Edgar Filing: ARDEN REALTY INC

Arden Realty, Inc., Form 10-K

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K


x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2003

OR

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

For the transition period from to

Commission File Number 1-12193

ARDEN REALTY, INC.

(Exact name of registrant as specified in its charter)


Maryland		95-4578533
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11601 Wilshire Boulevard, 4th Floor

Los Angeles, California 90025-1740

(Address and zip code of principal executive offices)

Registrant’s telephone number, including area code: (310) 966-2600

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

Common Stock, $0.01 par value		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

The aggregate market value of the shares of common stock held by non-affiliates was approximately $1.6 billion based on the closing price on the New York Stock Exchange for such shares on June 30, 2003.

The number of the Registrant’s shares of common stock outstanding was 65,315,254 as of March 11, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report incorporates information by reference from the definitive Proxy Statement for the 2004 Annual Meeting of Stockholders.

ARDEN REALTY, INC.

TABLE OF CONTENTS


Item			Page
No.			No.

PART I
	1.	Business		1
	2.	Properties		7
	3.	Legal Proceedings		18
	4.	Submission of Matters to a Vote of Security Holders		18
PART II
	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
	6.	Selected Financial Data		20
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	7A.	Quantitative and Qualitative Disclosure about Market Risk		45
	8.	Financial Statements and Supplementary Data		55
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56
	9A.	Controls and Procedures		56
PART III
	10.	Directors and Executive Officers of the Registrant		56
	11.	Executive Compensation		56
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		57
	13.	Certain Relationships and Related Transactions		57
	14.	Principal Accountant Fees and Services		57
PART IV
	15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		58
		Signatures		63
EXHIBIT 12.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

Forward-Looking Statements

This Form 10-K, including the documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act pertaining to, among other things, our future results of operations, cash available for distribution, acquisitions, lease renewals, property development, property renovation, capital requirements and general business, industry and economic conditions applicable to us. Also, documents we subsequently file with the SEC and incorporated herein by reference will contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and the matters set forth or incorporated in this Form 10-K generally. We caution you, however, that this list of factors may not be exhaustive, particularly with respect to future filings.


ITEM 1.	*Business*


(a)	GENERAL

The terms “Arden Realty”, “us”, “we” and “our” as used in this report refer to Arden Realty, Inc. We were incorporated in Maryland in May 1996 and completed our initial public offering in October 1996. Commencing with our taxable year ended December 31, 1996, we have operated and qualified as a real estate investment trust, or REIT, for federal income tax purposes. We are a self-administered and self-managed REIT that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are the sole general partner of Arden Realty Limited Partnership, or the Operating Partnership, and as of December 31, 2003, we owned approximately 97.4% of the Operating Partnership’s common partnership units. We conduct substantially all of our operations through the Operating Partnership and its consolidated subsidiaries.


(b)	INDUSTRY SEGMENTS

We are currently involved in only one industry segment, the operation of commercial real estate located in Southern California. All of the financial information contained in this report relates to this industry segment.


(c)	DESCRIPTION OF BUSINESS

We are a full-service real estate organization managed by 7 senior executive officers who have experience in the real estate industry ranging from 13 to 34 years and who collectively have an average of 18 years of experience. We perform all property management, construction management, accounting, finance and acquisition and disposition activities and a majority of our leasing transactions for our portfolio with our staff of approximately 300 employees.

As of December 31, 2003, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of December 31, 2003, our portfolio of primarily suburban office properties consisted of 130 properties and 215 buildings containing approximately 18.9 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2003, our operating portfolio was 90.4% occupied.

Portfolio Management

We perform all portfolio management activities, including management of all lease negotiations, construction management of tenant improvements or tenant build-outs, property renovations, capital expenditures and on-site property management for our portfolio. We directly manage these activities from approximately 45 management offices located throughout our portfolio. The activities of these management offices are supervised by four regional offices with oversight by our corporate office to ensure consistency of the application of our operating policies and procedures. Each regional office is strategically located within the

Southern California submarkets where our properties are located and is managed by a regional First Vice President who is responsible for supervising the day-to-day activities of our management offices. Each regional office is staffed with leasing, property management, building engineering, construction and information systems specialists, referred to as our Regional Service Teams. By maintaining a regionally focused organizational structure led by seasoned managers, we are able to quickly respond to our tenants’ needs and market opportunities.

All of our management and regional offices are networked with our corporate office and have access to the Internet and our e-mail, accounting and lease management systems. Our accounting and lease management systems employ the latest technology and allow both corporate and field personnel access to tenant and prospective tenant-related information to enhance responsiveness and communication of marketing and leasing activity for each property.

We currently lease approximately 60% of our portfolio’s net rentable space using our in-house staff. We employ outside brokers who are monitored by our Regional Service Teams for the remainder of our net rentable space. Our in-house leasing program allows us to closely monitor rental rates and lease terms for new and renewal leases and reduce third-party leasing commissions.

Business Strategies

Our primary business strategy is to actively manage our portfolio to achieve gains in rental rates and occupancy, control operating expenses and maximize income from ancillary operations and services. When market conditions permit, we may also selectively develop, renovate or acquire new properties in submarkets that add value and fit strategically into our portfolio. We may also sell existing properties and place the proceeds into investments that we believe will generate higher long-term value.

Through our corporate office and regional offices, we implement our business strategies by:


	•	using integrated decision making to provide proactive solutions to the space needs of tenants in the markets where we have extensive real estate and technical expertise;

	•	emphasizing quality service and tenant satisfaction and retention;

	•	employing intensive property marketing and leasing programs; and

	•	implementing cost control management techniques and systems that capitalize on economies of scale and concentration arising from the size and geographic focus of our portfolio.

We believe the implementation of these operating practices has been instrumental in maximizing the operating results of our portfolio.

Integrated Decision Making

We use a multidisciplinary approach to our decision making by having our regional management, leasing, construction management, acquisition, disposition and finance teams coordinate their activities to enhance responsiveness to market opportunities and to provide proactive solutions to the space needs of tenants in the submarkets where we have extensive real estate and technical expertise. This integrated approach permits us to analyze the specific requirements of existing and prospective tenants and the economic terms and costs for each transaction on a timely and efficient basis. We are therefore able to commit to leasing, development, acquisition or disposition terms quickly, which facilitates an efficient completion of lease negotiation and tenant build-out, shorter vacancy periods after lease expirations and the timely completion of development, acquisition or disposition transactions.

Quality Service and Tenant Satisfaction

We strive to provide quality service through our multidisciplinary operating approach resulting in timely responses to our tenants’ needs. Our seasoned Regional Service Teams interact and resolve issues relating to tenant satisfaction and day-to-day operations. For portfolio-wide operational and administrative functions, our

corporate office provides support to all regional offices and provides immediate response for critical operational issues. Providing quality service leads to enhanced tenant retention.

Proactive Marketing and Leasing

The concentration of many of our properties within particular office submarkets and our relationships with a broad array of businesses and outside brokers enables us to pursue proactive marketing and leasing strategies, to effectively monitor the demand of office space in our existing submarkets, to efficiently examine the office space requirements of existing and prospective tenants and to offer tenants a variety of space alternatives across our portfolio.

Cost Control and Operating Efficiencies

The size and geographic focus of our portfolio permits us to enhance portfolio value by controlling operating costs. We seek to capitalize on the economies of scale and concentration which result from the geographic focus of our portfolio through the ownership and management of multiple properties within particular submarkets and the maintenance of standardized processes and systems for cost control at each of our properties. These cost controls and operating efficiencies allowed us to achieve a 67.9% ratio of property operating results to total property revenues in 2003.

Operating Strategies

Based on our geographic focus in Southern California, experience in the local real estate markets and our evaluation of current market conditions, we believe the following key factors provide us with opportunities to maximize returns:


	•	the broad diversification and balance of the Southern California economy and our tenant base minimizes our dependence on any one industry segment or limited group of tenants;

	•	the relative resiliency of the Southern California real estate market, as measured by lower vacancy rates compared to the national average and a lower decline in rental rates in our key submarkets than the average decreases in rates reported for the nation since the beginning of the office real estate sector downturn in 2001; and

	•	the limited construction of new office properties in the Southern California region due to substantial building construction limitations and a minimal amount of developable land in many key submarkets.

Internal Operating Strategy

We believe that opportunities exist to increase cash flow from our existing portfolio. We intend to pursue internal growth by:


	•	stabilizing occupancy throughout our portfolio;

	•	capitalizing on economies of scale and concentration due to the size and geographic focus of our portfolio;

	•	controlling operating expenses through active cost control management techniques and systems; and

	•	sourcing new and innovative revenue streams while providing high quality services to our tenants.

Stabilizing Portfolio Occupancy

Various published reports noted that Southern California achieved approximately 4.1 million square feet of positive net absorption in 2003 with average rental rates declining less than 2% during the year. We believe that we have been successful in attracting and retaining a diverse tenant base by actively managing our properties with an emphasis on tenant satisfaction and retention. Our in-house leasing teams, working with outside leasing brokers, continuously monitor each market to identify strong prospective tenants who are in need of new or additional space. We also strive to be responsive to the needs of existing tenants through our on-site professional management staff and by providing them with alternative space within our portfolio to accommodate their changing space requirements.

Capitalizing on Economies of Scale and Concentration

In order to capitalize on economies of scale and concentration arising from the size and geographic focus of our portfolio, each of our Regional Service Teams is responsible for several properties, which spreads administrative and maintenance costs over those properties and reduces per square foot expenses. In addition, contracting in bulk for parking operations, building services and supplies on a portfolio-wide basis also reduces our overall operating expenses.

Cost Control Management Techniques and Systems

We plan to continue controlling our operating expenses through active management at all of our properties. We focus on cost control in various areas of our operations. We continuously monitor the operating performance of our properties and employ energy-enhancing purchasing and expense recovery technologies when appropriate. These system enhancements include:


	•	lighting retrofits;

	•	replacement of inefficient heating, ventilation and air conditioning systems;

	•	computer-driven energy management systems that monitor and react to the climatic requirements of individual properties;

	•	automated security systems that allow us to provide security services to our tenants at a lower cost;

	•	online bid purchasing of supplies, building materials and construction services;

	•	enhancement of billing systems, which enable us to more efficiently recover operating expenses from our tenants; and

	•	on-going preventive maintenance programs to operate our building systems efficiently, thereby reducing operating costs.

Sourcing Additional Revenue While Providing High Quality Services to Tenants

We have invested in energy enhancement programs within our portfolio with the aim of reducing energy consumption, enhancing efficiency and lowering operating costs. From 2000 through 2002, we were recognized by the Environmental Protection Agency with the national Commercial Real Estate Partner of the Year award for our performance in the Energy Star Program. The competition involves top commercial real estate landlords throughout the United States and rigorous bench-marking procedures that track individual building energy efficiency. Of the 673 total Energy Star designated office buildings awarded nationally during that three year period, 309 were awarded in California; of those, we had 83 award-winning buildings and were cited for having the most energy efficient buildings within a single portfolio in the nation.

In 2001, we formed our taxable REIT subsidiary, Next>edge, to market our expertise in energy solutions and facilities management. In 2002, Next>edge began to assist companies in increasing their energy efficiency and reducing costs by employing the latest technologies and the most energy-efficient operational strategies developed to date. These technologies include lighting, heating, ventilation and air conditioning retrofits, energy management system installations, on-site distributed generation and cogeneration projects and solar energy systems.

External Operating Strategy

We believe in the diversity and balance of the Southern California commercial real estate market, and we intend to continue to focus our resources primarily in that region. We have assembled a management team that has extensive experience and knowledge in that market which we believe provides us with a competitive advantage in identifying and capitalizing on selective development, renovation and acquisition opportunities.

Subject to capital availability and market conditions, our approach is to seek development, renovation and acquisition opportunities in markets where we have an existing presence and where the following conditions exist:


	•	low vacancy rates;

	•	opportunities for rising rents due to employment growth and population movements;

	•	a minimal amount of developable land; and

	•	significant barriers to entry due to constraints on new development, including strict entitlement processes, height and density restrictions or other governmental requirements.

