that there has been no material impairment in the carrying value of real estate assets held by us or any unconsolidated joint ventures at June 30, 2006.

Related-Party Transactions and Agreements

We have entered into agreements with our advisors, Wells Capital and Wells Management, and their affiliates whereby we pay certain fees and reimbursements to Wells Capital, or its affiliates, for asset advisory fees, acquisition and advisory fees, sales commissions, dealer-manager fees, and reimbursement of operating costs. See Note 6 to our accompanying consolidated financial statements included herein for a discussion of the various related-party transactions, agreements and fees.

Commitments and Contingencies

We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 7 to our consolidated financial statements for further explanation. Examples of such commitments and contingencies include:

•

Commitments Under Existing Lease Agreements

•

Tennessee Excise Tax Contingency

•

Litigation

Subsequent Events

Reallocation of Shares Reserved for Redemption

On July 18, 2006, our board of directors reduced the number of shares held by investors that are available for redemption upon death and required minimum distribution redemptions (“Death and RMD Redemptions”) for calendar year 2006 by such amount as may be necessary or required to enable us to accommodate all ordinary redemptions made through the month of August 2006. However, the total number of shares held by investors that are available for all 2006 calendar year redemptions, ordinary or otherwise, remains unchanged. Our board of directors further made the determination that requests would not be fulfilled for ordinary redemptions for the remainder of calendar year 2006 after the completion of the August 2006 share redemptions. Therefore, all ordinary redemption requests received after August 31, 2006 will be deferred until the beginning of the next calendar year.

Property Under Contract

On August 4, 2006, we entered into a purchase and sale agreement to purchase two office buildings containing approximately 386,000 aggregate rentable square feet located in Irving, Texas, for a gross purchase price of approximately $60.8 million, exclusive of closing costs. In connection with the execution of the agreement, we paid a deposit of $0.6 million to an escrow agent, which will be applied to the purchase price at closing.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on our indebtedness, which could impact our financial condition and results of operations. We manage our exposure to these market risks through our regular operating and financing activities. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow, primarily through a low-to-moderate level of overall borrowings. Additionally, we manage our ratio of fixed to floating rate debt with the objective of achieving the most efficient mix between favorable rates and exposure to rate changes based on anticipated market conditions. We have and may from time to time enter into interest rate swap agreements or interest rate cap agreements to hedge our exposure to fluctuating interest rates. We do not anticipate any material changes in our exposure to interest rate fluctuations or in our management thereof. We intend to use derivative financial instruments as risk management tools and not for speculative or trading purposes.

All of our debt was entered into for other than trading purposes, and the fair value of our debt approximates its carrying amount.

As of June 30, 2006, substantially all of our outstanding debt is subject to fixed interest rates. Our total outstanding debt, including draws under our line of credit mentioned below, has an average interest rate of approximately 5.23% per annum with expirations ranging from 2007 to 2028. A change in the market interest rate impacts the net financial instrument position of our fixed-rate debt portfolio but has no impact on interest incurred or cash flows. Such agreements may result in higher fixed interest rates in certain periods of lower variable interest rates, but are intended to decrease our exposure to potential increases in interest rates.

As of June 30, 2006, the draws outstanding under our $85 Million Secured Line of Credit and our $50.0 Million Secured Line of Credit are based on variable interest rates. As of June 30, 2006, the amounts outstanding under the lines of credit are $56.5 million and $0.1 million, respectively, and both facilities have a stated variable interest rate of LIBOR plus 1.5% per annum. To the extent that we borrow funds in the future under our variable-rate lines of credit, we would have exposure to increases in interest rates, which would potentially increase our cost of debt.

ITEM 4.

CONTROLS AND PROCEDURES

Management’s Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no identified change in our internal control over financial reporting that occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are from time to time a party to other legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any litigation the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such litigation threatened against us during the quarter ended June 30, 2006 requiring disclosure under Item 103 of Regulation S-K.

ITEM 1A.

RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

During the quarter ended June 30, 2006, we did not sell any equity securities that were not registered under the Securities Act of 1933.