Competition

We compete with other owners and developers of office properties to attract tenants to our properties and to obtain suitable land for development. Ownership of competing properties is currently diversified among many different types, from publicly traded companies and institutional investors, including other REITs, to small enterprises and individual owners. No one owner or group of owners currently dominate or significantly influence the markets in which we operate. See “Risk Factors — Competition affects occupancy levels, rents and the cost of land which could adversely affect our revenues.”

California Electric Utility Deregulation

Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas. All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed-rate contracts with commercial electrical providers. While we have no information suggesting that any future service interruptions are expected, we believe that higher utility costs may continue as price increases are allowed by the California Public Utility Commission or other regulatory agencies.

Approximately 27% of our properties and 21% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs and the remainder provide that our tenants will reimburse us for utility costs in excess of a base year amount. See “Risk Factors — Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.”

We are also working with other companies to provide our properties with new applications of distributed generation, or on-site energy systems, such as solar microturbines, natural gas reciprocating engines, fuel cells and other “green” power alternatives. Lastly, we maintain ongoing communication with our tenants to assist them in ways to lower consumption in their workplace.


	Employees

As of December 31, 2003, we had approximately 300 full-time employees that perform all of our property management, construction management, accounting, finance and acquisition and disposition activities and a majority of our leasing transactions.


	Available Information

We file with the Securities and Exchange Commission, or SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, proxy statements and registration statements. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may also obtain public information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains reports, proxy and information regarding registrants, including us, that file electronically. This annual report on Form 10-K and other periodic and current reports, and amendments to those reports, filed or furnished with the SEC, are

also available, free of charge, by viewing the SEC filings available in the Investor Information section of our website at www.ardenrealty.com as soon as reasonably practicable after we file or furnish them with the SEC.


(d)	FOREIGN OPERATIONS

We do not engage in any foreign operations or derive any revenue from foreign sources.


ITEM 2.	*Properties*


	Existing Portfolio

Our portfolio consists of 130 primarily office properties, containing approximately 18.9 million net rentable square feet, including one development property with approximately 283,000 net rentable square feet under lease-up, that individually range from approximately 12,000 to 600,000 net rentable square feet. Of the 129 properties currently in service in our portfolio, 127, or 98%, are office properties. All of our properties are located in Southern California and most are in suburban areas in close proximity to main thoroughfares. We believe that our properties are located within desirable and established business communities and are well maintained. Our properties offer an array of amenities including high-speed internet access, security, parking, conference facilities, on-site management, food services and health clubs.

Following is a summary of our property portfolio as of December 31, 2003:



																						Property Operating
																						Results(2),(3)

																Approximate Net
				Number of						Number of						Rentable Square						For the Year Ended
				Properties(1)						Buildings(1)						Feet(1)						December 31, 2003

							% of						% of						% of					% of
Location				Total			Total			Total			Total			Total			Total			Total		Total


																						($000’s and
																						unaudited)
Los Angeles County
	West(4)				30			23	%		32			15	%		4,882,004			26	%	$	104,331		37	%
	North				27			21	%		43			20	%		3,149,186			17	%		45,590		16	%
	South				16			12	%		21			10	%		3,057,925			16	%		39,457		14	%

		Subtotal			73			56	%		96			45	%		11,089,115			59	%		189,378		67	%
Orange County					23			18	%		56			26	%		3,676,119			20	%		46,278		17	%
San Diego County					26			20	%		41			19	%		2,958,628			16	%		35,506		13	%
Ventura/ Kern Counties					6			5	%		17			8	%		778,363			4	%		9,620		3	%
Riverside County(5)					1			1	%		4			2	%		133,481			1	%		—		—

			Total		129	(6)		100	%		214	(6)		100	%		18,635,706	(6)		100	%	$	280,782		100	%


(1)	Includes two properties with approximately 295,000 net rentable square feet held for disposition.

(2)	Property Operating Results is a non-GAAP measure of performance. Property Operating Results is used by investors and our management to evaluate and compare the performance of our office properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds of the property owner, (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with Generally Accepted Accounting Principles, or GAAP, or (3) general and administrative expenses and other specific costs such as permanent impairments to carrying costs. The cost of funds is eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased in value as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our office properties as well as trends in occupancy rates, rental rates and operating costs.


	However, the usefulness of Property Operating Results is limited because it excludes general and administrative costs, interest expense, interest income, depreciation and amortization expense and gains or losses from the sale of properties, changes in value in our real estate properties that result from use or permanent impairment to carrying costs as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Property Operating Results may fail to capture significant trends in these components of net income which further limits its usefulness.

	Property Operating Results is a measure of the operating performance of our office properties but does not measure our performance as a whole. Property Operating Results is therefore not a substitute for net income as computed in accordance with GAAP. This


	measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the calculation of Property Operating Results. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and, accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

	The following is a reconciliation of Property Operating Results to net income computed in accordance with GAAP (in thousands):



		Year Ended December 31,

		2003			2002			2001

Net Income		$	58,509		$	70,175		$	97,759
Add:
	General and administrative expense		18,123			13,166			12,143
	Interest expense		93,767			88,516			86,651
	Depreciation and amortization		118,114			106,182			98,136
	Minority interest		5,536			5,999			7,304
Less:
	Interest and other income		(734	)		(2,542	)		(2,941	)
	Gain on sale of discontinued properties		(5,937	)		—			—
	Discontinued operations, net of minority interest		(6,596	)		(8,692	)		(7,850	)
	Gain on sale of operating properties		—			(1,967	)		(4,591	)

Property Operating Results		$	280,782		$	270,837		$	286,611


(3)	Excludes the operating results of one property sold during the first quarter of 2003, five properties sold during the second quarter of 2003, two properties sold during the fourth quarter of 2003 and two properties classified as held for disposition. The operating results for these properties are reported as part of discontinued operations in our consolidated statements of income.

(4)	Includes a retail property with approximately 37,000 net rentable square feet.

(5)	Includes a retail property with approximately 133,000 net rentable square feet.

(6)	Including one development property currently under lease-up, our total portfolio consists of 130 properties with 215 buildings and approximately 18.9 million rentable square feet.

The following is a summary of our occupancy and in-place rents as of December 31, 2003:



								Annualized Base Rent Per
								Leased Square Foot(1)

		Percent			Percent			Portfolio		Full Service
Location		Occupied			Leased			Total		Gross Leases(2)

Los Angeles County
	West		92.3	%(3)		94.4	%(3)	$	27.96	$	28.07
	North		90.6	%		92.2	%		21.63		22.47
	South		86.6	%		87.7	%		19.39		20.51
Orange County			93.2	%		94.4	%		18.35		21.70
San Diego County			85.3	%		87.9	%		19.27		23.52
Ventura/ Kern Counties			96.9	%		97.9	%		18.77		19.26
Riverside County			99.4	%		99.4	%		12.76		—

Total/ Weighted Average			90.4	%		92.1	%	$	21.76	$	23.78


(1)	Based on monthly contractual base rent under existing leases as of December 31, 2003, multiplied by 12 and divided by leased net rentable square feet; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.

(2)	Excludes 35 properties and approximately 3.9 million square feet under triple net and modified gross leases.

(3)	Excludes a 283,000 net rentable square foot development property under lease-up that as of February 4, 2004 was 74% leased and 60% occupied.


	Development Properties

In addition to the properties listed above, we currently have one development property containing approximately 283,000 net rentable square feet under lease-up. This property is located in the Howard Hughes

Center, a 70-acre commercial development located two miles north of Los Angeles International Airport and immediately adjacent to the San Diego Freeway (I-405), with on- and off-ramps that directly serve the site.

The following table summarizes information about this property as of December 31, 2003:

Estimated

Year 1

Estimated

Stabilized

Year 1

Percent

Shell

Estimated

Cash Property

Annual

Square

Costs Incurred

Estimated

Leased at

Completion

Stabilization

Operating

Cash

GAAP

Property

Feet

To Date

Total Cost(1)

2/4/04

Date

Date(2)

Results(3)

Yield

Yield(4)

(in thousands)

Howard Hughes Center:

6100 Center Drive

283,000

75,627

81,500

2nd Qtr 2002

2nd Qtr 2004

6,450

7.9

8.9


(1)	Estimated total cost includes purchase and closing costs, capital expenditures, tenant improvements, leasing commissions and carrying costs during development, as well as an allocation of land and master plan costs.

(2)	We consider a property to be stabilized when the property is at least 95% leased.

(3)	We consider stabilized Cash Property Operating Results to be the rental revenues from the property less the operating expenses of the property on a cash basis before deducting financing costs (interest and principle payments) after the property is at least 95% leased. Property Operating Results are discussed in greater detail in Note (2) to the Existing Portfolio summary table above.

(4)	Estimated Year 1 Annual GAAP Yield includes an adjustment for straight-line rents.

In addition to the property above, we have entitlements and preliminary architectural designs completed for an additional 475,000 net rentable square feet. We also have construction entitlements at the Howard Hughes Center for up to 600 hotel rooms. We do not intend to commence construction on any additional build-to-suit buildings or hotels at the Howard Hughes Center until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each project’s development risk.

In addition to our development at the Howard Hughes Center, we have completed preliminary designs and are marketing an approximately 170,000 net rentable square foot build-to-suit office building at our Long Beach Airport Business Park. Build-to-suit buildings consist of properties constructed to the tenant’s specifications in return for the tenant’s long-term commitment to the property. Also, as part of our Gateway Towers acquisition in August 2002, we acquired a 5-acre developable land parcel in Torrance, California that we are also marketing for a build-to-suit building. We do not intend to commence construction on these projects until build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each project’s development risk.

We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales or proceeds from our lines of credit.


	Dispositions

The following table summarizes our disposition activity during 2003:

Property

Square

Gross Sales

Property

County

Submarket

Date of Sale

Type

Feet

Price

($000’s)

9201 Sunset

Los Angeles

West Hollywood

March 11, 2003

Office

139,711

32,350

Centrelake Plaza

San Bernardino

Inland Empire West

April 11, 2003

Office

110,763

14,395

Havengate Center

San Bernardino

Inland Empire East

April 11, 2003

Office

80,557

10,521

HDS Plaza

San Bernardino

Inland Empire East

April 11, 2003

Office

104,178

12,371

Chicago Avenue Business Park

Riverside

Inland Empire East

April 11, 2003

Office

47,482

6,113

Lambert Plaza

Orange

North County

May 22, 2003

Office

32,807

5,000

Pennsfield Plaza

Los Angeles

Simi/ Conejo Valley

November 5, 2003

Office

21,202

3,555

Lyons Plaza

Los Angeles

Simi/ Conejo Valley

December 11, 2003

Office

61,203

9,200

597,903

93,505


	Acquisitions

The following table summarizes our acquisition activity during 2003:

Gross

Property

Square

Purchase

Property

County

Submarket

Date of Purchase

Type

Feet

Price

($000’s)

Governor Executive Centre II

San Diego

Governor Park

December 23, 2003

Office

101,433

23,400

The following table presents specific information regarding our 129 stabilized properties as of December 31, 2003:


				Year(s)	Approximate
Property				Built/	Net Rentable
Name		Submarket	Location	Renovated	Square Feet

Los Angeles County
Los Angeles West
9665 Wilshire		Beverly Hills/ Century City	Beverly Hills	1972/ 92-93		158,684
Beverly Atrium		Beverly Hills/ Century City	Beverly Hills	1989		59,650
8383 Wilshire		Beverly Hills/ Century City	Beverly Hills	1971/ 93		417,463
120 S. Spalding		Beverly Hills/ Century City	Beverly Hills	1984		60,656
9100 Wilshire Blvd		Beverly Hills/ Century City	Beverly Hills	1971/ 90		326,227
Century Park Center		Beverly Hills/ Century City	Los Angeles	1972/ 94		243,404
10350 Santa Monica		Beverly Hills/ Century City	Los Angeles	1979		42,292
10351 Santa Monica		Beverly Hills/ Century City	Los Angeles	1984		96,251
Westwood Terrace		Westwood/ West Los Angeles	Los Angeles	1988		135,943
1950 Sawtelle		Westwood/ West Los Angeles	Los Angeles	1988/ 95		103,106
10780 Santa Monica		Westwood/ West Los Angeles	Los Angeles	1984		92,486
Wilshire Pacific Plaza		Westwood/ West Los Angeles	Los Angeles	1976/ 87		100,122
World Savings Center(2)		Westwood/ West Los Angeles	Los Angeles	1983		469,115
11075 Santa Monica		Westwood/ West Los Angeles	Los Angeles	1983		35,696
2730 Wilshire		Westwood/ West Los Angeles	Santa Monica	1985		55,080
2800 28th Street		Westwood/ West Los Angeles	Santa Monica	1979		103,506
1919 Santa Monica		Westwood/ West Los Angeles	Santa Monica	1991		43,796
2001 Wilshire Blvd		Westwood/ West Los Angeles	Santa Monica	1980		101,125
Westwood Center		Westwood/ West Los Angeles	Santa Monica	1965/ 2000		313,000
400 Corporate Pointe		Marina Area/ Culver City/ LAX	Culver City	1987		164,598
600 Corporate Pointe		Marina Area/ Culver City/ LAX	Culver City	1989		273,339
Bristol Plaza		Marina Area/ Culver City/ LAX	Culver City	1982		84,014
Northpoint		Marina Area/ Culver City/ LAX	Los Angeles	1991		104,235
Howard Hughes Spectrum Club		Marina Area/ Culver City/ LAX	Los Angeles	1993		36,959
Howard Hughes Tower		Marina Area/ Culver City/ LAX	Los Angeles	1987		313,833
6060 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2000		241,928
6080 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2002		287,148
Univision-5999 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2001		161,650
6100 Wilshire		Park Mile/ West Hollywood	Los Angeles	1986		202,704
145 South Fairfax		Park Mile/ West Hollywood	Los Angeles	1984		53,994

	Subtotal/ Weighted Average — Los Angeles West					4,882,004

[Additional columns below]

[Continued from above table, first column(s) repeated]


												Annualized
		Percentage of										Base Rent
		Total										per Leased
		Portfolio Net						Annualized				Net Rentable
Property		Rentable			Percent			Base Rent		Number of		Square
Name		Square Feet			Leased			($000s)		Leases		Feet(1)

Los Angeles County
Los Angeles West
9665 Wilshire			0.9	%		100.0	%	$	6,338		23	$	39.46
Beverly Atrium			0.3			99.6			1,665		15		28.01
8383 Wilshire			2.2			98.3			10,581		134		25.79
120 S. Spalding			0.3			100.0			2,499		15		39.50
9100 Wilshire Blvd			1.8			94.9			8,586		74		27.73
Century Park Center			1.3			98.3			5,451		98		22.79
10350 Santa Monica			0.2			89.7			883		16		23.28
10351 Santa Monica			0.5			90.9			2,006		15		22.94
Westwood Terrace			0.7			99.6			3,763		27		27.81
1950 Sawtelle			0.6			86.4			2,127		36		23.88
10780 Santa Monica			0.5			88.7			2,032		32		24.79
Wilshire Pacific Plaza			0.5			96.5			2,392		41		24.76
World Savings Center(2)			2.5			88.9			12,247		51		29.37
11075 Santa Monica			0.2			100.0			844		8		23.66
2730 Wilshire			0.3			99.9			1,502		31		27.30
2800 28th Street			0.6			97.2			2,684		41		26.69
1919 Santa Monica			0.2			95.1			1,164		5		27.93
2001 Wilshire Blvd			0.5			95.1			2,499		21		25.99
Westwood Center			1.7			99.5			11,226		45		36.06
400 Corporate Pointe			0.9			67.3			2,024		16		18.26
600 Corporate Pointe			1.5			91.5			5,465		23		21.86
Bristol Plaza			0.4			93.8			1,652		28		20.95
Northpoint			0.6			62.5			1,955		5		30.00
Howard Hughes Spectrum Club			0.2			100.0			967		1		26.16
Howard Hughes Tower			1.7			99.0			8,297		39		26.70
6060 Center Drive			1.3			100.0			8,190		8		33.00
6080 Center Drive			1.5			93.0			9,654		15		36.15
Univision-5999 Center Drive			0.9			100.0			4,247		2		25.53
6100 Wilshire			1.1			94.6			4,736		54		24.71
145 South Fairfax			0.3			97.7			1,152		14		21.84

	Subtotal/ Weighted Average — Los Angeles West		26.2	%		94.4	%	$	128,828		933	$	27.96


				Year(s)	Approximate
Property				Built/	Net Rentable
Name		Submarket	Location	Renovated	Square Feet

Los Angeles North
Calabasas Commerce Center		Simi/ Conejo Valley	Calabasas	1990		126,771
Calabasas Tech		Simi/ Conejo Valley	Calabasas	1990/ 2001		273,526
Conejo Business Center		Simi/ Conejo Valley	Thousand Oaks	1991		69,017
Marin Corporate Center		Simi/ Conejo Valley	Thousand Oaks	1986		51,360
Hillside Corporate Center		Simi/ Conejo Valley	Westlake	1998		59,876
Westlake — 5601 Lindero		Simi/ Conejo Valley	Westlake	1989		105,830
Westlake Gardens		Simi/ Conejo Valley	Westlake	1998		49,639
Westlake Gardens II		Simi/ Conejo Valley	Westlake	1999		48,874
Woodland Hills		West San Fernando Valley	Woodland Hills	1972/ 95		224,955
Los Angeles Corporate Center		San Gabriel Valley	Monterey Park	1984/ 86		389,293
Clarendon Crest		West San Fernando Valley	Woodland Hills	1990		43,063
Tourney Pointe		Santa Clarita Valley	Santa Clarita	1985/ 98-2000		219,991
16000 Ventura		Central San Fernando Valley	Encino	1980/ 96		174,841
15250 Ventura		Central San Fernando Valley	Sherman Oaks	1970/ 90-91		110,641
Noble Professional Center		Central San Fernando Valley	Sherman Oaks	1985/ 93		51,828
Sunset Pointe Plaza		Valencia	Newhall	1988		58,105
303 Glenoaks		East San Fernando Valley/ Tri-Cities	Burbank	1983/ 96		175,289
601 S. Glenoaks		East San Fernando Valley/ Tri-Cities	Burbank	1990		72,524
Burbank Executive Plaza		East San Fernando Valley/ Tri-Cities	Burbank	1983		60,395
333 N Glenoaks		East San Fernando Valley/ Tri-Cities	Burbank	1978		81,243
425 West Broadway		East San Fernando Valley/ Tri-Cities	Glendale	1984		71,589
Glendale Corporate Center		East San Fernando Valley/ Tri-Cities	Glendale	1985		108,209
70 South Lake		East San Fernando Valley/ Tri-Cities	Pasadena	1982/ 94		100,133
150 East Colorado Boulevard		East San Fernando Valley/ Tri-Cities	Pasadena	1979/ 97		61,168
299 N. Euclid		East San Fernando Valley/ Tri-Cities	Pasadena	1983		73,522
5161 Lankershim		East San Fernando Valley/ Tri-Cities	North Hollywood	1985/ 97		178,317
535 N. Brand Blvd		East San Fernando Valley/ Tri-Cities	North Hollywood	1973/ 92/ 99		109,187

	Subtotal/ Weighted Average — Los Angeles North					3,149,186
Los Angeles South
Long Beach Airport Bldg D(2)		Long Beach	Long Beach	1987/ 95		121,610
Long Beach Airport Bldg F & G(2)		Long Beach	Long Beach	1987/ 95		150,403
5000 East Spring(2)		Long Beach	Long Beach	1989/ 95		163,358
100 Broadway		Long Beach	Long Beach	1987/ 96		191,727
1501 Hughes Way		Long Beach	Long Beach	1983/ 97		77,060
3901 Via Oro		Long Beach	Long Beach	1986/ 97		53,195

[Additional columns below]

[Continued from above table, first column(s) repeated]


												Annualized
		Percentage of										Base Rent
		Total										per Leased
		Portfolio Net						Annualized				Net Rentable
Property		Rentable			Percent			Base Rent		Number of		Square
Name		Square Feet			Leased			($000s)		Leases		Feet(1)

Los Angeles North
Calabasas Commerce Center			0.7	%		96.7	%	$	1,932		11	$	15.76
Calabasas Tech			1.5			91.2			4,487		14		17.99
Conejo Business Center			0.4			90.7			1,302		28		20.80
Marin Corporate Center			0.3			90.6			1,053		29		22.63
Hillside Corporate Center			0.3			87.2			1,324		10		25.35
Westlake — 5601 Lindero			0.6			95.6			1,870		5		18.49
Westlake Gardens			0.3			80.8			1,079		15		26.89
Westlake Gardens II			0.3			100.0			1,290		4		26.40
Woodland Hills			1.2			84.5			4,414		67		23.21
Los Angeles Corporate Center			2.1			100.0			8,662		47		22.20
Clarendon Crest			0.2			97.9			878		18		20.82
Tourney Pointe			1.2			85.0			3,842		34		20.53
16000 Ventura			0.9			96.8			3,706		47		21.91
15250 Ventura			0.6			86.9			2,242		36		23.32
Noble Professional Center			0.3			100.0			1,175		19		22.49
Sunset Pointe Plaza			0.3			99.7			1,493		28		25.78
303 Glenoaks			0.9			95.0			3,725		30		22.36

601 S. Glenoaks			0.4			74.6			1,107		16		20.48

Burbank Executive Plaza			0.3			93.4			1,308		16		23.19
333 N Glenoaks			0.4			80.1			1,322		12		20.32

425 West Broadway			0.4			100.0			1,543		15		21.49

Glendale Corporate Center			0.6			82.1			1,823		20		20.51
70 South Lake			0.5			100.0			2,574		19		25.54

150 East Colorado Boulevard			0.3			100.0			1,396		20		22.81
299 N. Euclid			0.4			100.0			1,730		4		23.16

5161 Lankershim			0.9			84.3			3,189		7		21.22

535 N. Brand Blvd			0.6			96.9			2,353		43		22.24

	Subtotal/ Weighted Average — Los Angeles North		16.9	%		92.2	%	$	62,819		614	$	21.63
Los Angeles South
Long Beach Airport Bldg D(2)			0.6	%		100.0	%	$	1,211		1	$	9.96
Long Beach Airport Bldg F & G(2)			0.8			100.0			1,354		1		9.00
5000 East Spring(2)			0.9			79.0			3,178		36		24.61
100 Broadway			1.0			90.8			4,044		37		23.23
1501 Hughes Way			0.4			97.3			1,385		6		18.47
3901 Via Oro			0.3			90.3			826		5		17.18


				Year(s)	Approximate
Property				Built/	Net Rentable
Name		Submarket	Location	Renovated	Square Feet

Oceangate Tower		Long Beach	Long Beach	1971/ 93-94		210,907
Continental Grand Plaza		El Segundo	El Segundo	1986		235,926
Grand Avenue Plaza (1970)		El Segundo	El Segundo	1980		81,448
5200 West Century		Marina Area/ Culver City/ LAX	Culver City	1982/ 98-99		310,910
Skyview Center		Marina Area/ Culver City/ LAX	Los Angeles	1981/ 87/ 95		391,675
South Bay Centre		Torrance	Gardena	1984		202,830
Pacific Gateway		Torrance	Torrance	1982/ 90		223,731
Mariner Court		Torrance	Torrance	1989		105,436
South Bay Tech		Torrance	Torrance	1984		104,815
Gateway Towers		Torrance	Torrance	1984/ 86		432,894

	Subtotal/ Weighted Average — Los Angeles South					3,057,925
Orange County		San Gabriel Valley	Whittier	1982		135,415
Whittier		San Gabriel Valley	Diamond Bar	1988		84,081
1370 Valley Vista		West County	Huntington Beach	1985		49,355
5832 Bolsa
Huntington Beach Plaza		West County West County	Huntington Beach Huntington Beach	1984/ 96 1987/ 97		52,186 27,731
5702 Bolsa		West County	Huntington Beach	1987		11,968
5672 Bolsa		West County	Huntington Beach	1987		21,568
5632 Bolsa
Huntington Commerce Center		West County West County	Huntington Beach Fountain Valley	1987 1982		67,551 302,519
City Centre
Fountain Valley Plaza		West County Greater Airport Area	Fountain Valley Newport Beach	1982 1981/ 97		107,252 74,224
3300 Irvine Avenue		Greater Airport Area	Irvine	1980/ 88		115,061
1821 Dyer
Von Karman Corporate Center		Greater Airport Area Long Beach	Irvine Norwalk	1981/ 84 1978/ 94		451,477 122,175
Norwalk		Mid-Cities	Artesia	1986/ 97		93,277
91 Freeway Center		Greater Airport Area	Costa Mesa	1979/ 97		60,605
1503 South Coast		Tri-Freeway Area	Anaheim	1986/ 91		175,391
222 South Harbor(2)
Crown Cabot Financial		South County Tri-Freeway Area	Laguna Niguel Orange	1989 1985/ 97		172,900 139,806
625 The City
Orange Financial Center		Central County	Orange	1985/ 95		305,439