(b)

The fourth public offering of our common stock was closed on July 25, 2004. The Registration Statement relating to our dividend reinvestment plan (Commission File No. 333-114212) became effective on April 5, 2004. The initial sale of shares of our common stock pursuant to this Registration Statement occurred with respect to dividends declared and paid in September 2004. The net offering proceeds raised pursuant to the dividend reinvestment plan will be used for general corporate purposes, including, but not limited to, the acquisition of interests in additional properties or real estate investments, funding of tenant improvements, leasing commissions and other lease-up costs, repayment of debt, and funding of redemptions under our share redemption program.

(c)

During the quarter ended June 30, 2006, we redeemed shares pursuant to our share redemption program as follows (in thousands, except per-share amounts):


Period	Approximate Number of Shares Redeemed	Approximate Average Price Paid per Share		Maximum Approximate Dollar Value of Shares Available That May Yet Be Redeemed in Calendar Year 2006 Under the Plan
April 2006	1,493	$	8.38	$	87,426
May 2006	2,634	$	8.38	$	65,352
June 2006	2,334	$	8.38	$	45,794	⁽¹⁾

⁽¹⁾

The maximum dollar amount remaining as of June 30, 2006 for redemptions pursuant to our share redemption program in future periods is approximately $93.0 million, as life-to-date redemptions may not exceed life-to-date proceeds received under our dividend reinvestment plan. The total shares held by investors that are available for redemption during calendar year 2006 is approximately 23.3 million shares, which will be redeemed at a price equal to the lesser of (i) $10 per share or (ii) the purchase price per share actually paid, less in both instances any amounts previously distributed to stockholders attributable to net sales proceeds from the sale of our properties (currently $1.62 per share). Of these total shares available for redemption in calendar year 2006, our board of directors has made the determination that requests would not be fulfilled for ordinary redemptions for the remainder of calendar year 2006 after the completion of August 2006 share redemptions.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

(a)

There were no defaults with respect to any of our indebtedness during the second quarter of 2006.

(b)

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the second quarter of 2006.

ITEM 5.

OTHER INFORMATION

(a)

During the second quarter of 2006, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

(b)

There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors since the filing of our Schedule 14A.

ITEM 6.

EXHIBITS

The Exhibits required to be filed with this report are set forth on the Exhibit Index to Second Quarter Form 10-Q attached hereto.

SIGNATURES

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


	WELLS REAL ESTATE INVESTMENT TRUST, INC. (Registrant)

Dated: August 9, 2006	By:	/s/ DOUGLAS P. WILLIAMS
		Douglas P. Williams Executive Vice President, Director, and Principal Financial Officer

EXHIBIT INDEX

SECOND QUARTER FORM 10-Q

WELLS REAL ESTATE INVESTMENT TRUST, INC.


Exhibit Number		Description of Document
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Section 302 CEO Certification

EXHIBIT 31.1

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Leo F. Wells, III, certify that:

I have reviewed this quarterly report on Form 10-Q of Wells Real Estate Investment Trust, Inc. for the quarter ended June 30, 2006;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2006

By:

/s/ Leo F. Wells, III

Leo F. Wells, III

Principal Executive Officer

Section 302 CFO Certification

EXHIBIT 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas P. Williams, certify that:

I have reviewed this quarterly report on Form 10-Q of Wells Real Estate Investment Trust, Inc. for the quarter ended June 30, 2006;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2006

By:

/s/ Douglas P. Williams

Douglas P. Williams

Principal Financial Officer

Section 906 CEO and CFO Certification

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

In connection with the Report of Wells Real Estate Investment Trust, Inc. (the “Registrant”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission (the “Report”), the undersigned, Leo F. Wells, III, Chief Executive Officer of the Registrant, and Douglas P. Williams, Chief Financial Officer of the Registrant, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:

/s/ Leo F. Wells, III

Leo F. Wells, III

Chief Executive Officer

August 9, 2006

By:

/s/ Douglas P. Williams

Douglas P. Williams

Chief Financial Officer

August 9, 2006