[Additional columns below]

[Continued from above table, first column(s) repeated]


												Annualized
		Percentage of										Base Rent
		Total										per Leased
		Portfolio Net						Annualized				Net Rentable
Property		Rentable			Percent			Base Rent		Number of		Square
Name		Square Feet			Leased			($000s)		Leases		Feet(1)

Oceangate Tower			1.1			91.8			3,478		41		17.96
Continental Grand Plaza			1.3			87.6			5,211		32		25.22
Grand Avenue Plaza (1970)			0.4			46.2			810		7		21.52
5200 West Century			1.7			94.8			5,298		32		17.98
Skyview Center			2.1			73.1			4,519		49		15.78
South Bay Centre			1.1			98.7			3,933		34		19.64
Pacific Gateway			1.2			93.1			4,383		39		21.04
Mariner Court			0.6			94.9			2,020		36		20.18
South Bay Tech			0.6			55.3			1,040		6		17.96
Gateway Towers			2.3			91.6			9,271		70		23.38

	Subtotal/ Weighted Average — Los Angeles South		16.4	%		87.7	%	$	51,961		432	$	19.39
Orange County			0.7	%		100.0	%	$	3,012		46	$	22.19
Whittier			0.5			100.0			1,783		13		21.02
1370 Valley Vista			0.3			100.0			799		1		16.20
5832 Bolsa
Huntington Beach Plaza			0.3 0.1			81.6 100.0			739 221		17 2		17.35 7.96
5702 Bolsa			0.1			100.0			100		1		8.28
5672 Bolsa			0.1			100.0			179		1		8.28
5632 Bolsa
Huntington Commerce Center			0.4 1.6			99.7 64.2			612 4,478		23 19		9.08 23.07
City Centre
Fountain Valley Plaza			0.6 0.4			100.0 96.9			2,150 1,798		9 29		19.95 25.00
3300 Irvine Avenue			0.6			100.0			1,549		4		12.14
1821 Dyer
Von Karman Corporate Center			2.4 0.7			96.1 97.3			9,221 2,241		32 16		21.25 18.85
Norwalk			0.5			94.9			1,753		37		19.81
91 Freeway Center			0.3			77.4			884		21		18.85
1503 South Coast			0.9			98.2			3,429		24		19.91
222 South Harbor(2)
Crown Cabot Financial			0.9 0.8			100.0 92.2			4,752 2,624		43 31		27.29 20.35
625 The City
Orange Financial Center			1.6			96.6			6,501		40		22.04


				Year(s)	Approximate
Property				Built/	Net Rentable
Name		Submarket	Location	Renovated	Square Feet

Centerpointe La Palma		North County	La Palma	1986/ 88/ 90		597,550
Savi Tech Center		North County	Yorba Linda	1989		341,446
Yorba Linda Business Park		North County	Yorba Linda	1988		167,142

	Subtotal/ Weighted Average — Orange County					3,676,119
San Diego County
701 B Street(2)		Downtown	San Diego	1982/ 96		540,413
Foremost Professional Plaza		I-15 Corridor	San Diego	1992		60,534
Activity Business Center		I-15 Corridor	San Diego	1987		167,045
Bernardo Regency		I-15 Corridor	San Diego	1986		47,916
Carlsbad Corporate Center		North Coast	Carlsbad	1996		125,000
10180 Scripps Ranch		I-15 Corridor	San Diego	1978/ 96		43,560
Cymer Technology Center		I-15 Corridor	Rancho Bernardino	1986		155,612
Via Frontera		I-15 Corridor	Rancho Bernardino	1982/ 97		77,920
Poway Industrial		I-15 Corridor	Poway	1991/ 96		112,000
Balboa Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1990		69,890
Panorama Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1991		133,149
Ruffin Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1990		45,059
Skypark Office Plaza		Mission Valley/ Kearny Mesa	San Diego	1986		202,164
Governor Park Plaza		North City	San Diego	1986		104,065
Westridge		North City	San Diego	1984/ 96		48,955
5120 Shoreham		North City	San Diego	1984		37,759
Morehouse Tech Center		North City	San Diego	1984		181,207
Torreyana Science Park		North City	La Jolla	1980/ 97		81,204
Waples Tech Center		North City	San Diego	1990		28,119
Genesee Executive Plaza		North City	San Diego	1984		155,820
10251 Vista Sorrento		North City	San Diego	1981/ 95		69,386
Carmel Valley Centre		Del Mar Heights	San Diego	1987/ 89		107,197
Governor Executive Center		Governor Park	San Diego	1988		52,195
Governor Executive Center II		Governor Park	San Diego	1989		101,433
Crossroads		Mission Valley	San Diego	1979		133,566
Carmel View Office Plaza		Rancho Bernardo/ Poway	San Diego	1985		77,460

	Subtotal/ Weighted Average — San Diego County					2,958,628

[Additional columns below]

[Continued from above table, first column(s) repeated]


												Annualized
		Percentage of										Base Rent
		Total										per Leased
		Portfolio Net						Annualized				Net Rentable
Property		Rentable			Percent			Base Rent		Number of		Square
Name		Square Feet			Leased			($000s)		Leases		Feet(1)

Centerpointe La Palma			3.2			94.1			10,310		93		18.33
Savi Tech Center			1.8			100.0			3,074		4		9.00
Yorba Linda Business Park			0.9			98.5			1,470		60		8.93

	Subtotal/ Weighted Average — Orange County		19.7	%		94.4	%	$	63,679		566	$	18.35
San Diego County
701 B Street(2)			2.9	%		84.9	%	$	10,563		70	$	23.02
Foremost Professional Plaza			0.3			98.7			1,472		36		24.64
Activity Business Center			0.9			77.2			1,775		39		13.76
Bernardo Regency			0.3			89.2			1,071		15		25.06
Carlsbad Corporate Center			0.7			100.0			1,625		1		12.60
10180 Scripps Ranch			0.2			100.0			463		1		10.63
Cymer Technology Center			0.8			100.0			1,867		2		12.00
Via Frontera			0.4			100.0			855		6		10.84
Poway Industrial			0.6			100.0			672		1		6.00
Balboa Corporate Center			0.4			—			—		—		—
Panorama Corporate Center			0.7			88.3			1,963		2		16.69
Ruffin Corporate Center			0.2			100.0			351		1		7.80
Skypark Office Plaza			1.1			75.9			2,364		20		15.40
Governor Park Plaza			0.6			96.3			2,454		20		24.50
Westridge			0.3			100.0			780		4		15.92
5120 Shoreham			0.2			100.0			826		7		21.79
Morehouse Tech Center			1.0			100.0			3,171		8		17.46
Torreyana Science Park			0.4			100.0			1,949		1		24.00
Waples Tech Center			0.2			99.3			407		4		14.59
Genesee Executive Plaza			0.8			88.2			3,378		23		24.57
10251 Vista Sorrento			0.4			—			—		—		—
Carmel Valley Centre			0.6			92.3			3,206		15		32.41
Governor Executive Center			0.3			93.6			1,293		11		26.46
Governor Executive Center II			0.5			99.4			2,825		17		28.03
Crossroads			0.7			100.0			2,901		10		21.57
Carmel View Office Plaza			0.4			100.0			1,901		15		24.50

	Subtotal/ Weighted Average — San Diego County		15.9	%		87.9	%	$	50,132		329	$	19.27


				Year(s)	Approximate
Property				Built/	Net Rentable
Name		Submarket	Location	Renovated	Square Feet

Ventura & Kern Counties
Parkway Center I		Bakersfield	Bakersfield	1992/95		61,333
4900 California		Bakersfield	Bakersfield	1983		155,189
Center Promenade		West County	Ventura	1982		174,837
1000 Town Center		West County	Oxnard	1989		107,656
Solar Drive Business Center		West County	Oxnard	1982		125,132
Camarillo Business Park		West County	Camarillo	1984/97		154,216

	Subtotal/ Weighted Average — Ventura & Kern Counties					778,363
Riverside County
Tower Plaza Retail		Temecula	Temecula	1970/97		133,481

	Subtotal/ Weighted Average — Riverside County					133,481

	Portfolio Total/ Weighted Average					18,635,706

[Additional columns below]

[Continued from above table, first column(s) repeated]


												Annualized
		Percentage of										Base Rent
		Total										per Leased
		Portfolio Net						Annualized				Net Rentable
Property		Rentable			Percent			Base Rent		Number of		Square
Name		Square Feet			Leased			($000s)		Leases		Feet(1)

Ventura & Kern Counties
Parkway Center I			0.3	%		95.6	%	$	1,070		13	$	18.25
4900 California			0.8			93.8			2,483		20		17.06
Center Promenade			1.0			95.4			2,988		64		17.92
1000 Town Center			0.6			100.0			2,293		11		21.23
Solar Drive Business Center			0.7			100.0			2,525		40		18.36
Camarillo Business Park			0.8			94.6			2,945		28		20.20

	Subtotal/ Weighted Average — Ventura & Kern Counties		4.2	%		97.9	%	$	14,304		176	$	18.77
Riverside County
Tower Plaza Retail			0.7	%		99.4	%	$	1,692		30	$	12.76

	Subtotal/ Weighted Average — Riverside County		0.7	%		99.4	%	$	1,692		30	$	12.76

	Portfolio Total/ Weighted Average		100.0	%		92.1	%	$	373,415		3,080	$	21.76


(1)	Calculated as monthly contractual base rent under existing leases as of December 31, 2003, multiplied by 12 and divided by leased net rentable square feet, for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.

(2)	We lease the land underlying these properties or their parking structures pursuant to long term ground leases.

Tenant Information

As of December 31, 2003, we had approximately 3,000 tenants, with no one tenant representing more than 2.2% of the aggregate annualized base rent of our properties, and only 4 tenants individually representing more than 1.0% of our aggregate annualized base rent. Our properties are leased to local, national and international companies engaged in a variety of businesses including financial services, entertainment, health care services, accounting, law, education, publishing and local, state and federal government entities.

Our leases are typically structured for terms of three to ten years. Leases typically contain provisions permitting tenants to renew expiring leases at prevailing market rates. Approximately 79% of our total rentable square footage is under full service gross leases under which tenants typically pay for all real estate taxes and operating expenses above those for an established base year or expense stop. Our remaining square footage is under triple net and modified gross leases. Triple net and modified gross leases are those where tenants pay not only base rent, but also some or all real estate taxes and operating expenses of the leased property. Tenants generally reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for on-site monthly employee and visitor parking. We are generally responsible for structural repairs.

The following table presents information as of December 31, 2003 derived from our ten largest tenants based on the percentage of aggregate portfolio annualized base rent:


				Weighted		Percentage of			Percentage of
				Average		Aggregate			Aggregate
				Remaining		Portfolio			Portfolio					Annualized
		Number of		Lease Term		Leased			Annualized			Net Rentable		Base Rent
Tenant		Locations		in Months		Square Feet			Base Rent(1)			Square Feet		(in thousands)

State of California			25		48		2.25	%		2.18	%		386,808	$	8,144
Vivendi Universal			2		76		1.35			2.09			231,681		7,803
University of Phoenix			6		35		1.18			1.15			201,870		4,277
Univision Television Group			1		214		0.97			1.14			166,363		4,246
Ceridian Corporation			2		81		0.89			0.94			152,071		3,507
Atlantic Richfield			1		32		0.79			0.77			135,609		2,887
Westfield Corporation			1		92		0.61			0.75			104,874		2,802
State Compensation Insurance Fund			1		51		0.66			0.71			113,513		2,656
U.S. Government			15		30		0.66			0.70			112,945		2,618
Haight, Brown & Bonesteel, LLP			1		91		0.36			0.69			61,399		2,579

	Total/ Weighted Average(2)		55		72		9.72	%		11.12	%		1,667,133	$	41,519


(1)	Annualized base rent is calculated as monthly contractual base rent under existing leases as of December 31, 2003, multiplied by 12; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.

(2)	The weighted average calculation is based on net rentable square footage leased by each tenant.

The following table presents the diversification of the tenants occupying space in our portfolio by industry as of December 31, 2003:


						Percentage of
						Total
		NAICS		Occupied		Occupied
North American Industrial Classification System Description (NAICS)		Code		Square Feet		Portfolio

Professional, Scientific, and Technical Services			541		4,496,237		26.71	%
Finance and Insurance			521-525		2,675,992		15.89
Information			511-519		1,957,019		11.62
Manufacturing			311-339		1,341,813		7.97
Health Care and Social Assistance			621-624		1,057,784		6.28
Administrative and Support and Waste Management and Remediation Services			561-562		685,729		4.07
Public Administration			921-928		755,814		4.49
Educational Services			611		764,151		4.54
Real Estate, Rental and Leasing			531-533		824,008		4.89
Wholesale Trade			423-425		547,385		3.25
Transportation and Warehousing			481-493		396,205		2.35
Arts, Entertainment, and Recreation			711-713		324,087		1.92
Construction			236-238		255,239		1.52
Accommodation and Food Services			721-722		194,866		1.16
Other Services (except Public Administration)			811-814		253,959		1.51
Retail Trade			441-454		154,722		0.92
Mining			211-213		54,399		0.32
Management of Companies and Enterprises			551		21,970		0.13
Utilities			221		8,975		0.05
Agriculture, Forestry, Fishing and Hunting			111-115		6,065		0.04
Other — Uncategorized			—		61,515		0.37

	Total Square Feet Occupied				16,837,934		100.00	%

Lease Distribution

The following table presents information relating to the distribution of the leases for our 129 stabilized properties, based on leased net rentable square feet, as of December 31, 2003:


									Percent of			Annualized				Percent of
							Total		Aggregate			Base Rent		Avg. Base		Aggregate
				Percent			Leased		Portfolio			of		Rent per		Portfolio
		Number		of All			Square		Leased			Leases(1)		Leased		Annualized
Square Feet Under Lease		of Leases		Leases			Feet		Square Feet			(000’s)		Square Foot		Base Rent

2,500 and under			1,549		50.29	%		2,158,034		12.58	%	$	51,174	$	23.71		12.67	%
2,501 – 5,000			702		22.79			2,434,315		14.19			59,871		24.59		14.83
5,001 – 7,500			295		9.58			1,788,606		10.42			44,543		24.90		11.03
7,501 – 10,000			173		5.62			1,509,474		8.80			36,786		24.37		9.11
10,001 – 20,000			224		7.27			3,141,191		18.31			76,866		24.47		19.04
20,001 – 40,000			81		2.63			2,248,167		13.10			52,550		23.37		13.02
40,001 and over			56		1.82			3,877,858		22.60			81,971		21.14		20.30

	Total/ Weighted Average		3,080		100.00	%		17,157,645		100.00	%	$	403,761	$	23.53		100.00	%


(1)	Base rent is determined as of the date of lease expiration, including all fixed contractual base rent increases; increases tied to indices such as the Consumer Price Index are not included.

Lease Expirations

The following table presents a summary schedule of the total lease expirations for our 129 stabilized properties for leases in place at December 31, 2003. This table assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations:


												Average
												Annualized
							Percentage of			Annualized		Base Rent		Percentage
					Square		Aggregate			Base Rent of		per Square		of Aggregate
			Number of		Footage of		Portfolio			Expiring		Foot of		Portfolio
			Leases		Expiring		Leased			Leases(1)		Expiring		Annualized
Year of Lease Expiration			Expiring		Leases		Square Feet			($000s)		Leases		Base Rent

Month-to-Month				115		387,672		2.26	%	$	7,345	$	18.95		1.82	%
Q1 2004				177		777,830		4.53			15,363		19.75		3.81
Q2 2004				164		536,229		3.13			11,929		22.25		2.95
Q3 2004				183		875,113		5.10			19,425		22.20		4.81
Q4 2004				178		968,647		5.64			18,987		19.60		4.70

	2004 Sub-Total(2)			702		3,157,819		18.40			65,704		20.81		16.27
2005				643		3,108,096		18.11			66,129		21.28		16.38
2006				548		2,660,416		15.51			62,144		23.36		15.39
2007				370		1,983,663		11.56			47,029		23.71		11.65
2008				347		2,072,137		12.08			51,495		24.85		12.75
2009				125		1,032,902		6.02			25,799		24.98		6.39
2010				73		912,939		5.32			24,075		26.37		5.96
2011				34		555,322		3.24			18,086		32.57		4.48
2012				33		473,347		2.76			13,192		27.87		3.27
2013				27		342,583		2.00			9,647		28.16		2.39
2014+				63		470,749		2.74			13,116		27.86		3.25

		Total/ Weighted Average		3,080		17,157,645		100.00	%	$	403,761	$	23.53		100.00	%


(1)	Base rent is determined as of the date of lease expiration, including all fixed contractual base rent increases; increases tied to indices such as the Consumer Price Index are not included.

(2)	Excludes month-to-month leases.


ITEM 3.	*Legal Proceedings*

We are presently subject to various lawsuits, claims and proceedings arising in the ordinary course of business none of which if determined unfavorably to us is expected to have a material adverse effect on our cash flows, financial condition or results of operations during the year ended December 31, 2003.


ITEM 4.	*Submission of Matters to a Vote of Security Holders*

No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2003.

PART II


ITEM 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol “ARI.” On March 11, 2004, the last reported sales price per share of common stock on the NYSE was $31.82 and there

were approximately 192 registered holders of record of our common stock. The table below sets forth the quarterly high and low closing sales price per share of our common stock as reported on the NYSE and the cash dividends per share we declared with respect to each period.


					Dividends
	High		Low		Declared

2002
First Quarter	$	28.75	$	25.47	$	0.505
Second Quarter	$	29.56	$	26.04	$	0.505
Third Quarter	$	27.23	$	22.22	$	0.505
Fourth Quarter	$	22.99	$	20.52	$	0.505
2003
First Quarter	$	23.69	$	20.18	$	0.505
Second Quarter	$	26.23	$	22.68	$	0.505
Third Quarter	$	27.92	$	26.15	$	0.505
Fourth Quarter	$	30.34	$	27.49	$	0.505

We pay quarterly cash dividends to common stockholders at the discretion of our Board of Directors. The amount of each quarterly cash dividend depends on our funds from operations, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors our Board of Directors deems relevant.


ITEM 6.	*Selected Financial Data*

You should read the following consolidated financial and operating data for Arden Realty together with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this Form 10-K.



		Year Ended December 31,

		2003			2002			2001			2000			1999


		(in thousands, except ratio and per share amounts)
Operating Data:
Revenues		$	414,269		$	397,029		$	406,717		$	374,821		$	328,250
Property operating expenses			(132,753	)		(123,650	)		(117,165	)		(106,517	)		(97,158	)
General and administrative expense			(18,123	)		(13,166	)		(12,143	)		(9,336	)		(7,393	)
Depreciation and amortization			(118,114	)		(106,182	)		(98,136	)		(83,244	)		(67,428	)
Interest expense			(93,767	)		(88,516	)		(86,651	)		(79,211	)		(60,867	)

Income from continuing operations before gain on sale of properties and minority interest			51,512			65,515			92,622			96,513			95,404
Gain on sale of operating properties			—			1,967			4,591			2,132			—

Income from continuing operations before minority interest			51,512			67,482			97,213			98,645			95,404
Minority interest			(5,536	)		(5,999	)		(7,304	)		(7,426	)		(5,041	)

Income from continuing operations			45,976			61,483			89,909			91,219			90,363
Discontinued operations, net of minority interest			6,596			8,692			7,850			5,491			6,263
Gain on sale of discontinued properties			5,937			—			—			—			—

Net income		$	58,509		$	70,175		$	97,759		$	96,710		$	96,626

Basic net income per common share:
	Income from continuing operations	$	0.72		$	0.96		$	1.41		$	1.44		$	1.43
	Income from discontinued operations		0.20			0.13			0.12			0.09			0.10

Net income per common share-basic		$	0.92		$	1.09		$	1.53		$	1.53		$	1.53

Weighed average number of common shares-basic			63,553			64,151			63,754			63,408			63,106

Diluted net income per common share:
	Income from continuing operations	$	0.72		$	0.96		$	1.41		$	1.43		$	1.43
	Income from discontinued operations		0.20			0.13			0.12			0.09			0.10

Net income per common share-diluted		$	0.92		$	1.09		$	1.53		$	1.52		$	1.53

Weighed average number of common shares-diluted		$	63,815		$	64,351		$	64,014		$	63,598		$	63,072

Cash dividends declared per common share		$	2.02		$	2.02		$	1.96		$	1.86		$	1.78

Other Data:
Cash provided by operating activities		$	181,482		$	199,922		$	204,667		$	192,152		$	170,354
Cash used in investing activities			(20,355	)		(213,002	)		(115,854	)		(216,024	)		(283,574	)
Cash (used in) provided by financing activities			(160,483	)		(19,898	)		(57,204	)		22,248			115,698
Funds from Operations(1)			174,458			181,549			198,240			185,146			170,405

Selected financial data continues on next page.



	Year Ended December 31,

	2003		2002		2001		2000		1999

Balance Sheet Data:
Net investment in real estate	$	2,646,699	$	2,741,624	$	2,622,980	$	2,603,566	$	2,479,111
Total assets		2,741,433		2,832,409		2,761,443		2,705,597		2,570,458
Total indebtedness		1,349,781		1,402,304		1,251,483		1,177,769		1,029,656
Other liabilities(2)		76,638		76,350		62,685		56,885		50,555
Minority interests		72,194		74,571		78,661		86,176		86,294
Total Stockholders’ Equity		1,210,285		1,247,377		1,337,206		1,355,171		1,375,758

(1)

We believe that funds from operations, or FFO, is a useful supplemental measure of our operating performance. We compute FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NARIET, in April 2002. The white paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles, or GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.


	We believe that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by GAAP, provides an additional perspective on our operating results. However, because these items have real economic effect, FFO is a limited measure of performance.

	FFO captures trends in occupancy rates, rental rates and operating costs. FFO excludes depreciation and amortization costs and it does not capture the changes in value in our properties that result from use or changes in market conditions or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Therefore, its ability to measure performance is limited.

	Because FFO excludes significant economic components of net income determined in accordance with GAAP, FFO should be used as an adjunct to net income and not as an alternative to net income. FFO should also not be used as an indicator of our financial performance, or as a substitute for cash flow from operating activities determined in accordance with GAAP or as a measure of our liquidity. FFO is not by itself indicative of funds available to fund our cash needs, including our ability to pay dividends or service our debt. Therefore, FFO only provides investors with an additional performance measure that when combined with measures computed in accordance with GAAP such as net income, cash flow from operating activities, investing activities and financing activities provides investors with an indication of our ability to service debt and to fund acquisitions and other expenditures.

	FFO is used by investors to compare our performance with other REITs. Other REITs may use different methodologies for calculating FFO and, accordingly, our FFO may not be comparable to other REITs. See a reconciliation of FFO to Net income in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.


(2)	Excludes dividends payable.


ITEM 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	Overview

The following discussion should be read in conjunction with Item 6, “Selected Financial Data,” and our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

We are a self-administered and self-managed real estate investment trust that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are a full-service real estate organization managed by 7 senior executive officers who have experience in the real estate industry ranging from 13 to 34 years and who collectively have an average of 18 years of experience. We perform all property management, construction management, accounting, finance and acquisition and disposition activities and a majority of our leasing transactions with our staff of approximately 300 employees.

As of December 31, 2003, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio consisted of 130 primarily suburban office properties and 215 buildings containing approximately 18.9 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2003, our operating portfolio was 90.4% occupied.

Our primary business strategy is to actively manage our portfolio to achieve gains in rental rates and occupancy, control operating expenses and maximize income from ancillary operations and services. When market conditions permit, we may also selectively develop or acquire new properties that add value and fit strategically into our portfolio. We may also sell existing properties and place the proceeds into investments that we believe will generate higher long-term value.


	Critical Accounting Policies

Revenue Recognition

Minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, is recognized on a straight-line basis over the term of the related lease.

Allowance for Rents and Other Receivables

We periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. We also maintain an allowance for deferred rent receivables that arises from the straight-lining of rents. We exercise judgment in establishing these allowances and consider payment history and current credit status in formulating these estimates. If estimates differ from actual results, this could impact our operating results.

Commercial Properties

Our properties are stated at depreciated cost. Write-downs to estimated fair value are recognized whenever a property’s estimated undiscounted future cash flows are less than its book value. We carry properties held for disposition at the lower of their depreciated cost or fair value less cost to sell. Based on our assessment, no write-downs to estimated fair value were necessary as of December 31, 2003 and 2002.

Property acquisitions have been accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” since June 30, 2001, the effective date of this pronouncement. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, 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, if any, based in each case on their fair values.

The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then

allocated to land, building and tenant improvements based on management’s determination of the relative fair values 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 management 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, management includes estimates of lost rental revenue, real estate taxes, insurance and other operating expenses during the expected lease-up periods based on current market demand. We also estimate costs to execute similar leases including leasing commissions, concessions, legal and other related costs.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which 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) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values are amortized into rental income over the remaining non-cancelable terms of the respective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, if any, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease. Should acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship.

Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related asset.

Repair and maintenance costs are charged to expenses as incurred and significant replacements and betterments are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of a an asset or increase its operating efficiency. Significant replacements and betterments represent costs that extend an asset’s useful life or increase its operating efficiency.

Depreciation

Depreciation is calculated under the straight-line method using depreciable lives of ten to forty seven years for building and building improvements and five-year lives for furniture, fixtures and equipment. Amortization of tenant improvements is calculated using the straight-line method over the term of the related lease.

The carrying amount of all commercial properties is evaluated periodically to determine if adjustment to the useful life is warranted. During 2001, the useful life of certain building and building improvements were adjusted to more accurately reflect their estimated usefulness. The effect of this change in estimate in 2001 was an increase to net income of approximately $10.1 million or $0.16 per common share. This change in estimate did not have an impact on our 2001 cash flows.

Costs associated with leasing properties are capitalized and amortized to expense on a straight-line basis over the related lease term.

Qualification as a REIT

Since our taxable year ended December 31, 1996, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Our qualification and taxation as a REIT depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, numerous requirements established under highly technical and complex Internal Revenue Code provisions subject to interpretation.

If we failed to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, we also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. For additional information see “Risk Factors — We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT,” and “Our operating partnership intends to qualify as a partnership, but we cannot guarantee that it will qualify,” elsewhere in this Form 10-K.

Off-Balance Sheet Arrangements

There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


	Results Of Operations

Our financial position and operating results are primarily comprised of our portfolio of properties and income derived from those properties. Therefore, the comparability of financial data from period to period will be affected by the timing of significant property development, acquisitions and dispositions.

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

(In thousands, except number of properties and percentages)



				Year Ended December 31,
													Percent
				2003			2002			Change(1)			Change

Revenue from rental operations:
	Scheduled cash rents			$	356,804		$	339,292		$	17,512			5	%
	Straight-line rents				986			4,214			(3,228	)		(77	)
	Tenant reimbursements				24,683			22,135			2,548			12
	Parking, net of expense				22,084			20,805			1,279			6
	Other rental operations				8,978			8,041			937			12

			Total revenue from rental operations		413,535			394,487			19,048			5

Property expenses:
	Repairs and maintenance				42,859			37,250			5,609			15
	Utilities				34,253			34,209			44			—
	Real estate taxes				29,488			28,616			872			3
	Insurance				8,431			7,787			644			8
	Ground rent				961			895			66			7
	Administrative				16,761			14,893			1,868			13

			Total property expenses		132,753			123,650			9,103			7

			Property operating results(2)		280,782			270,837			9,945			4
	General and administrative				18,123			13,166			4,957			38
	Interest				93,767			88,516			5,251			6
	Depreciation and amortization				118,114			106,182			11,932			11
	Interest and other income				(734	)		(2,542	)		(1,808	)		(71	)

	Income from continuing operations before gain on sale of properties and minority interest			$	51,512		$	65,515		$	(14,003	)		(21	)%

	Discontinued operations, net of minority interest(3)			$	6,596		$	8,692		$	(2,096	)		(24	)%

Other Data:
	Number of properties:
		Acquired during period			1			5
		Completed and placed in service during period			—			1
		Disposed of during period			(8	)		(3	)
		Owned at end of period			129	(4)		136
	Net rentable square feet:
		Acquired during period			101			803
		Completed and placed in service during period			—			287
		Disposed of during period			598			(205	)
		Owned at end of period			18,636	(4)		19,132


(1)	Variances for Revenue from Rental Operations and Property Operating Expenses are discussed as part of “Properties Owned for all of 2002 and 2003” below.

(2)	Property Operating Results are discussed as part of “Variances for Revenue from Rental Operations and Property Operating Expenses” below.

(3)	Discontinued operations for 2002 and 2003 are discussed below.

(4)	Excludes one development property containing approximately 283,000 net rentable square feet currently under lease-up.

General and administrative expenses increased approximately $5.0 million, or 38%, in 2003 as compared to 2002. This increase was primarily due to employee compensation costs, including employee separation costs in the current year and non-cash compensation costs associated with annual restricted stock grants issued in 2003 as well as higher corporate governance costs in 2003.

Interest expense increased approximately $5.3 million, or 6%, in 2003 as compared to 2002. This increase was primarily due to an increase in borrowings in the last half of 2002 for property acquisitions, lower interest capitalized in 2003 and costs associated with interest rate swaps entered into at the end of 2002 to fix approximately $175 million of floating rate debt. Capitalized interest in 2003 was lower as we ceased capitalizing interest on our 6100 Center Drive property in May 2003.

Depreciation and amortization expense increased by approximately $11.9 million, or 11%, in 2003 as compared to 2002. The increase was primarily due to depreciation related to five properties acquired in August 2002, the placement in service of our 6080 Center Drive development property in the fourth quarter of 2002 and depreciation related to capital expenditures, tenant improvements and leasing commissions placed in service in 2002 and 2003.

Interest and other income decreased by approximately $1.8 million, or 71%, in 2003 as compared to 2002, primarily due to the repayment by the borrower of a $13.7 million mortgage note receivable in the fourth quarter of 2002.

Variances for Revenue from Rental Operations and Property Operating Expenses

The decrease in revenue from rental operations and increase in property operating expenses in 2003 as compared to 2002 was partially due to a 1.1% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 122 properties that we owned as part of continuing operations for all of 2002 and 2003.

Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the 18 properties that were either sold, acquired or placed in service after January 1, 2002, and for the 122 non-development properties we owned for all of 2002 and 2003 (in thousands, except number of properties).


					Properties Sold,			Non-Development
					Acquired or			Properties Owned
					Placed in Service			for all of
		Total Variance(1)			after January 1, 2002			2002 and 2003(2)

Revenue from Rental Operations:
	Scheduled cash rents	$	17,512		$	11,545		$	5,967
	Straight-line rents		(3,228	)		366			(3,594	)
	Tenant reimbursements		2,548			251			2,297
	Parking, net of expense		1,279			356			923
	Other rental operations		937			1,396			(459	)

		$	19,048		$	13,914		$	5,134

Property Expenses:
	Repairs and maintenance		5,609			2,022			3,587
	Utilities		44			(52	)		96
	Real estate taxes		872			1,655			(783	)
	Insurance		644			260			384
	Ground rent		66			—			66
	Administrative		1,868			289			1,579

		$	9,103		$	4,174		$	4,929

Other Data:
	Number of properties					18			122
	Net rentable square feet					1,993			17,444

(1)

The components outlined above comprise our Property Operating Results. Property Operating Results is a non-GAAP measure of performance. Property Operating Results is used by investors and our management to evaluate and compare the performance of our office properties and to determine trends in earnings. Property Operating Results is also employed by investors as one of the components used to estimate the value of our properties. Property Operating Results is used for the purposes noted above because it is not affected by (1) the cost of funds of the property owner, (2) the impact of depreciation and amortization expense as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with Generally Accepted Accounting Principles, or GAAP or (3) general and administrative expenses and other specific costs such as permanent impairments to carrying costs. The cost of funds is eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased in value as a result of changes in overall economic conditions as well as the actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases and subsequent sales. General and administrative expenses and other owner specific costs such as impairment losses are eliminated because these costs are also in large part specific to the ownership structure and timing of purchases of the owner. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our office properties as well as trends in occupancy rates, rental rates and operating costs.


	However, the usefulness of Property Operating Results is limited because it excludes general and administrative costs, interest expense, interest income, depreciation and amortization expense and gains or losses from the sale of properties, changes in value in our real estate properties that result from use or permanent impairment to carrying costs as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Property Operating Results may fail to capture significant trends in these components of net income which further limits its usefulness.

	Property Operating Results is a measure of the operating performance of our office properties but does not measure our performance as a whole. Property Operating Results is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the calculation of Property Operating Results. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and, accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

	The following is a reconciliation of Property Operating Results to net income computed in accordance with GAAP (in thousands):



		Year Ended December 31,

		2003			2002			2001

Net Income		$	58,509		$	70,175		$	97,759
Add:
	General and administrative expense		18,123			13,166			12,143
	Interest expense		93,767			88,516			86,651
	Depreciation and amortization		118,114			106,182			98,136
	Minority interest		5,536			5,999			7,304
Less:
	Interest and other income		(734	)		(2,542	)		(2,941	)
	Gain on sale of discontinued properties		(5,937	)		—			—
	Discontinued operations, net of minority interest		(6,596	)		(8,692	)		(7,850	)
	Gain on sale of operating properties		—			(1,967	)		(4,591	)

Property Operating Results		$	280,782		$	270,837		$	286,611


(2)	The operating results for properties included in continuing and discontinued operations that were owned for all of 2002 and 2003 are discussed below.

Discontinued Operations

Financial Accounting Standards No. 144, (SFAS 144), requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. The table below summarizes the

operating results of our two properties classified as held for disposition as of December 31, 2003 as well as eight properties sold during 2003.

The results of operations for the two properties held for disposition as of December 31, 2003 and eight properties sold during 2003 for the years ended December 31, 2003 and 2002 are as follows (in thousands, except number of properties):



		Year Ended
		December 31,
									Percent
		2003		2002		Change			Change

Discontinued Operations:
	Revenues	$	14,108	$	21,732	$	(7,624	)		(35	)%
	Property operating expenses		4,964		7,568		(2,604	)		(34	)

			9,144		14,164		(5,020	)		(35	)
	Depreciation and amortization		2,210		5,235		(3,025	)		(58	)
	Minority interest		338		237		101			43

	Discontinued operations, net of minority interest	$	6,596	$	8,692	$	(2,096	)		(24	)%

Other Data:
	Number of properties		10		10
	Net rentable square feet		893		893

The variances in operating results for the two properties held for disposition as of December 31, 2003 included in discontinued operations above and which were owned for all of 2002 and 2003 are discussed as part of “Properties Owned for all of 2002 and 2003” immediately below.

Properties Owned for all of 2002 and 2003

Following is a comparison of property operating data for the 122 non-development properties we owned for all of 2002 and 2003 reported in continuing and discontinued operations (in thousands, except number of properties and percentages):



	Year Ended December 31,
							Dollar		Percent
	2003			2002			Change		Change

Revenue from rental operations	$	391,960		$	386,826		$	5,134		1	%
Property expenses		126,041			121,112			4,929		4

	$	265,919		$	265,714		$	205		—	%

Straight-line rents	$	721		$	4,315

Number of properties		122			122
Average occupancy		90.2	%		91.3	%
Net rentable square feet		17,444			17,444

Revenue from rental operations for these properties increased by approximately $5.1 million, or 1.3%, in 2003 as compared to 2002. The increase was due to an approximate $6.0 million increase in scheduled cash rents, a $2.3 million increase in tenant reimbursements and a $923,000 increase in parking income, which were partially offset by an approximate $3.6 million decrease in straight line rents and a $459,000 decrease in other rental operations. The increase in scheduled cash rents was primarily attributable to scheduled rent bumps in existing leases that were partially offset by the 1.1% decrease in average occupancy for these properties. Tenant reimbursements increased primarily due to recovery billings for higher operating expenses in 2003 as discussed below. Parking income increased primarily due to an increase in demand for monthly parking in 2003 in some of our buildings. Straight-line rents decreased primarily due to the decline in occupancy and the scheduled reversal of straight-line rents for certain older leases. Other rental operations decreased primarily due to decreases in lease termination settlements in 2003.

Property expenses for these properties increased by approximately $4.9 million, or 4.1%, in 2003 as compared to 2002. The increase was primarily due to an approximate $3.6 million increase in repairs and maintenance, a $1.6 million increase in property administrative expenses and a $384,000 increase in insurance expense, partially offset by a $783,000 decrease in real estate taxes. The increase in repairs and maintenance expense was primarily due to higher contractual costs for janitorial and other contract services as well as the timing of certain projects. The increase in property administrative expense was primarily due to higher employee compensation costs, higher property legal expenses and costs associated with training programs implemented in 2003. The increase in insurance expense was due to increases in industry-wide rates and premiums related to a $100 million terrorism insurance policy entered into in the second quarter of 2002. Real estate taxes decreased due to the timing of final reassessments of some properties in 2002.

Comparison of the year ended December 31, 2002 to the year ended December 31, 2001

(In thousands, except number of properties and percentages)



				Year Ended December 31,
													Percent
				2002			2001			Change(1)			Change

Revenue from rental operations:
	Scheduled cash rents			$	339,292		$	335,202		$	4,090			1	%
	Straight-line rents				4,214			8,780			(4,566	)		(52	)
	Tenant reimbursements				22,135			21,715			420			2
	Parking, net of expense				20,805			21,248			(443	)		(2	)
	Other rental operations				8,041			16,831			(8,790	)		(52	)

			Total revenue from rental operations		394,487			403,776			(9,289	)		(2	)

Property expenses:
	Repairs and maintenance				37,250			34,939			2,311			7
	Utilities				34,209			32,518			1,691			5
	Real estate taxes				28,616			28,329			287			1
	Insurance				7,787			5,492			2,295			42
	Ground rent				895			1,884			(989	)		(52	)
	Administrative				14,893			14,003			890			6

			Total property expenses		123,650			117,165			6,485			6

			Property operating results(2)		270,837			286,611			(15,774	)		(6	)
	General and administrative				13,166			12,143			1,023			8
	Interest				88,516			86,651			1,865			2
	Depreciation and amortization				106,182			98,136			8,046			8
	Interest and other income				(2,542	)		(2,941	)		(399	)		(14	)

	Income from continuing operations before gain on sale of properties and minority interest			$	65,515		$	92,622		$	(27,107	)		(29	)%

	Discontinued operations, net of minority interest(3)			$	8,692		$	7,850		$	842			11	%

Other Data:
	Number of properties:
		Acquired during period			5			—
		Completed and placed in service during period			1			1
		Disposed of during period			(3	)		(10	)
		Owned at end of period			136	(4)		133
	Net rentable square feet:
		Acquired during period			803			—
		Completed and placed in service during period			287			162
		Disposed of during period			(205	)		(573	)
		Owned at end of period			19,132	(4)		18,247


(1)	Variances for Revenues from Rental Operations and Property Operating Expenses are discussed as part of “Properties Owned for all of 2001 and 2002” below.

(2)	Property Operating Results are discussed as part of “Variance for Revenue from Rental Operations and Property Operating Expenses” below.

(3)	Discontinued operations for 2001 and 2002 are discussed below.

(4)	Excludes one development property containing approximately 283,000 net rentable square feet under lease-up.

General and administrative expenses increased approximately $1.0 million or, 8%, in 2002 as compared to 2001. This increase was primarily due to employee separation costs and higher external legal and accounting costs in 2002.

Interest expense increased approximately $1.9 million, or 2%, in 2002 as compared to 2001. This increase was primarily due to an increase in borrowings in 2002 for property acquisitions and lower interest capitalized in 2002. Capitalized interest in 2002 was lower as we ceased capitalizing interest on our 6080 Center Drive in May 2002. The increase in interest expense was partially offset by lower effective interest rates in 2002.

Depreciation and amortization expense increased by approximately $8.0 million, or 8%, in 2002 as compared to 2001. The increase was primarily due to depreciation related to two newly developed properties placed in service since the fourth quarter of 2001, five properties acquired during 2002 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001 for which no depreciation expense was recorded in 2001 while classified as held for sale.

Interest and other income decreased by approximately $399,000, or 14%, in 2002 as compared to 2001, primarily due to lower interest income earned in 2002 from our restricted cash balances required by mortgage loans on lower effective interest rates in 2002. The decrease in interest income was partially offset by the early repayment of our mortgage notes receivable in October 2002 which resulted in approximately $375,000 higher net interest income from these notes.

Variances for Revenue from Rental Operations and Property Operating Expenses

The increase in revenue from rental operations and property operating expenses in 2002 as compared to 2001 was primarily due to a 2.2% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 128 properties that we owned as part of continuing operations for all of 2002.

Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the 20 properties that were either sold, acquired or placed in service after January 1, 2001 and for the 128 non-development properties we owned as part of continuing operations for all of 2001 and 2002 (in thousands, except number of properties).


					Properties Sold, Acquired,			Non-Development
					Placed in Service or			Properties Owned
					Under Development after			for all of 2001
		Total Variance(1)			January 1, 2001			and 2002(2)

Revenue from Rental Operations:
	Scheduled cash rents	$	4,090		$	2,359		$	1,731
	Straight-line rents		(4,566	)		96			(4,662	)
	Tenant reimbursements		420			(51	)		471
	Parking, net of expense		(443	)		(53	)		(390	)
	Other rental operations		(8,790	)		(1,947	)		(6,843	)

		$	(9,289	)	$	404		$	(9,693	)

Property Expenses:
	Repairs and maintenance		2,311			589			1,722
	Utilities		1,691			74			1,617
	Real estate taxes		287			690			(403	)
	Insurance		2,295			14			2,281
	Ground rent		(989	)		—			(989	)
	Administrative		890			179			711

		$	6,485		$	1,546			4,939

Other Data:
	Number of properties					20			129
	Net rentable square feet					2,030			17,880

(1)


	believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our office properties as well as trends in occupancy rates, rental rates and operating costs.


	However, the usefulness of Property Operating Results is limited because it excludes general and administrative costs, interest expense, interest income, depreciation and amortization expense and gains or losses from the sale of properties, changes in value in our real estate properties that result from use or permanent impairment to carrying costs as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. Property Operating Results may fail to capture significant trends in these components of net income which further limits its usefulness.

	Property Operating Results is a measure of the operating performance of our office properties but does not measure our performance as a whole. Property Operating Results is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the calculation of Property Operating Results. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and, accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

	The following is a reconciliation of Property Operating Results to net income computed in accordance with GAAP (in thousands):



		Year Ended December 31,

		2002			2001			2000

Net Income		$	70,175		$	97,759		$	96,710
Add:
	General and administrative expense		13,166			12,143			9,336
	Interest expense		88,516			86,651			79,211
	Depreciation and amortization		106,182			98,136			83,244
	Minority interest		5,999			7,304			7,426
Less:
	Interest and other income		(2,542	)		(2,941	)		(3,527	)
	Discontinued operations, net of minority interest		(8,692	)		(7,850	)		(5,491	)
	Gain on sale of operating properties		(1,967	)		(4,591	)		(2,132	)

Property Operating Results		$	270,837		$	286,611		$	264,777


(2)	The operating results for properties included in continuing and discontinued operations that were owned for all of 2001 and 2002 are discussed below.

Discontinued Operations

SFAS 144, effective January 1, 2002, requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. The table below summarizes the operating results of two properties classified as held for disposition as of December 31, 2003 as well as eight properties sold during 2003.

The results of operations for the two properties classified as held for disposition as of December 31, 2003 and eight properties sold during 2003 for the years ended December 31, 2002 and 2001 are as follows (in thousands, except number of properties):



		Year Ended
		December 31,
										Percent
		2002		2001			Change			Change

Discontinued Operations:
	Revenues	$	21,732	$	14,749		$	6,983			47	%
	Property operating expenses		7,568		5,411			2,157			40

			14,164		9,338			4,826			52
	Depreciation and amortization		5,235		3,683			1,552			42
	Interest expense		—		(2,456	)		2,456			100
	Minority interest		237		261			(24	)		(9	)

	Discontinued operations, net of minority interest	$	8,692	$	7,850		$	842			11	%

Other Data:
	Number of properties		10		10
	Net rentable square feet		893		893

The variances in operating results for the two properties held for disposition as of December 31, 2003 included in discontinued operations above and which were owned for all of 2001 and 2002 are discussed as part of “Properties Owned for all of 2001 and 2002” immediately below.

Properties Owned for all of 2001 and 2002

Following is a comparison of property operating data for the 129 non-renovation/non-development properties we owned for all of 2001 and 2002 reported in continuing and discontinued operations (in thousands, except number of properties and percentages):



	Year Ended December 31,
							Dollar			Percent
	2002			2001			Change			Change

Revenue from rental operations	$	391,893		$	401,586		$	(9,693	)		(2	)%
Property expenses		123,700			118,761			4,939			4

		268,193		$	282,825		$	(14,632	)		(5	)%

Straight-line rents		3,412		$	8,074

Number of properties		129			129
Average occupancy		91.1	%		93.3	%
Net rentable square feet		17,880			17,880

Revenue from rental operations for these properties decreased by approximately $9.7 million, or 2%, in 2002 as compared to 2001. The decrease was due to a $6.8 million decrease in revenue from other rental operations, a $4.7 million decrease in straight-line rents and a $390,000 decrease in parking income that was partially offset by an approximate $1.7 million increase in scheduled cash rents and a $471,000 increase in tenant reimbursements. The decrease in revenue from other rental operations was primarily attributable to decreases in lease termination settlements in 2002, while straight-line rents decreased primarily due to the turning over of straight-line rents for older leases. Parking income decreased due to the 2.2% decline in average occupancy. Scheduled cash rents increased primarily due to scheduled rent increases and rental rate growth attained on new and renewed leases which were partially offset by the decline in average occupancy. Tenant reimbursements increased primarily due to recovery billings for higher operating expenses in 2002 as discussed below.

Property expenses for these properties increased by approximately $4.9 million, or 4%, in 2002 as compared to 2001. The increase was primarily due to a $2.3 million increase in insurance expense in 2002, a $1.7 million increase in repairs and maintenance and a $1.6 million increase in utility expenses which were partially offset by a $990,000 decrease in ground rent expense. The increase in insurance expense was due to increases in industry-wide rates in 2002 and premiums related to a $100 million terrorism insurance policy entered into in the second quarter of 2002. Repairs and maintenance expense increased in 2002 primarily due to higher janitorial costs while utility costs increased due to rate increases enacted in May 2001. Ground rent expense decreased in 2002 due to lower operating income from one of our properties with a participating ground lease.

Liquidity and Capital Resources

Cash Flows

Cash provided by operating activities decreased by approximately $18.4 million to $181.5 million in 2003 as compared to $199.9 million in 2002. This decrease was primarily due to the loss of operating cash flows on eleven properties sold since the beginning of 2002 as part of our capital recycling program, which have been only partially offset by the increased cash flows on five properties acquired in the third quarter of 2002 and cash flows for one development property placed in service subsequent to January 1, 2002. In addition, in 2002, as a result of collection efforts implemented, we reduced our outstanding trade receivables by approximately $6.7 million.

Cash used in investing activities decreased by approximately $192.6 million to $20.4 million in 2003 as compared to $213.0 million in 2002. The decrease was primarily due to the acquisition of five properties for approximately $135 million in the third quarter of 2002 and the sale of eight properties in 2003 for approximately $91.0 million in net proceeds. In 2002, we sold three properties for approximately $24.3 million in net proceeds.

Cash used in financing activities increased by approximately $140.6 million to an outflow of $160.5 million in 2003 as compared to an outflow of $19.9 million in 2002. This increase was primarily due to the proceeds from our term loan in the third quarter of 2002 and higher net repayments in 2003 on our unsecured lines of credit from proceeds generated from our capital recycling program.

Capital Commitments

As of December 31, 2003, we had approximately $9.1 million outstanding in capital commitments related to tenant improvements, development and property-related capital expenditures. We expect to fund short term capital commitments through cash flow generated by operating activities, proceeds from asset sales or our unsecured lines of credit.

Available Borrowings, Cash Balances and Capital Resources

Our Operating Partnership has an unsecured line of credit with a total commitment of $20 million from City National Bank. This line of credit accrues interest at LIBOR + 1.00% or the City National Bank Prime Rate less 1.875% and is scheduled to mature on August 1, 2004. Proceeds from this line of credit are used, among other things, to provide funds for tenant improvements and capital expenditures and provide for working capital and other corporate purposes. As of December 31, 2003, there was $3.0 million outstanding on this line of credit and $17.0 million was available for additional borrowings.

Our Operating Partnership also has an unsecured line of credit with a group of banks led by Wells Fargo. The line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the line of credit) depending on the Operating Partnership’s unsecured debt rating. This new line of credit amends the previous $275 million unsecured line of credit that was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as the Operating Partnership maintains an unsecured debt rating of BBB-/ Baa3 or better, the agreement contains a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. The Operating Partnership also has the option to convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%. As of December 31, 2003, $158.0 million was outstanding on this line of credit and $152.0 million was available for additional borrowings.

As of December 31, 2003, we had approximately $24.4 million in cash and cash equivalents, including $19.7 million in restricted cash. Restricted cash consisted of $13.7 million in interest bearing cash deposits required by five of our mortgage loans payable and $6.0 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.

We have entered into $150 million of forward-starting hedges during 2003 to effectively fix the 10-year Treasury rate at an average rate of approximately 4.1% for borrowings that are anticipated to occur in 2004 to refinance some of our scheduled debt maturities. The forward-starting interest rate hedges were entered into at current market rates and, therefore, had no initial cost.

In October and November of 2003, we also entered into reverse interest rate hedge agreements to float $100 million of the fixed interest rate associated with the 7.00% senior unsecured notes due in November of 2007. Under these reverse hedges, we will receive interest at a fixed rate of 7.00% and pay interest at a variable rate averaging the six-month LIBOR in arrears plus 3.10%. These interest rate hedges mature at the same time the notes are due. Including these hedges, our floating-rate debt ratio as of December 31, 2003 was approximately 16%.

Capital Recycling Program

During 2003 we sold eight properties pursuant to our capital recycling program totaling approximately 598,000 square feet for approximately $93.5 million in gross sales proceeds as follows:

Gross Sales

Property

County

Submarket

Date of Sale

Property Type

Square Feet

Price

($000’s)

9201 Sunset

Los Angeles

West Hollywood

March 11, 2003

Office

139,711

32,350

Centrelake Plaza

San Bernardino

Inland Empire West

April 11, 2003

Office

110,763

14,395

Havengate Center

San Bernardino

Inland Empire East

April 11, 2003

Office

80,557

10,521

HDS Plaza

San Bernardino

Inland Empire East

April 11, 2003

Office

104,178

12,371

Chicago Avenue Business Park

Riverside

Inland Empire East

April 11, 2003

Office

47,482

6,113

Lambert Plaza

Orange

North County

May 22, 2003

Office

32,807

5,000

Pennsfield Plaza

Los Angeles

Simi/Conejo Valley

November 5, 2003

Office

21,202

3,555

Lyons Plaza

Los Angeles

Simi/Conejo Valley

December 11, 2003

Office

61,203

9,200

597,903

93,505

The net proceeds from these dispositions were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.

On December 23, 2003, we acquired Governor Executive Centre II, a 101,433 square foot, 96% leased, office property located in the Governor Park submarket of San Diego County for approximately $23.4 million.


	Debt Summary

Following is a summary of scheduled principal payments for our total outstanding indebtedness as of December 31, 2003 (in thousands):


Year	Amount

2004	$	184,466
2005		207,470
2006		297,859	(1)
2007		158,961
2008		230,985
2009		112,550
2010		150,565
2011		710
2012		768
2013		845
Thereafter		4,602

Total	$	1,349,781


(1)	Includes $158 million outstanding on the Wells Fargo unsecured line of credit.

Following is other information related to our indebtedness as of December 31, 2003 (in thousands, except percentage and interest rate data):


	Unsecured and Secured Debt:


						Weighted Average
	Balance		Percent			Interest Rate(1)

	(000’s)
Unsecured Debt	$	784,952		58	%		6.58	%
Secured Debt		564,829		42			7.37

Total Debt	$	1,349,781		100	%		6.91	%


	Floating and Fixed Rate Debt:


						Weighted Average
	Balance		Percent			Interest Rate(1)

	(000’s)
Floating Rate Debt(2)	$	211,000		16	%		3.93	%
Fixed Debt(3)		1,138,781		84			7.46

Total Debt	$	1,349,781		100	%		6.91	%


(1)	Includes amortization of prepaid financing costs.

(2)	Includes $100 million of fixed rate debt that has been converted to floating rate through interest rate hedge agreements.

(3)	Includes $175 million of floating rate debt that has been fixed through interest rate swap agreements.


	Consolidated Income Available for Debt Service and Compliance with Principal Financial Covenants

Consolidated Income Available for Debt Service is a non-GAAP measurement of our performance and liquidity. Consolidated Income Available for Debt Service is presented below because this data is used by investors and our management as a supplemental measure to (a) evaluate our operating performance and compare it to other real estate companies, (b) determine trends in earnings, (c) determine our ability to service debt and (d) determine our ability to fund future capital expenditure requirements. As discussed more

fully below, Consolidated Income Available for Debt Service is also used in several financial covenants we are required to satisfy each quarter under the terms of our principal debt agreements.

Consolidated Income Available for Debt Service permits investors and management to view income from our operations on an unleveraged basis before the effects of non-cash depreciation and amortization expense. By excluding interest expense, Consolidated Income Available for Debt Service measures our operating performance independent of our capital structure and indebtedness and, therefore, allows for a more meaningful comparison of our operating performance between quarters as well as annual periods and to compare our operating performance to that of other companies, and to more readily identify and evaluate trends in earnings.

The usefulness of Consolidated Income Available for Debt Service is limited because it does not reflect interest expense, taxes, gains or losses on sales of property, losses on valuations of derivatives, asset impairment losses, cumulative effect of a change in accounting principle, extraordinary items as defined by GAAP and depreciation and amortization costs. These costs have been or may in the future be incurred by us, each of which affects or could effect our operating performance and ability to finance our investments at competitive borrowing costs, successfully maintain our REIT status, and acquire and dispose of real estate properties at favorable prices to us. Some of these costs also reflect changes in value in our properties that result from use or changes in market conditions and the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties. Due to the significance of the net income components excluded from Consolidated Income Available for Debt Service, this measure should not be considered an alternative to (and should be considered in conjunction with) net income, cash flow from operations, and other performance or liquidity measures prescribed by GAAP. This measure should also be analyzed in conjunction with discussions elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the items eliminated in the calculation of Consolidated Income Available for Debt Service.

The reader is cautioned that Consolidated Income Available for Debt Service, as calculated by us, may not be comparable to similar measures reported by other companies (under names such as or similar to Consolidated Income Available for Debt Service, EBITDA or adjusted EBITDA) that do not define this measure exactly the same as we do.

We calculate Consolidated Income Available for Debt Service as follows:



		Year Ended December 31,

		2003			2002			2001			2000			1999

Net cash provided by operating activities		$	181,482		$	199,922		$	204,667		$	192,152		$	170,354
Add:
	Interest expense		93,767			88,516			86,651			79,211			60,867
	Interest expense from discontinued operations		—			—			(2,456	)		(805	)		(628	)
	Gain on repayment of mortgage note receivable		—			750			—			—			—
Less:
	Amortization of loan costs and fees		(3,972	)		(3,807	)		(3,568	)		(3,568	)		(2,868	)
	Amortization of deferred compensation		(2,251	)		(1,199	)		(1,938	)		(586	)		—
Changes in operating assets and liabilities:
	Rent and other receivables		771			(6,768	)		(3,775	)		1,080			2,279
	Deferred rent		557			4,657			7,401			7,656			6,928
	Prepaid financing costs, expenses and other assets		1,494			2,997			4,366			7,480			1,456
	Accounts payable and accrued expenses		2,365			(9,729	)		(4,388	)		(11,359	)		(4,250	)
	Security deposits		(1,676	)		(962	)		(213	)		(3,397	)		(2,140	)

Consolidated Income Available for Debt Service		$	272,537			274,377		$	286,747		$	267,864		$	231,998



		Year Ended December 31,

		2003			2002			2001			2000			1999

Net Income		$	58,509			70,175		$	97,759		$	96,710		$	96,626
Add:
	Interest expense		93,767			88,516			86,651			79,211			60,867
	Interest expense from discontinued operations		—			—			(2,456	)		(805	)		(629	)
	Depreciation and amortization		118,114			106,182			98,136			83,244			67,428
	Minority interest		5,536			5,999			7,304			7,426			5,041
	Minority interest from discontinued operations		338			237			261			187			255
	Depreciation from discontinued operations		2,210			5,235			3,683			4,023			2,410
Less:
	Gain on sale of discontinued properties		(5,937	)		—			—			—			—
	Gain on sale of operating properties		—			(1,967	)		(4,591	)		(2,132	)		—

Consolidated Income Available for Debt Service		$	272,537			274,377		$	286,747		$	267,864		$	231,998

Consolidated Income Available for Debt Service is also presented because it is used in ratios contained in the principal financial covenants of the Indenture governing our publicly traded senior unsecured notes and our Credit Agreement with a syndicate of banks led by Wells Fargo. As of December 31, 2003, our senior unsecured notes represented 37% of our total outstanding debt and amounts outstanding under our Wells Fargo unsecured line of credit represented 12% of our total outstanding debt. The Consolidated Income Available for Debt Service ratios and the other ratios reported below are part of financial covenants we are required to satisfy each fiscal quarter. We believe information about these ratios is useful to (1) confirm that

we are in compliance with the financial covenants of our principal loan agreements, (2) evaluate our ability to service our debt, (3) evaluate our ability to fund future capital expenditures, and (4) compare our ratios to other real estate companies, including other REITs, that present the same ratios.

If we were to fail to satisfy these financial covenants, we would be in default under the terms of the Indenture for the senior unsecured notes and/or the Wells Fargo Credit Agreement. A default under those agreements could accelerate the obligation to repay such debt and could cause us to be in default under our other debt agreements. Depending on the circumstances surrounding such acceleration, we might not be able to repay the debt on terms that are favorable to us, or at all, which could have a material adverse affect on our financial condition and our ability to raise capital in the future.

The reader is cautioned that these ratios, as calculated by us, may not be comparable to similarly entitled ratios reported by other companies that do not calculate these ratios exactly the same as we do. These ratios should not be considered as alternatives to the ratio of earnings to fixed charges.

The following table summarizes the principal ratios contained in the financial covenants of our senior unsecured notes and Wells Fargo unsecured line of credit as of December 31, 2003 (in thousands, except percentage and covenant ratio data):


Net investment in real estate		$	2,646,699
Cash and cash equivalents			4,707
Restricted cash			19,694
Accumulated depreciation and amortization(1)			456,432

	Total Assets	$	3,127,532

	Total unencumbered assets	$	1,793,226

Mortgage loans payable(2)		$	564,829
Unsecured lines of credit			161,000
Unsecured term loan			125,000
Unsecured senior notes, net of discount			498,952

	Total Outstanding Debt	$	1,349,781

Consolidated Income Available for Debt Service		$	272,537

Interest incurred(3)		$	96,263
Loan fee amortization(3)			(3,589	)

Debt Service(3)		$	92,674


Covenant Ratios	Test		Actual

Ratio of Consolidated Income Available for Debt Service to Debt Service		Greater than 1.5		2.9
Ratio of Consolidated Income Available for Debt Service to interest expense		Greater than 2.0		3.0
Ratio of Consolidated Income Available for Debt Service to fixed charges(4)		Greater than 1.75		2.2
Total Outstanding Debt/ Total Assets		Less than 60%		43	%
Secured Debt/ Total Assets		Less than 40%		18	%